Document: WT/DS46/RW/2 Page B-1 ANNEX B SUBMISSIONS OF BRAZIL Contents Page Annex B-1 First submission of Brazil B-2 Annex B-2 Second submission of Brazil B-17 Annex B-3 Oral statement of Brazil B-32 Annex B-4 Closing statement of Brazil B-44 Annex B-5 Responses by Brazil to Questions of the Panel B-47 Annex B-6 Brazil's comments on Responses to Questions of Canada and Third Parties B-66
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)

ANNEX B
SUBMISSIONS OF BRAZIL
Contents Page
Annex B-1 First submission of Brazil B-2
Annex B-2 Second submission of Brazil B-17
Annex B-3 Oral statement of Brazil B-32
Annex B-4 Closing statement of Brazil B-44
Annex B-5 Responses by Brazil to Questions of the Panel B-47
Annex B-6 Brazil's comments on Responses to Questions of Canada and Third
Parties
B-66

I. INTRODUCTION
1. On 4 August 2000, the Dispute Settlement Body ("DSB") adopted the report of the Appellate
Body in the previous Article 21.5 proceedings in this matter.1 In its report, the Appellate Body found
that Brazil had failed to establish that the steps it had taken to amend the measure at issue in this case,
the Programa de Financiamento às Exportações (PROEX), brought that measure into conformity
with the previous rulings and recommendations of the DSB. Accordingly, on 12 December 2000,
Brazil advised the DSB of additional amendments to PROEX that it had taken to bring the measure
fully into conformity with Brazil’s obligations under the Agreement on Subsidies and Countervailing
Measures (the "SCM Agreement" or "Agreement").
2. On 19 January 2001, Canada notified the DSB of its intention once again to seek recourse to
Article 21.5 of the Understanding on Rules and Procedures Governing the Settlement of Disputes
("DSU") in these proceedings. Canada’s decision not to seek consultations concerning the steps
Brazil had taken to amend PROEX has meant that Brazil has not had an opportunity to explain the
measure to Canada. At its meeting on 16 February 2001, the DSB referred the matter to the original
Panel.
3. In this submission, Brazil will demonstrate first, that PROEX interest rate support payments
for aircraft no longer constitute a subsidy within the meaning of Article 1 of the SCM Agreement.
Assuming arguendo, however, that PROEX interest rate support payments are a subsidy within the
meaning of Article 1, Brazil also will demonstrate that they are not prohibited by Article 3 because
they comply with the interest rate requirements of the Arrangement on Guidelines for Officially
Supported Export Credits of the Organization for Economic Cooperation and Development (" OECD
Arrangement," or " Arrangement"). Therefore, they are eligible for the "safe haven" of the second
paragraph of item (k) to Annex I of the Agreement. Further, even if PROEX interest rate support
payments for aircraft are considered to be a subsid y, and, assuming also that they do not comply with
the requirements of the second paragraph of item (k), they, nevertheless, are payments that 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), and, therefore, do not constitute a prohibited subsidy.
4. Brazil also will establish that the version of the OECD Arrangement that is relevant to these
proceedings is the 1992 version that was in effect on 1 January 1995 when the Marrakesh Agreement
Establishing the World Trade Organization ("Marrakesh Agreement" or "WTO Agreement") became
effective. However, Brazil also will show that PROEX interest rate support payments for aircraft
comply with both the 1992 version of the Arrangement that was in effect on 1 January 1995, and with
the 1998 version, which is currently in effect.
II. THE HISTORY OF THESE PROCEEDINGS
5. Before the original Panel and the Appellate Body, and also before the first Article 21.5 Panel,
Brazil contended that – even though the initial PROEX and its first revised version, PROEX II, were
subsidies contingent upon exports – they were not prohibited because they fell under the exception of
the first paragraph of item (k), and did not confer a "material advantage" within the meaning of that
paragraph. The Article 21.5 Panel, however, disagreed. It concluded that PROEX payments could
not be said to constitute "the payment by [a government] of all or part of the costs incurred by
exporters or financial institutions in obtaining [export] credits," as required by the first paragraph of
item (k).
2 Further, it held that Brazil had not provided sufficient evidence that export credits at fixed
interest rates in respect of regional aircraft were provided in the commercial market at the benchmark

1 Brazil – Export Financing Programme for Aircraft – Recourse by Canada to Article 21.5 of the DSU
("Original 21.5 Report"), WT/DS46/RW (9 May 2000).
2 Id., para. 6.72.

rate established by Brazil in PROEX II. 3 Finally, the Panel concluded that the first paragraph of
item (k) "cannot be used to establish that a subsidy which is contingent upon export performance
within the meaning of Article 3.1.(a) is 'permitted'."4
6. The Appellate Body agreed with the 21.5 Panel that "Brazil has failed to demonstrate that
PROEX payments are not ‘used to secure a material advantage in the filed of export credit terms’
within the meaning of the first paragraph of item (k)" of the Illustrative List of Export Subsidies.
5
Because that finding was sufficient to overcome Brazil’s defense under the first paragraph of item (k),
the Appellate Body found it unnecessary "to examine the issue of whether export subsidies under the
revised PROEX are ‘payments [by governments] of all or part of the costs incurred by exporters or
financial institutions in obtaining credits’ within the meaning of the first paragraph of item (k)."
6 The
Appellate Body, however, stated that it "would have been prepared to find that the payments made
under the revised PROEX are justified under item (k) of the Illustrative List" if Brazil had
demonstrated that that the payments under PROEX II were "payments" within the meaning of the first
paragraph of item (k) and that they were not used to secure a material advantage.
7 In light of the
rulings and recommendations of the DSB, Brazil has again revised PROEX.
III. DESCRIPTION OF THE REVISED PROEX
7. On 6 December 2000, the Central Bank of Brazil adopted Resolution No. 002799, which
"Modifies the applicable criteria for operations under the interest rate equalization system of the
Export Finance Program – PROEX." 8 For convenience, the revised PROEX programme arising out
this resolution shall be referred to as "PROEX III." Article 1 of the Resolution states:
In export financing operations for goods and services, as well as for software, in
compliance with Law 9,606, dated February 19, 1998, the National Treasury may
provide to the finance or re-financing agency, as the case may be, equalization
enough to render financing costs compatible with those practiced in the international
market.
Regarding interest equalization for exports of regional jet aircraft, Article 1, paragraph 1 of the
Resolution provides:
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.
Even though Brazil, as a developing country, is not a member of the OECD and hence is not a party to
the Arrangement, the Resolution commits Brazil to comply with the CIRR for transactions involving
aircraft.
8. PROEX III interest rate equalization remains subject to the maximum percentages established
by the Central Bank of Brazil in its Circular Letter No. 002881, dated 19 November 1999. Circular

3 Id., para. 6.104.
4 Id., para. 6.67.
5 Brazil – Export Financing Programme for Aircraft – Recourse by Canada to Article 21.5 of the DSU,
AB-2000-3 ("Appellate Body 21.5 Report"), WT/DS46/AB/RW (21 July 2000), para. 77.
6 Id., para. 78.
7 Id., para. 80.
8 The original Portuguese version and the official English translation of Resolution No. 002799 are
attached as Exhibit Bra-1.

Letter No. 002881 sets the maximum allowable interest equalization payment at 2.5 percent. 9 Th is
maximum amount is subject to the stipulation of Article 1, paragraph 1 of Resolution 00279 that
interest rate equalization for regional aircraft must comply with the terms of the CIRR established
under the OECD Arrangement.
9. In addition, PROEX III interest rate equalization remains subject to the requirement that
interest rate equalization may be provided for only 85 percent of the value of the sale, pursuant to
Article 5, paragraph 1 of Directive number 374 of the Ministry of Development, Industry, and Foreign
Trade, dated 21 December, 1999. 10 Directive 374 also establishes a maximum financing term of 10
years for regional jet aircraft.11
IV. PROEX IS NOT A SUBSIDY WITHIN THE MEANING OF ARTICLE 1
10. The threshold issue for this Panel is whether PROEX III is an export subsidy within the
meaning of Article 1 of the SCM Agreement. A negative answer to that question obviates any need to
consider the measure under either paragraph of item (k).
11. A subsidy is a financial contribution by a government that confers a benefit. However, a
financial contribution that does not confer a benefit is not a subsidy.
12 The Appellate Body has held
that CIRR is a commercial rate. 13 Indeed, Canada itself – in a belated admission that "struck" the
Panel in the previous Article 21.5 review – has admitted that commercial rates may be below CIRR
and therefore not confer a benefit within the meaning of Article 1.
14
12. Canada is not alone in this opinion. The current (7 March 2001) web page for Eksportfinans,
the Norwegian Export Credit Agency, offers 8.5 year or longer United States dollar financing at the
CIRR, which it lists as 6.13 percent. It also offers a "fixed market" rate for 7.0 years or longer of 5.8
percent.15 Thus, for 10 year support, the Norwegian export credit agency offers a market rate that is 33
basis points below the CIRR. As noted above, PROE X III, by its terms, is limited to loans up to a
maximum of 85 percent of the cost of the aircraft, for a period of 10 years at the CIRR or above the
CIRR. Since these terms conform fully with what is offered in the market, PROEX III, on its face,
cannot be found to confer a benefit.
13. There is additional evidence in support of this conclusion. David Stafford, former Chairman
of the OECD Participants’ Nuclear Sector and Aircraft Sector Groups, observes: "The CIRR system
… does provide a reasonable compromise in trying to formulate a proxy market rate …
My experience suggests that the CIRRs are about right or, if anything, marginally high." 16 I n
addition, Mr. Fumio Hoshi, Director-General of the International Finance Policy Department of the
Japan Bank for International Cooperation, noted in his presentation at the EXIMBANK 65 th

9 The original Portuguese version and the official English translation of Circular Letter No. 002881 are
attached as Exhibit Bra-2.
10 The original Portuguese version and the official English translation of Directive 374 are attached as
Exhibit Bra-3.
11 Id., Annex, NCM Heading 8802 (attached as Exhibit Bra-3).
12 Canada – Measures Affecting the Export of Civilian Aircraft, AB-1999-2, WT/DS70/AB/R (2
August 1999), para. 157.
13 Brazil – Export Financing Programme for Aircraft , AB-1999-1, WT/DS46/AB/R (2 August 1999),
para. 182.
14 Original 21.5 Report, para. 6.99.
15 <http://222.eksportfinans.no/eprise/main/EF/content/english/Inngangs> (visited 7 March 2001) (copy
attached as Exhibit Bra-4).
16 David Stafford, Wallen, Helsinki, Schaerer et al.: Some Major Achievements, Some Challenges to
Meet, in T HE EXPORT CREDIT ARRANGEMENT, A CHIEVEMENTS AND CHALLENGES 1978-1998 (OECD, 1998).
The text of the article is attached as Exhibit Bra-5.

Anniversary Conference in May 2000 that the CIRR may actually be "excessively high." 17 Thus, the
CIRR reflects with reasonable precision the market rate or, according to some, is in fact higher than
the market rate. Either way, interest rate support at or above the CIRR does not confer a benefit.
14. Brazil notes that by conforming PROEX III to comply with the CIRR, Brazil appears to have
complied with Canada’s claimed objective in these proceedings of requiring Brazil to conform to the
CIRR. Indeed, in its Second Oral Submission to the original Panel, Canada stated unequivocally that
it "would not have brought this case" if only "PROEX simply reduced the interest rate offered to an
airline to one that is above LIBOR or OECD rates."
18 Despite achieving its original stated goal,
Canada has once again raised the bar, now seeking to impose on Brazil standards that, on their face,
are more onerous than both those specified in the SCM Agreement and, more importantly, those used
in practice by developed countries such as Canada itself.
15. Finally, as shown below, PROEX III complies with the interest rates provisions of the OECD
Arrangement. Because PROEX III provides interest rate support in conformity with the Arrangement,
it does not confer a benefit. In addition, Article 8, para. 2 of Resolution 002799 requires the
Committee on Export Credits that co-administers PROEX III (the "Committee") to use "as reference
the financing terms practiced in the international market." Thus, when the Committee does so, it will
be required to make sure that no benefit is conferred.
V. PROEX MEETS THE REQUIREMENTS OF THE "SAFE HAVEN" OF ITEM (K)
SECOND PARAGRAPH
16. Brazil has shown that PROEX III, by its terms, does not confer a benefit and, therefore, is not
a subsidy. Assuming arguendo, however, that PROEX III does confer a benefit and, therefore, is a
subsidy, it nevertheless qualifies for the "safe haven" of item (k) second paragraph.
17. The second paragraph of item (k) provides:
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 Members), or if in practice a Member applies the interest rate 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.
18. The OECD Arrangement is the only "international undertaking on official export credits"
under the second paragraph of item (k).
19 Brazil, like most Members of the WTO, is not a party to the
Arrangement and has no voice in establishing its provisions. That is a privilege that is available only
to the 23 Participants in the Arrangement. Accordingly, Brazil is covered by the second clause of the
second paragraph because, "in practice," Brazil – through PROEX III – "applie s" the interest rates
provisions of the 1992 version of the Arrangement – the version that was incorporated by reference
into the SCM Agreement on 1 January 1995.

17 Presentation by Mr. Fumio Hoshi, Director-Gener al, International Finance Policy Department, Japan
Bank for International Cooperation, at the EXIMBANK 65 th Anniversary Conference, May 2000. The text of
the presentation is attached as Exhibit Bra-6.
18 Brazil – Export Financing Programme for Aircraft , Canada’s Second Oral Submission to the Panel,
at para. 109.
19 Canada – Measures Affecting the Export of Civilian Aircraft – Recourse by Brazil to Article 21.5 of
the DSU, ("Canada -- Aircraft 21.5 Report"), WT/DS70/RW (9 May 2000), para. 5.78.

A. THE PANEL SHOULD MEASURE PROEX III AGAINST THE VERSION OF THE OECD
ARRANGEMENT THAT WAS IN EFFECT ON THE DATE OF ENTRY INTO FORCE OF
THE SCM AGREEMENT
19. An interpretation of the text of the second paragraph of item (k), under the Vienna Convention
on the Law of Treaties (the "Vienna Convention"), leaves no doubt that the last version of the OECD
Arrangement which became effective prior to the entry into force of the SCM Agreement is "the
relevant undertaking" for the purposes of the second paragraph of item (k). This is the 1992 version
of the Arrangement.
20. Article 31 of the Vienna Convention requires that a treaty be "interpreted in good faith in
accordance with the ordinary meaning to be given to th e terms of the treaty in their context and in the
light of its object and purpose." The first step therefore is to interpret the second paragraph of
item (k) in accordance with the ordinary meaning of its terms.
1. The text of item (k) second paragraph establishes that the 1992 version of the
Arrangement applies.
21. The text of item (k) 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
(emphasis supplied). The phrase "has been" is central to the interpretation of item (k) second
paragraph. In its ordinary meaning, the present perfect tense – "has been" – refers to a "time regarded
as present" when the text became effective on 1 January 1995.
 20 It is a reference to a successor
undertaking already in existence – an undertaking that "has been adopted."
22. The alternative interpretation – that any and every later "successor undertaking" prevails,
even if adopted after the entry into force of the SCM Agreement – is not in accordance with the
ordinary meaning of the text. If the text envisaged that all future versions of the OECD Arrangement
adopted after the entry into force of the SCM Agreement would also be "relevant undertakings," it
would have used the future tense. It would ha ve referred to a successor undertaking which " will be
adopted" or "which may be adopted." That the text uses the present perfect "has," and not the future
"will" or the conditional "may," makes clear that the negotiators were referring only to a version of
the Arrangement in existence at that time.
23. The only "successor undertaking" that "has been adopted" by the original Members in "a time
regarded as present" when the SCM Agreement became effective is the 1992 version of the
Arrangement. Any versions adopted after the entry into force of the SCM Agreement are not
undertakings that have been adopted by the original Members at the time the SCM Agreement became
effective.
2. The context of item (k) second paragraph establishes that the 1992 version of the
Arrangement applies.
24. If amendments made to the Arrangement subsequent to 1 January 1995 were incorporated by
reference into item (k) second paragraph, the effective result would be amendment of the SCM
Agreement itself – an amendment made by the 23 or so participants in the Arrangement (out of
30 OECD member countries), not by the approximately 141 Members of the WTO. The context of
item (k) second paragraph makes clear that sub rosa amendment of a WTO agreement was not
intended.
25. Article 31.2 of the Vienna Convention provides that the context for the purpose of the
interpretation of a treaty comprises "any agreement relating to the treaty" made between the parties

20 The New Shorter Oxford English Dictionary 2158 (1993).

"in connexion with the conclusion of the treaty." It can hardly be disputed that all WTO agreements –
including the Marrakesh Agreement itself, and the DSU – provide the context for the proper
interpretation of the SCM Agreement.
26. The process of amendment is extremely important in the WTO Agreement, as it is in any
treaty. The terms of a treaty are carefully negotiated, and are not changed lightly or casually.
Article X of the Marrakesh Agreement reflects the importance of amendments to the WTO by
providing a detailed and precise system for their adoption, a system designed to protect the interests of
all Members.
27. Article X:1 of the Marrakesh Agreement specifies that a decision even to submit a proposed
amendment to the Members shall itself be taken by consensus of the entire WTO membership. If
consensus is not reached within a specified period, the decision whether to submit a proposed
amendment shall be taken by a two-thirds majority of the Members. If the two-thirds majority
decides to submit the amendment to the Members, paragraph 3 provides that, in most circumstances,
if two-thirds accept, the amendment shall take effect only as to those that have accepted it.
28. Article X:3 of the Marrakesh Agreement further requires that any amendments to an
Agreement in Annex IA (which includes the SCM Agreement) "that would alter the rights and
obligations of the Members" take effect only "for the Members that have accepted them." The only
exception is provided with respect to amendments that "would not alter the rights and obligations of
the Members." Those amendments, under Article X:4, "take effect for all Members upon acceptance
by two thirds of the Members."
29. An interpretation of item (k) that envisages the possibility of a handful of OECD countries
amending the scope of the exception for the entire WTO membership, after the entry into force of the
SCM Agreement, would evade the amendment process entirely, and could lead to significant
alteration of the rights and obligations of the Members of the WTO in regard to export credits.
30. Further, Article 3.2 of the DSU provides that, "Recommendations and rulings of the DSB
cannot add to or diminish the rights and obligations provided in the covered agreements." This
provision is intended, inter alia , to further the predictability of the multilateral trading system, to
which the dispute settlement system is a central element. It cannot be disputed that, through
amendment to the Arrangement, its participants could "diminish the rights and obligations provided in
the covered agreements" with regard to export credits, if subsequent versions of the Arrangement
were incorporated by reference into item (k) second paragraph. This further confirms that the text of
item (k) refers to the version of the Arrangement in effect on 1 January 1995, and to no later version
or versions.
31. In addition, Article 31.3© of the Vienna Convention requires that "any relevant rules of
international law" be taken into account together with the context. The law of treaties does not rule
out that governments may agree, pursuant to the provisions of an existing treaty, to be bound by the
provisions of a future treaty. However, such an agreement must be explicit and unambiguous; under
Article 30(2) of the Vienna Convention, the existing treaty must "specify that it is subject to" a later
treaty. The second paragraph of item (k) does not meet that requirement; its text makes it clear that it
is subject to only an undertaking that " has been adopted," i.e., an existing undertaking, not a future
one.
32. Finally, a determination that the OECD may amend a crucial provision of the SCM
Agreement at will, regardless of the views of the remainder of the WTO membership, would have
serious constitutional implications for Members – like Brazil – that incorporate the WTO Agreements
into their domestic law. No nation would confer carte blanche on non-citizens or other governments
to effect changes in its domestic law. The second paragraph of item (k) should not be interpreted to
say that Members of the WTO have done so.

3. The object and purpose of item (k) second paragraph establishes that the 1992 version
of the Arrangement applies.
33. The final stage of the analysis under Article 31 of the Vienna Convention requires an
interpretation of the terms of a treaty in light of its object and purpose. The object and purpose of the
SCM Agreement include establishing disciplines for the conduct of Members in providing subsidies
to their industries that would be clear, transparent, fair, binding on all Members, and enforceable.
34. It is one thing to say that, when the WTO Members negotiated and gave effect to the SCM
Agreement, they knew the terms of the most recent version of the OECD Arrangement, and were
willing to incorporate by reference its interest rates provisions into item (k). It is quite another thing
to say that they intended to give the OECD carte blanche to amend the SCM Agreement, and to add
to or diminish the rights and obligations provided by that Agreement.
35. The Panel in Canada – Aircraft explicitly ruled that the second paragraph of item (k) should
"not be interpreted in a manner that allows that subgroup of Members [the OECD Members] to create
for itself de facto more favourable treatment under the SCM Agreement than is available to all other
WTO Members. The OECD Arrangement , as a plurilateral arrangement to which most WTO
Members are not Participants, clearly has the potential to give rise to the discretion of individual
Members or group of Members."
21
36. This statement is extremely important. For example, nothing Brazil or the WTO might say or
do could prevent the OECD from amending the Arrangement’s provisions regarding regional aircraft
in a manner that specifically disadvantaged Brazil and Embraer. They could, for example, specify
that interest rate support may not be used for exports of regional aircraft. An interpretation of item (k)
that allowed even for the possibility of a WTO agreement’s being amended in such a fashion should
be avoided unless absolutely compelled. Nothing in item (k) permits, let alone compels, such an
interpretation.
4. A different interpretation of the second paragraph of item (k) leads to a result that is
manifestly absurd and unreasonable.
37. Article 32(b) of the Vienna Convention provides that an interpretation that "leads to a result
which is manifestly absurd or unreasonable" should be avoided. It would be unreasonable to interpret
the text of the second paragraph of item (k) to mean that 141 WTO Members have agreed to allow
23 OECD countries to amend the scope of the "safe haven" at their will. It would be absurd to
interpret an agreement subject to strict and detailed amendment requirements as permitting a small
group of outsiders to amend a vital part of its provisions, thereby adding to or diminishing the rights
and obligations of its Members. It would be mani festly unreasonable and absurd to interpret the text
to mean that those WTO Members that incorporate the Agreements into their domestic law have given
the OECD Arrangement Participants authority to amend that law.
38. If the OECD had the right to amend the SCM Agreement through the Arrangement, the
consequences truly would be bizarre. The 23 Participants in the Arrangement would be authorized to
impose binding obligations on some 141 WTO Members by means of adopting instruments that are
not even binding within the OECD itself. The Arrangement, it will be recalled, is simply a
"Gentlemen’s Agreement," with no enforcement provisions.
39. Moreover, the Participants in the Arrangement would be authorized to include in the scope of
the "safe haven" export credit practices they engage in while excluding export credit practices of other
WTO Members who are not members of the OECD. Simply stating these possibilities demonstrates
conclusively that an interpretation that post-1995 versions of the Arrangement are relevant to item (k)

21 Canada – Aircraft 21.5 Report, para. 5.132.

second paragraph is an interpretation that leads, in the words of Article 32(b) of the Vienna
Convention, "to a result which is manifestly absurd and unreasonable."
40. Accordingly, for all these reasons, Brazil submits that the Panel must examine the issue of
whether PROEX III is in conformity with the interest rate provisi ons of an international undertaking
on official export credits by reference to the text of the 1992 version of the OECD Arrangement, not
any later version.
B. PROEX III IS IN FULL CONFORMITY WITH THE RELEVANT INTEREST RATE
PROVISIONS OF THE 1992 OECD ARRANGEMENT
41. The second paragraph of item (k) makes reference only to the "interest rates provisions" of
the Arrangement, not to the provisions governing the terms and conditions of export credits, which are
broader. The interest rates provisions of the 1992 Arrangement are those set out in Article 5 of the
main text and Article 21 of Annex IV: Sectoral Understanding on Export Credits for Civil Aircraft. 22
PROEX III conforms with these provisions of the Arrangement. Brazil does not agree with the
approach of the Panel in Canada – Aircraft, which used a broad approach to identify what it believed
were the interest rates provisions of the 1998 OECD Arrangement .23 However, even if the same
broad approach is applied to the 1992 OECD Arrangement, Brazil conforms with the corresponding
interest rates provisions: Articles 3 through 7 of the main text, and Articles 17 through 22 and
Articles 24 and 25 of Annex IV. Brazil, under PROEX III, applies in practice those provisions of the
1992 OECD Arrangement as required by the second paragraph of item (k).
42. PROEX III conforms with the 1992 OECD Arrangement because all PROEX III supported
transactions in the regional aircraft sector take the form of official financing support with a repayment
term of two years or more, as required by Article 1 of the Arrangement.
43. PROEX III complies with Article 3 of the Arrangement, which requires that purchasers make
cash payments equal to a minimum of 15 percent of the export contract value; the maximum
percentage allowed under PROEX III for the purpose of interest rate equalization is 85 percent of the
export value of the sale.
24
44. Article 4 of the Arrangement relates to the terms of repayment. However, pursuant to
Articles 1(b) and 9(d) of the Arrangement, these provisions are superseded by Article 21 of Annex IV
dealing specifically with the aircraft manufactured by Embraer. PROEX III is in conformity with the
provisions of that Article, as discussed below.
45. Article 5(a) of the Arrangement fixes the minimum interest rate at the relevant CIRR. The
official financing support to the regional aircraft industry under PROEX III is at fixed interest rates
only.25 The net interest rates of all transactions in the regional aircraft sector under PROEX III are at
or above the relevant CIRR.26
46. Articles 6 (Local Costs) and 7 (Maximum Period of Validity of Commitments, Prior
Commitments and Certain Aid Commitments) are not relevant to PROEX III because no aircraft
credits are granted, financed, refinanced, guaranteed or insured under PROEX III. Article 1 of
Resolution 002799 explicitly states that PROEX III provides only interest rate support "enough to
render financing costs compatible with those prac ticed in the international market" and that the
financing to the regional aircraft industry is in the form of interest rate support in compliance with the

22 The text of the 1992 OECD Arrangement is attached as Exhibit Bra-7.
24 Article 5 of Directive No. 374.
26 Article 1, para. 1 of Resolution No. 002799. As will be discussed below, the SDR-based rates
referred to in Article 5(b) of the Arrangement are no longer relevant.

CIRR.27 Moreover, Article 5 of Directive 374 explicitly limits the interest rate support to 85 percent
of the export value of the contracted sale, thus clearly excluding additional local costs.
47. Articles 17 through 20 of Annex IV to the Arrangement describe the scope of Chapter II of
Annex IV relating specifically to aircraft other than large commercial aircraft. PROEX III falls within
that scope and is therefore covered by the interest rates provisions of that Chapter.
48. Article 21 of Annex IV requires that the maximum length of the financing term is 10 years at
the respective CIRR. The maximum length of the financing term under PROEX III is 10 years.28
49. Article 21 of Annex IV of the 1992 OECD Arrangement provides an alternative benchmark
for the maximum term of financing: "ten years at SDR-based rate for recipient countries classified in
category III." This alternative benchmark, however, was removed from the Arrangement in 1994
when the OECD adopted a set of guidelines, referred to as the "Schaerer Package." This abolished the
SDR-based interest rates "so that the CIRR system, intended to reflect market rates more closely,
would apply for all countries."
29 At any event, the SDR-based system is not relevant in the context of
PROEX III because PROEX III is in compliance with the specified term of 10 years at the relevant
CIRR.
50. Articles 22 (Sales or Leases to Third Countries (relay countries)), 24 (Insurance Premiums
and Guarantee Fees) and 25 (Tied Aid Credit Prohibitions) are not relevant to PROEX III because
PROEX III does not provide for such practices.
51. For these reasons, PROEX III, measured against the relevant provisions of the 1992 OECD
Arrangement, qualifies for the "safe haven" of the second paragraph of item(k).
C. PROEX III IS IN FULL CONFORMITY WITH THE RELEVANT INTEREST RATE
PROVISIONS OF THE 1998 OECD ARRANGEMENT
52. While Brazil will, through PROEX III, in practice apply the interest rates provisions of the
version of the Arrangement that was incorporated by reference into item (k) second paragraph, it is
clear that the same is true for the latest (1998) version of the Arrangement as well.
30 The difficulty,
however, as noted above, is that the OECD coul d change these requirements tomorrow – without
notice to Brazil, without notice to the WTO, without notice to anyone. Indeed, insofar as Brazil is
aware, there has been no official notification to the WTO or any of its Members by the OECD or any
of its members of the issuance of the 1998 version of the Arrangement. Thus, if the participants in the
Arrangement decide to change the requirements, Brazil and any other non-OECD participant,
unknowingly, would no longer be applying the interest rates provisions of the Arrangement.
53. In the view of Brazil, the relevant interest rates provisions of the 1998 OECD Arrangement
are Articles 15 through 19 of the main text and Article 22 of Annex III. PROEX III conforms to all
these provisions.
54. The Panel in Canada – Aircraft identified Articles 7 through 10 and 12 through 26 of the
main text and Articles 18 through 24 and Articles 27 through 29(a)-(c) of Annex III as the applicable
provisions of the 1998 OECD Arrangement.
31 Brazil disagrees with this finding of the Panel, and
believes that the relevant interest rates provisions are limited to Articles 15 through 19, as noted
above. However, even assuming that the conclusion of the Panel in Canada – Aircraft was correct,

27 Article 1 of Resolution No. 002799.
28 Circular-Letter No. 002881 and Annex to Directive No. 374.
29 A summary of the Schaerer Package provided in T HE EXPORT CREDIT ARRANGEMENT,
ACHIEVEMENTS AND CHALLENGES, 1978-1998 (OECD, 1998), at p. 20, is attached as Exhibit Bra-8.
30 The text of the 1998 OECD Arrangement is attached as Exhibit Bra-9.
31 Canada – Aircraft 21.5 Report, para. 5.147.

PROEX III conforms to all of these provisions, including both the minimum interest rates and "all
other applicable" provisions of the 1998 OECD Arrangement that "operate to support or reinforce the
minimum interest rate"32 with one arguable exception.
55. PROEX III transactions are official financing support with a repayment term of two years or
more, as required by Article 2 of the 1998 Arrangement. In fact, PROEX III complies fully with the
requirements of Annex III, Article 21, which provides that the maximum repayment term for
Category A aircraft (which includes Embraer’s jets), is 10 years.33 PROEX III support is also limited
to fixed interest rate transactions.34
56. PROEX III complies with the requirements of the 1998 Arrangement regarding minimum
interest rates. The 1998 Arrangement provides in Annex III, Article 22, "the Participants providing
official financing support shall apply minimum interest rates; the Participants shall apply the relevant
CIRR set out in Article 15 of the Arrangement." Article 15 in turn provides that the Participants
providing official financing support through direct credits/financing, refinancing, or interest rate
support shall apply the CIRR rates and lays out the relevant principles to be used in calculating the
CIRRs. By requiring compliance with the CIRR, Resolution 002799 clearly conforms with the basic
requirements of the 1998 OECD Arrangement.
57. PROEX III also complies with the other relevant provisions of the 1998 Arrangement.
PROEX III interest rate support is limited to 85 percent financing of the value of the sale. Again, this
conforms with Article 7 of the 1998 Arrangement (as well as Annex III, Article 6.a., though this
applies only to large aircraft and not Category A aircraft). In addition, as explained above,
PROEX III provides interest rate support at fixe d interest rates for a maximum repayment term of
10 years.
58. As is the case with the 1992 Arrangement, some of the interest rates provisions of the 1998
Arrangement are not relevant to PR OEX III because PROEX III does not provide for granting,
financing, refinancing, guaranteeing or insuring credits to the regional aircraft industry. As explicitly
stated in Article 1 of Resolution 002799, PROEX III provides only interest rate support "enough to
render financing costs compatible with those practiced in the international market."35
59. The only possible exception is the provision of Article 29(a) of the Annex dealing with spare
parts. That provision was in the sectio n dealing with large aircraft in the 1992 Arrangement. It was
moved to a separate section to cover both large and "other" aircraft in 1998. Thus, in 1996, when this
case began, Brazil was in compliance with this particular provision. Without notice to the WTO and
without notice to Brazil, the requirement was expanded in 1998 – two years after this dispute began –
to cover "other" aircraft as well. This is a perfect illustration of the point that interpreting the second
paragraph of item (k) to allow the OECD to amend the requirements of the "safe haven" leads to a
result that is manifestly absurd, unreasonable and unfair.
60. Article 29(a) limits financing for spare parts to a maximum of 15 percent of the aircraft price
for the first five aircraft and to 10 percent for the sixth and subsequent aircraft. Article 6 of Directive
374 provides that "Parts and spares may be included in a transaction, in a consolidated form up to a
limit of twenty percent (20%) of the aggregate valu e of the other goods." In the view of Brazil,
however, this provision of PROEX III conforms to the requirements of the interest rates provisions of
the 1998 OECD Arrangement.

32 Id., para. 5.114.
33 Article 3(c) of the Arrangement provides that provisions of the Sector Understanding shall prevail
over corresponding provisions of the Arrangement; Article 21 of Annex III supercedes Article 7 of the main text
of the Arrangement.
35 Article 1 of Resolution No. 00279.

61. First, Brazil disagrees with the Canada – Aircraft Panel and believes that Article 29 is not an
interest rate provision. The interest rates provisions of the 1998 Arrangement are Articles 15 through
19 of the main text and Article 22 of the Annex. PROEX III fully conforms with those provisions.
While Article 6 of Directive 374 gives the Committee the discretion to finance up to 20% of the spare
parts included in a transaction, 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.
 36 This is a discretionary, not a mandatory, provision. Brazil, therefore,
in practice applies the interest rates provisions of the 1998 Arrangement.
62. For all these reasons PROEX III conforms with all the provisions of the 1998 Arrangement
and its relevant Sector Understanding that the Canada –Aircraft Panel described as reinforcing the
minimum interest rate for Brazil’s regional jet transactions and hence as the "interest rate provisions"
of that Arrangement. The Panel should therefore find that PROEX III qualifies for the "safe haven" of
the second paragraph of item (k).
VI. PROEX III IS NOT USED TO CONFER A MATERIAL ADVANTAGE WITHIN THE
MEANING OF ITEM (K) FIRST PARAGRAPH
63. Brazil has demonstrated that PROEX does not confer a benefit within the meaning of
Article 1 of the SCM Agreement, and therefore is not a subsidy. Brazil also has demonstrated that –
assuming arguendo that PROEX is a subsidy – it qualifies for the safe haven of item (k) second
paragraph. In addition, however, it is Brazil’s contention that PROEX III is not used to secure a
material advantage in the field of export credit term s within the meaning of item (k) first paragraph.
In this portion of this submission, Brazil will demonstrate why this is the case.
A. PROEX D
OES NOT PROVIDE A MATERIAL ADVANTAGE
64. Even if the Panel determines that PROEX III does not qualify for the safe haven of the second
paragraph of item (k), Brazil submits that PROE X III equalization support is not a prohibited export
subsidy, because PROEX III payments do not confer a material advantage in the field of export credit
terms within the meaning of the first paragraph of item (k).
65. As noted above, in the first Article 21.5 proceedings in this matter, the Appellate Body found
that Brazil had failed to show that PROEX II was not used to secure a material advantage in the field
of export credit terms. The Appellate Body stated that to establish that PROEX payments are not
used to secure a material advantage, 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 is
appropriate."37 PROEX III stipulates that the net interest rates must be at or above the relevant CIRR.
Thus, PROEX III complies fully with the CIRR, a benchmark determined by the Appellate Body not
to confer a material advantage. In addition, Article 8, para. 2 of Resolution 002799 requires the
Committee to use "as reference the financing terms practiced in the international market." Thus,
when the Committee does so, it will be required to make sure that no material advantage is provided.

36 The value of spare parts in Embraer’s regional aircraft sales transactions is de minimus . The
arbitrators in the 22.6 proceedings in Brazil – Aircraft concluded that "there is no financing for spare parts under
PROEX for the ERJ-135" and that the "approximate average figure" for spare parts per ERJ-145 is $20,000.
Thus, on average, according to the arb itrators, the value of spare parts does not exceed 0.5% of the price of the
aircraft. Brazil – Export Financing Programme for Aircraft , Decision of the Arbitrators, WT/DS46/ARB
(28 August 2000), paras. 3.68-3.72. De minimus non curat lex.
37 Appellate Body 21.5 Report, para. 67.

B. AN A CONTRARIO INTERPRETATION OF ITEM (K) FIRST PARAGRAPH IS REQUIRED
66. Brazil submits that the material advantage clause should be interpreted a contrario such that a
payment that is not used to secure a material advantage within the meaning of the first paragraph is
not prohibited, and is therefore permitted, under the SCM Agreement. The failure to permit an a
contrario interpretation effectively would render the material advantage clause inutile, contrary to the
customary rules of interpretation of public international law.
67. In reviewing this issue in the original Articl e 21.5 proceedings, the Appellate Body began its
analysis by considering whether PROEX II in fact conferred a material advantage. 38 As noted above,
the Appellate Body concluded that Brazil had not discharged its burden of showing that PROEX III
did not confer a material advantage. Regarding Brazil’s a contrario argument, however, the
Appellate Body went on to say that if Brazil had discharged this burden, 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.39 Thus, as a legal matter, the Appellate Body appears to take the
view that assuming the other legal conditions are met, the first paragraph of item (k) should be read a
contrario to permit a subsidy that does not confer a mate rial advantage. This Panel should reach the
same conclusion.
C. PROEX IS A "PAYMENT" WITHIN THE MEANING OF ITEM (K) FIRST PARAGRAPH
68. PROEX III interest rate support is a "payment by [Brazil] of all or part of the costs incurred
by exporters or financial institutions in obtaining credits" within the meaning of item (k) first
paragraph.
69. Neither exporters nor financial institutions wish to obtain credits in order to hoard them; they
wish to "obtain" credits only to "provide" them. Before credits can be provided, they must be
obtained – obtained at a cost, and, in the case of a developing country like Brazil, a considerable cost.
70. When the lending institution is outside of the country, Embraer, the Brazilian exporter, faces
costs in obtaining for its customer a financial package that is competitive in the market, including a
market in which "market window" operators, such as Canada, are offering rates below the CIRR. If
Embraer could not obtain a competitive financial package for its customer, it would be forced to take
other costly action, such as paying for a commercially-available loan guarantee at a high premium.
When the lender is inside the country, however, it is the lender itself – the bank in Brazil – that must
obtain dollars in the market in order to provide dollar credits. This analysis was effectively confirmed
by the original Article 21.5 Panel, which observed that "developing countries’ costs of borrowing are
almost inevitably higher than those of developed counties."
40
71. PROEX interest rate support payments are payments designed to offset, at least partially, the
added costs faced by Brazilian institutions in obtaining the credits they provide.
72. If PROEX payments do not fit the definition of "payments" contemplated by item (k), it is
impossible to contemplate exactly what kind of payments in the export credit field the drafters of this
provision had in mind. The original Article 21.5 Panel stated that "a payment by Brazil that allowed a
Brazilian financial institution to provide export credits" could be permitted under the first paragraph
of item (k).41 This Panel should follow the logic of that statement and find that PROEX III payments
are "payments" within the meaning of the first paragraph of item (k).

38 Id., para. 58.
39 Id., para. 80.
40 Original 21.5 Report, para. 6.73.
41 Original 21.5 Report, para. 6.44.

VII. CONCLUSION
73. Brazil does not understand Canada’s purpose in again seeking recourse to Article 21.5,
especially without first seeking consultations with Brazil on its concerns regarding PROEX III. As
noted above, Canada has previously described its purpose in these proceedings as seeking to ensure
that Brazil would provide PROEX support only at or above the CIRR. As the Panel is aware, Brazil is
of the view that – as, indeed, Canada has admitted – transactions in the regional jet market occur
below the CIRR, and that Brazil should therefore not have to comply with standards that are honoured
more in breach than in observance by the group of developed country Members who themselves
developed those standards. Nevertheless, in response to the rulings and recommendations of the DSB,
Brazil has complied with Canada’s stated wishes and conformed PROEX to the interest rate
provisions of the Arrangement, as required by the second paragraph of item (k) of the SCM
Agreement. The sole issue before this Panel is whether the regulations governing PROEX conform to
the relevant provisions of the Arrangement. The Panel should answer this question in the affirmative
and not yield to Canada’s efforts once more to move the goalposts for Brazil.
74. Accordingly, Brazil requests that the Panel find and determine that Canada has not
established that PROEX III confers a benefit within the meaning of Article 1 of the SCM Agreement
and, accordingly, that Canada has not sustained its burden of proving that PROEX III is a subsidy.
75. However, even if the Panel should find that PROEX is a subsidy within the meaning of
Article 1, contingent upon export within the meaning of Article 3, PROEX is nevertheless not
prohibited because:
(a) Brazil in practice applies the interest rates provisions of the relevant undertaking – the
1992 version of the Arrangement on Guidelines for Officially Supported Export
Credits of the OECD;
(b) Brazil in practice applies the interest rates provisions of the 1998 version of the
Arrangement on Guidelines for Officially Supported Export Credits of the OECD;
(c) PROEX interest rate support is not used to provide a material advantage in the field
of export credit terms.

LIST OF EXHIBITS
BRA-1. Resolution No. 002799 of the Central Bank of Brazil, 6 December 2000 (Portuguese
and English versions)
BRA-2. Circular letter No. 002881 of the Central Bank of Brazil, 19 November 1999
(Portuguese and English versions)
BRA-3. Directive No. 374 of the Ministry of Development, Industry and Foreign Trade,
21 December 1999, and selected pages of the Annex thereto (Portuguese and English
versions)
BRA-4. Printout of http://222.eksportfinans.no/eprise/main/EF/content/english/Inngangs
BRA-5. David Stafford, Wallen, Helsinki, Schaerer et al.: Some Major Achievements, Some
Challenges to Meet , in T HE EXPORT CREDIT ARRANGEMENT, A CHIEVEMENTS AND
CHALLENGES 1978-1998 (OECD, 1998)
BRA-6. Presentation by Mr. Fumio Hoshi, Director-General, International Finance Policy
Department, Japan Bank for International Cooperation, at the EXIMBANK 65 th
Anniversary Conference, May 2000
BRA-7. 1992 OECD Arrangement on Guidelines for Officially Supported Export Credits
BRA-8. Summary of The Schaerer Package, in T HE EXPORT CREDIT ARRANGEMENT,
ACHIEVEMENTS AND CHALLENGES 1978-1998 (OECD, 1998)
BRA-9. 1998 OECD Arrangement on Guidelines for Officially Supported Export Credits

I. INTRODUCTION
1. In its First Submission of 2 March 2001, Canada asserts that Brazil's Programa de
Financiamento às Exportações ("PROEX III") is a prohibited export subsidy within the meaning of
Articles 1 and 3 of the Agreement on Subsidies and Countervailing Measures ("SCM Agreement" or
"Agreement). Next, Canada examines PROEX III in light of the first paragraph of item (k) of Annex
I to the SCM Agreement, and concludes that PR OEX III does not qualify for any exemption that
paragraph may offer. Canada does not address the second paragraph of item (k) which provides that,
when Members "in practice" "apply" the interest rates provisions of the Arrangement on Guidelines
for Officially Supported Export Credits of the Organization for Economic Cooperation and
Development ("OECD Arrangement" or "Arrangement"), they are not providing prohibited subsidies.
2. The practical consequence of Canada's position is that high-technology industries like aircraft
are the exclusive preserve of the developed countries; developing countries should stick to light
manufactures and commodities. This is because, historically, the developed countries have supported
industries, such as aircraft, with export credits that provide better terms than those available on the
market. The result is that trade in aircraft depends not only on the price and quality of the product,
but also on which government grants the more favourable financing terms. Because developed
country governments enjoy better credit ratings and a lower cost of funds than do developing country
governments, they are able to provide their exporters with more favorable export credits than are
developing countries – credits that can overcome product price and quality differences.
3. In previous proceedings Brazil has shown, and the first Article 21.5 Panel has found, that
developing countries, such as Brazil, simply are not able to compete with the credit ratings of
developed countries in offering loan guarantees, and are not able to compete with the treasuries of
developed countries in offering direct financing.
1 They are forced, by default, to rely largely on
interest rate support in supplying export credits.2
4. Meanwhile, developed countries, such as Canada, are free not only to offer direct financing,
but to do so through their so-called "market window" operations. The Head of the OECD Trade
Directorate and a specialist in the OECD Export Credit Division have characterized these "so-called
'market window' operations" as "institutions related to governments which are able to raise finance
and lend at very low rates but which may not currently follow all the provisions of the Arrangement."
3
5. Using the "very low rates" that do not "follow all of the provisions of the Arrangement,"
Canada, and some other developed countries, may make financing available at rates that are below the
Commercial Interest Reference Rate ("CIRR") of the Arrangement. But, the argument continues,
these rates are "commercial."4 Further, developed countries may make financing available for periods
that exceed the limits of the Arrangement, but these, too, are called "commercial."5 In Canada's view,
there appears to be one set of rules for one group of Members, and another, more stringent set of rules
for another group of Members. For the reasons explained below, this view is wrong, as a matter of
law as well as policy.

1 Brazil – Export Financing Programme for Aircraft – Recourse by Canada to Article 21.5 of the DSU,
WT/DS46/RW (9 May 2000) ("Original 21.5 Report"), para. 6.58-59.
2 Id., para. 659.
3 Steve Cutts and Janet West, "The Arrangement on Export Credits," The OECD Observer No. 211,
April/May 1998 at 12, 14 (Exhibit Bra-10).
4 Original 21.5 Report, para. 6.99: "We were, however, struck by Canada's assertion that export credits
provided by EDC through the 'market window,' even at interest rates below CIRR, were nevertheless
'commercial' export credits that did not confer a benefit within the meaning of Article 1."
5 Id., at page 94 (Canada's Answer to question 8 of The Panel's Further Questions).

II. QUESTION PRESENTED
6. The question presented to this Panel is "whether the measures taken by Brazil to comply with
the rulings and recommendations of the DSB bring Braz il into conformity with the provisions of the
SCM Agreement and result in the withdrawal of the export subsidies to regional aircraft under
PROEX."6
7. During the Article 22.6 Arbitration proceedings, 7 Canada was authorized to suspend
concessions to Brazil in the amount of C$344.2 million per year as appropriate countermeasures
within the meaning of Article 4.10 of the SCM Agreement. This authorization was based on a
calculation of the amount of subsidies under PROEX I and II deemed to be prohibited in the previous
Panel proceedings. Accordingly, Brazil distinguishes between the so-called "undelivered aircraft" –
aircraft subject to the calculation of the level of authorized countermeasures in the Article 22.6
proceedings – and any new PROEX III commitments. Brazil has stated repeatedly that it is unable to
default on commitments it made to private parties who have relied, in good faith, on Brazil's
commitments for the undelivered aircraft. The sole issue before this Panel, therefore, is whether
PROEX III now complies with the requirements of the SCM Agreement for new orders.
III. BURDEN OF PROOF
8. In its submission, Canada asserts that it has presented evidence that satisfies its burden of
proving that payments under PROEX III "continue to be prohibited export subsidies."
8 Canada has
done nothing of the kind.
9. Under the standard articulated by the Appellate Body in Chile – Alcoholic Beverages ,
PROEX III enjoys a presumption of compliance:
Members of the WTO should not be assumed, in any way, to have continued previous
protection or discrimination through the adoption of a new measure. This would
come close to a presumption of bad faith.9
10. Canada's assertion that it has met this legal and evidentiary burden is incorrect. Its "proof"
that PROEX III is a subsidy is based entirely on its assertion that, "as has been confirmed twice before
by both the Panel and the Appellate Body, PROEX payments continue to involve a direct transfer of
funds from the Government of Brazil that confers a benefit." 10 Yet as Canada itself has
acknowledged, "this second Article 21.5 proceeding is to consider only whether PROEX III is
consistent with the SCM Agreement." 11 Since neither the Panel nor the Appellate Body has
previously examined PROEX III, Canada's referen ces to the prior findings regarding PROEX I and
PROEX II are irrelevant. These references to past measures do not discharge Canada's threshold
burden to establish that the programme now before this Panel – PROEX III – constitutes a prohibited
export subsidy. Moreover, Canada's legal arguments regarding PROEX III are insufficient to
discharge this burden.

6 WT/DS46/26 (22 January 2001).
7 Brazil – Export Financing Programme for Aircraft – Recourse to Arbitration by Brazil under Article
22.6 of the DSU and Article 4.10 of the SCM Agreement, Decision by the Arbitrators, WT/DS46/ARB
(28 August 2000).
8 Brazil – Export Financing Programme for Aircraft – Second Recourse by Canada to Article 21.5 of
the DSU, First Submission of Canada (2 March 2001) ("Canada First Submission"), para 20.
9 Chile – Taxes on Alcoholic Beverages , WT/DS87/AB/R, WT/DS110/AB/R (13 December 1999)
(Adopted 12 January 2000), para. 74 (emphasis in original).
10 Canada First Submission, para. 23 (emphasis added).
11 Id., para. 19.

IV. LEGAL ARGUMENT
A. CANADA HAS NOT ESTABLISHED THAT PROEX III INTEREST EQUALIZATION
PAYMENTS FOR AIRCRAFT CONSTITUTE A SUBSIDY
11. Canada claims that "Brazil continues to acknowledge that PROEX [III] subsidies are
prohibited export subsidies." 12 This statement is incorrect. Brazil acknowledges no such thing.
Canada's added claim, in footnote 22 to its First Submission, that Brazil has acknowledged that
PROEX payments were "prohibited export subsidie s" also is incorrect. Brazil has acknowledged
nothing of the sort. What Brazil has argued in the past is that PROEX interest equalization payments,
as they were constituted in the prior proceedings, were subsidies contingent upon export, but that they
were not "prohibited" under the SCM Agreement.
12. Canada has presented no evidence that would establish that PROEX III confers a benefit in
the sense that, in the words of the Appellate Body, it confers "terms more favorable than those
available to the recipient in the market."
13 A financial contribution that does not confer a benefit is
not a subsidy. 14 Canada's argument appears to be based solely on the premise that providing
equalization at the CIRR confers a benefit or provides terms more favorable than those available to
the recipient in the market. 15 As an attempt to discharge an evidentiary burden, this argument is
wholly insufficient.
13. Moreover, it is completely contradicted by Canada's position in the previous two stages of
these proceedings. Before the Original Panel, Canada stated that it would have not brought the case if
PROEX simply matched OECD rates, i.e. the CIRR. 16 Before the Article 21.5 Panel, Canada
admitted that it provides export financing at rates below the CIRR, and claimed that those rates were
nevertheless "commercial."17 Yet Canada now seeks to impugn PROEX III – which establishes the
CIRR as a benchmark – as providing terms that are more favorable than those available in the
marketplace. This allegation is inconsistent both with Canada's prior statements and with its own
admitted practice. In the circumstances, Canada cannot be found to have discharged even a minimum
legal and evidentiary burden of showing that PROEX III constitutes a prohibited export subsidy.
14. Canada is under a burden to establish that PROEX III, on its face, constitutes a prohibited
export subsidy. Canada has provided no factual or legal evidence that satisfies this burden. The Panel
therefore should deny Canada's request for relief in this proceeding.
B. CANADA HAS FAILED TO SHOW THAT PROEX III CONFERS A MATERIAL
ADVANTAGE WITHIN THE MEANING OF ITEM (K) FIRST PARAGRAPH
15. Even though PROEX III, by its terms, specifically provides that all interest equalization shall
conform to the CIRR, Canada, in its First Submission to the Panel, does not address the issue whether
Brazil qualifies for the safe haven of the second paragraph of item (k). Canada's First Submission
challenges PROEX III solely on the ground that Brazil cannot establish that PROEX III does not
confer a material advantage within the meaning of the first paragraph of item (k). Brazil, for the

12 Id., para. 24.
13 Canada – Measures Affecting the Export of Civilian Aircraft, AB-1999-2, WT/DS70/AB/R
(2 August 1999), para. 157.
14 Id.
15 Canada acknowledges that the ongoing PROEX I and II payments on the so-called "undelivered"
aircraft that were at issue in the Article 22.6 proceedings in this matter are not at issue in this Article 21.5
proceeding. Canada First Submission, para. 18. However, Canada has not provided any evidence regarding any
actual transactions under PROEX III.
16 Brazil – Export Financing Programme for Aircraft , Canada's Second Oral Submission to the Panel,
para. 109.
17 Original 21.5 Report, pages 82, 89 (Responses by Canada to Questions of the Panel).

reasons explained in its First Submission, submits that PROEX III conforms with the relevant interest
rate provisions of the Arrangement and therefore qualifies for the safe haven of the second paragraph
of item (k). Brazil also believes, however, that PROEX III is not used to secure a material advantage
within the meaning of item (k) first paragraph. Brazil explains why this is so in this section of its
submission.
16. Brazil agrees with Canada that in order to prevail under item (k) first paragraph, Brazil must
establish three elements. 18 First, Brazil must show that item (k) first paragraph may be interpreted
a contrario such that a payment that is not used to secure a material advantage within the meaning of
the first paragraph is not prohibited, and therefore is permitted, under the SCM Agreement. Second,
Brazil must show that PROEX III payments fall within the definition of "payment by [a government]
of all or part of the costs incurred by exporters or financial institutions in obtaining credits," within the
meaning of the first paragraph of item (k). Th ird, Brazil must show that PROEX payments are not
used to "secure a material advantage in the field of export credit terms." Canada's arguments on each
of these three points are unavailing, and the Panel should find that PROEX III payments are not
prohibited export subsidies.
2. The First Paragraph of Item (k) Must Be Given an A Contrario Interpretation
17. Item (k) of Annex I to the SCM Agreement provides, in relevant part, that certain
governmental payments are prohibited export subsidies "in so far as they are used to secure a material
advantage in the field of export credit terms." The addition of this "material advantage" clause where
the paragraph would otherwise conclude necessarily affects the meaning of the paragraph. For the
following reasons, the Panel should interp ret this clause to mean that payments not used to secure a
material advantage are not prohibited.
(b) Standard Principles of Treaty Interpretation Favor Brazil's Interpretation
18. The first paragraph of item (k) should be interpreted in accordance with the provisions of
Article 31 of the Vienna Convention on the Law of Treaties (the "Vienna Convention"), which
provides that a treaty shall be interpreted in acco rdance with the ordinary meaning to be given to the
terms of the treaty in their context and in light of its object and purpose. Moreover, this Panel "must
give meaning and effect to all the terms of the treaty." 19 While these principles appear
straightforward, there nevertheless remains considerab le dispute as to the "ordinary meaning" of the
material advantage clause.
19. In Brazil's view, the issue is quite simple. The Panel must give meaning and effect to the
material advantage clause. The minimum meaning and effect that can reasonably be given is that the
clause qualifies the preceding language of the first paragraph. This must mean that the "payments"
described in the preceding clauses are not all or entirely prohibited. Put another way, the language
plainly calls for a distinction between payments that are used to secure a material advantage and those
that are not. Thus, the ordinary, straightforward meaning of the material advantage clause is that
payments that are used to secure a material advantage are prohibited subsidies, whereas payments that
are not so used are not prohibited. Canada's submission contains no reading of the clause that would
give the language its ordinary meaning and reach a different result.
(c) The Maxim Expressio Unius Est Exclusio Alterius Supports Brazil's Interpretation
20. Canada describes the a contrario rule as another way of referring to the maxim expressio
unius est exclusio alterius , which means, in effect, that by stating one proposition in a text, the

18 Canada First Submission, para. 27.
19 Korea – Definitive Safeguard Measure on Imports of Certain Dairy Products, WT/DS98/AB/R
(12 January 2000), para. 80.

drafters necessarily excluded another proposition. Brazil agrees with Canada that the a contrario rule
is related to the expressio unius maxim. However, Brazil disagrees with Canada that the maxim is
unhelpful here. To the contrary, the expressio unius principle, as interpreted by the authorities relied
upon by Canada, supports Brazil's construction of the first paragraph of item (k).
21. Put simply, the expressio unius maxim, in this case, means that by describing as prohibited
subsidies payments "in so far as they are used to secure a material advantage," the drafters of the SCM
Agreement necessarily intended that payments would not be prohibited export subsidies in so far as
they are not used to secure a material advantage. The maxim is a "rule of both law and logic and
applicable to the interpretation of treaties as well as municipal statutes and contracts." 20 In this
instance, as a rule of law, the maxim corresponds with the principles of Article 31 of the Vienna
Convention. The ordinary meaning of the language suggests that payments are prohibited only if they
are used to secure a material advantage.
22. As a rule of logic, the maxim also supports Brazil's interpretation. Logically, had the drafters
of the first paragraph intended to describe all "payments" as prohibited export subsidies, they simply
would have ended the first paragraph right before the "in so far as" clause. The drafters did not so.
Logically, therefore, they intended to qualify the description of payments that would be considered as
prohibited subsidies so that only those payments described in the additional clause – those that are
used to secure a material advantage – would be described as prohibited. Again logically, this means
that the drafters intended that payments that did not fit that description – those that do not secure a
material advantage – would not be proscribed.
23. Canada attempts to avoid this compelling logic by arguing that the maxim must be applied
with caution. Canada quotes from a decision of an English court which stated that "the exclusio [i.e.,
the thing not expressly mentioned] is often the result of inadvertence or negligence, and the maxim
ought not to be applied . . ."
21 This concern regarding the application, though no doubt valid, is not
present here. It is impossible that the exclusio in this case was a result of inadvertence or negligence.
To the contrary, the history of the first paragraph and the "material advantage" clause – the expressio
in this case – makes clear that the clause was deliberately added to "restrict the definition of this type
of export subsidy to instances where a 'material advantage' has been 'secured.'"
22
24. The language that now comprises the first paragraph of item (k), without the material
advantage clause, had its origins in rules adopted in 1958 by the Organization for European Economic
Cooperation (the "OEEC"), the predecessor of the OECD, which prohibited:
(g) The grant by governments (or special institutions controlled by governments)
of export credits at rates below those which they have to pay in order to obtain the
funds so employed;
(h) The government bearing all or part of the costs incurred by exporters in
obtaining credit.23
25. These provisions were included verbatim in a 1960 Report of a GATT Working Party on
Subsidies as examples of export subsidies.24 Subsequently, they provided the basis for the Illustrative
List that eventually was included in the Tokyo Round Subsidies Code. It is significant, however, that

20 United States v. Germany, 7 R.I.A.A. 91, 111 (1924) (the Life Insurance Claims arbitration).
21 Colquhoun v. Brooks, 21 QBD 52, 65.
22 Brazil – Export Financing Programme for Aircraft, Report of the Appellate Body, WT/DS46/AB/R
23 John E. Ray, Managing Official Export Credits – The Quest for a Global Regime , Institute for
International Economics (1995), at 35 (Exhibit Bra-11).
24 BISD 9S/185 (Report adopted on 19 November 1960).

in their first appearance in a GATT document, and for the next 18 years, these provisions contained
no material advantage clause.
26. Meanwhile, the OECD Arrangement was agreed upon in 1978, close to the 1979 conclusion
of the Tokyo Round.25 This presented a conflict. The Arrangement expressly permitted governmental
action with regard to export credits – interest rate support, for example – that would fall within the
definition of an export subsidy in the 1960 Working Party Report and Article XVI of GATT, which
were the basis of the contemporaneous Tokyo Round negotiations. Gary Hufbauer, one of the Tokyo
Round negotiators, in recounting this history, noted that, "many countries were unwilling to condemn
as export subsidies those practices condoned in the OECD."
26 An exception, therefore, was inserted
in the Code, and what is now the second paragraph of item (k) – the safe haven clause for practices
that conform to the interest rates provisions of the Arrangement – was added.27 Initially, this was all
the Tokyo Round negotiators did. They did not add a material advantage clause.
27. On 10 July 1978, an Outline of an Arrangement, prepared by the delegations of Canada, the
European Communities, Japan, the Nordic countries, and the United States, was circulated to the Sub-
Group on Subsidies and Countervailing Measures of the Negotiating Group on Non-Tariff Barriers. 28
This Sub-Group comprised the GATT negotiators whose efforts produced the Tokyo Round Subsidies
Code. The draft contained a description of an Annex A, which would set forth an illustrative list of
export subsidies:
A list of export subsidies illustrative of the obligations in GATT Article XVI:4, as
supplemented by the Arrangement. In this connexion, work should build upon the
1960 Illustrative List, taking into account other work on this subject undertaken in the
GATT.
29
28. This description explicitly takes account of the OECD Arrangement, but does not mention a
material advantage clause which, as of that date, had not appeared in any previous iteration of the
Illustrative List, either in the OECD or in GATT. The first appearance of the material advantage
clause in a GATT document did not occur unti l 19 December 1978, some 20 years after the other
relevant language was included in the first Illust rative List of the OEEC. This document, also an
Outline of an Arrangement, contained the langua ge that was included in the Tokyo Round Subsidies
Code and eventually became Item (k):
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 have
to pay in order to obtain the funds so employed, or the payment by them of all or part
of the costs incurred by exporters or financial institutions in obtaining credit, insofar
as they are used to secure a material advantage in the field of export credit terms.30
29. Thus, sometime after deciding to include the OECD safe haven clause, the GATT negotiators
then made two additional significant changes to the language contained in the 1960 Working Party

25 Ray, supra, at 40 (Exhibit Bra-11).
26 G ARY CLYDE HUFBAUER AND JOANNA SHELTON ERB, S UBSIDIES IN INTERNATIONAL TRADE 70
(Washington, D.C., Institute for International Economics 1984) (Exhibit Bra-12).
27 Ray, supra, at 36-38 (Exhibit Bra-11).
28 General Agreement on Tariffs and Trade, Multilateral Trade Negotiations, Group "Non-Tariff
Measures," Sub-Group "Subsidies and Counte rvailing Duties," SUBSIDIES/ COUNTERVAILING
MEASURES, Outline of an Arrangement, MTN/NTM/W/168, 10 July 1978 (Exhibit Bra-13).
29 Id. page 23.
30 General Agreement on Tariffs and Trade, Multilateral Trade Negotiations, Group "Non-Tariff
Measures," Sub-Group "Subsidies and Counte rvailing Duties," SUBSIDIES/ COUNTERVAILING
MEASURES, Outline of an Arrangement, MTN/NTM/W/210, 19 December 1978, page 26 (emphasis added)
(Exhibit Bra-14).

report. First, they added the phrase "or financial institutions," and second, they added the material
advantage clause: "insofar as they are used to secure a material advantage in the field of export credit
terms."
30. These additions were the last changes made in the language of item (k). They were made
deliberately, and were intended by their drafters to have genuine meaning and effect. In Hufbauer's
words, the material advantage clause was intended to provide "a weak injury test in the event of a
departure from the basic GATT standard."
31
31. This history makes clear that the expressio – the material advantage clause – was added
intentionally as a restriction on the definition of a prohibited export subsidy. Accordingly, the
exclusio – payments that do not secure a material advantage – cannot have been inadvertent, as
Canada suggests. Instead, the exclusio must be given full effect to interpret the language as it was
intended – which is to exclude from the definition of prohibited subsidy instances where no material
advantage is secured.
(d) Footnote 5 Does Not Control the Meaning of the First Paragraph of Item (k)
32. Canada continues to rely on footnote 5 to the Agreement, which it claims is "particularly
important" to Brazil's a contrario argument.
32 Footnote 5 provides that "Measures referred to in
Annex I as not constituting export subsidies shall not be prohibited under this or any other provision
of this Agreement." Canada claims "it is impossible to reach a conclusion as to the existence of an a
contrario exception without interpreting the language of footnote 5."
33
33. Brazil does not dispute that footnote 5 directs the reader to Annex I of the SCM Agreement.
But that is not at issue. Rather, the issue is whether the language of footnote 5 provides any
elaboration as to which measures in fact are referred to in Annex I as not constituting export
subsidies. Canada believes it does, based on its view of the meaning of the words "referred to."
Canada would like to read the word "expressly" into the language of footnote 5. However, as the
Article 21.5 Panel noted, the word "expressly" was dropped from an earlier draft of the language of
the footnote, which apparently "broadened" its meaning.
34 Nevertheless, Canada offers the dictionary
meaning of the phrase "refers to" as "direct to . . . by drawing attention to" and synonyms such as
"mentioned, cited, named." 35 Canada's problem is that none of these definitions is in any way
inconsistent with an a contrario interpretation of the material advantage clause. Thus, if on review of
the ordinary meaning of the language of the first paragraph, the Panel were to conclude that an a
contrario interpretation of that language is appropriate, it would be entirely proper to consider
payments that do not secure a material advantage as a "measure referred to in Annex I as not
constituting [an] export subsid[y]" within the meaning of footnote 5. In short, nothing in the language
of footnote 5 determines the plain meaning of item (k) first paragraph. To the contrary, that paragraph
must be interpreted based on its own provisions and according to its own ordinary meaning and
purpose. Once item (k) is given such an interpretation it will accord naturally with the language of
footnote 5.
34. Canada attempts to avoid this analysis by bolstering the language of footnote 5, which it
describes as an "explicit" exclusionary clause. But footnote 5 is not explicit in the sense used by
Canada. It does not describe measures " specifically" or "directly" referred to in Annex I. Instead, it
simply describes, in Canada's own words, "measures mentioned or draw[n] attention to" in Annex I.
36

31 HUFBAUER, supra, note 26 at 70.
32 Canada First Submission, paras. 47-55.
33 Id., para. 50.
34 Original 21.5 Report, paras. 6.39-40.
35 Canada First Submission, para. 52.
36 Id., para. 52.

Again, it does not make sense to say that item (k) "draws attention to" payments that secure a material
advantage and at the same time allege that it says nothing at all about payments that do not secure a
material advantage. For this reason also, Brazil's interpretation is more consistent than Canada's with
the statement of the Appellate Body in United States – Foreign Sales Corporations (to which Canada
cites) that footnote 5 applies "where the Illustrative List indicates that a measure is not a prohibited
subsidy."37 It is precisely Brazil's position that by limiting the description of prohibited subsidies to
payments that secure a material advantage, item (k) indicates that payments that do not do so are not
prohibited subsidies.
35. Canada seeks to elevate the importance of footnote 5 to avoid the ordinary meaning of the
material advantage clause of item (k). In the words of the Appellate Body in its original opinion in
this case, "[a]s a matter of treaty interpretation, this cannot be so." 38 Instead, the Panel should follow
the Appellate Body's approach: "examine the terms of the provision at issue, in this case, the 'material
advantage' clause of item (k). We look first to the ordinary meaning of the language used."
39
36. Canada's arguments regarding the impact of footnote 5 on the interpretation of Annex I are
undermined by the logical interpretation of other provisions of the Annex. In this regard, item (i)
specifies that the remission by governments of import charges, "in excess of those levied on imported
inputs," are prohibited export subsidies. A contrario, of course, this must mean that the remission of
import charges not in excess of those levied on imported inputs are not prohibited. As with the
material advantage clause of item (k), no other interpretation is reasonable. If the negotiators had
intended that the remission by governments of all import charges were prohibited subsidies, item (i)
simply would have been drafted with a period, or full stop, after the word "charges."40
37. In conclusion, the denial of an a contrario interpretation to the material advantage clause
would effectively render the clause superfluous. Without an a contrario interpretation, the clause is
totally unnecessary in the first paragraph of item (k). This reduction of the material advantage clause
to inutility is not permissible under the customary rules of interpretation of public international law. 41
Moreover, this inutility is not avoided by reference to footnote 5, which says nothing that qualifies the
meaning of the text of the material advantage clause.
38. In its opinion in the Article 21.5 proceeding, the Appellate Body stated that it "would have
been prepared to find" that an a contrario interpretation of the material advantage clause could be
used to justify PROEX payments, had Brazil been able to prove that PROEX interest rate support
payments did not confer a material advantage.
42 Thus, as a legal matter, the Appellate Body appears
to believe 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. This Panel should reach the same conclusion.

37 Id., para. 53, citing United States – Tax Treatment for "Foreign Sales Corporations,"
WT/DS108/AB/R (20 March 2000), para. 93 (emphasis added).
38 Appellate Body Report, para. 179 and footnote 110, quoting United States – Standards for
Reformulated and Conventional Gasoline , WT/DS2/AB/R (29 April 1996) (Adopted 20 May 1996), pg. 23
("[a]n interpreter is not free to adopt a reading that would result in reducing whole clauses or paragraphs of a
treaty to redundancy or inutility").
39 Appellate Body Report, para. 177.
40 Brazil does not allege, and the Panel need not decide, that every item in the Illustrative List is
susceptible to an a contrario interpretation.
41 Appellate Body Report, para. 177.
42 Brazil – Export Financing Programme for Aircraft – Recourse by Canada to Article 21.5 of the
DSU, Report of the Appellate Body, WT/DS46AB/RW (21 July 2000) ("Article 21.5 AB Report"), para. 80.

3. PROEX III Payments Are "Payments" within the Meaning of the First Paragraph of
Item (k)
39. Canada argues that PROEX III payments are not payments within the meaning of item (k)
first paragraph. Canada draws a distinction between providing export credits, and payment of all or
part of the costs of obtaining export credits.43 This distinction forms the basis of Canada's arguments
that PROEX III interest rate support payments ar e not "payments" within the meaning of the first
paragraph. As explained below, this distinction makes no sense in the context of the market for
regional jet aircraft. Moreover, if PROEX payments do not fit the definition of "payments"
contemplated by item (k), Canada fails to explain exactly what kind of payments in the export credit
field the drafters of this provision had in mind.
40. The original Article 21.5 Panel stated that, "a payment by Brazil that allowed a Brazilian
financial institution to provide export credits" could be permitted under the first paragraph of item (k)
provided no benefit is conferred.
44 This would appear to contemplate that PROEX payments fell
within the definition of the first paragraph, in that by enabling the Brazilian financial institution to
provide export credits, it first had to pay the costs of obtaining the credits. This interpretation also
would appear to be consistent with the ordinary meaning and purpose of the definition of "payments"
in the first paragraph. 45 Canada has failed to provide any reasoned explanation why this
interpretation is not appropriate.
41. The distinction between "obtaining" and "providing" credits fails for another reason. The first
paragraph of item (k) refers, inter alia, to costs "incurred by exporters or financial institutions in
obtaining credits." The language clearly contemplates that exporters and financial institutions
"obtain" credits. But neither wants to "obtain" credits simply to hoard them. Both "provide" to export
purchasers the credits they previously "obtain." That is the reason they are obtained. The fact that an
exporter or a financial institution also provides credits does not mean that it does not obtain them at a
cost.
42. The first sentence of item (k) first paragraph supports this conclusion. It deals with the grant
by governments "of export credits at rates below those which they actually have to pay for the funds
so employed." Just as the use of the term "export credits" in the first part of the paragraph justifies an
interpretation of "credits" as meaning the same in the latter part, so also the reference to "the funds so
employed" in the first part justifies 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. This suggests that the language was intended to cover the provision of export credits to
borrowers at a cost that is less than the borrower might otherwise have to pay. PROEX reduces the
net interest rate to the borrower at a cost to the provider. The language of the first paragraph appears
to have been designed to address precisely this type of programme.
43. Canada argues that Embraer itself does not provide export financing, and that non-Brazilian
financial institutions sometimes do so. While both of these statements are factually correct, the legal
conclusions reached by Canada do not follow. Canada's analysis fails totally to distinguish between
situations in which the lender is a financial institution outside Brazil and situations in which the lender
is a financial institution inside Brazil. Both in the original proceeding and in the Article 21.5
proceeding, Brazil carefully distinguished between these two situations, and offered very different
legal justifications for each.

43 Canada First Submission, paras. 67-69.
44 Original 21.5 Report, para. 6.44 .
45 THE NEW SHORTER OXFORD ENGLISH DICTIONARY 2130 (1993) (A "payment is "a sum of money
paid").

44. When the lending institution is outside Brazil , Embraer, the exporter, faces costs in obtaining
for its customer a financial package that is competitive in the market. If it cannot obtain a competitive
financial package for its customer, it would be forced to take other costly action such as paying for a
commercially available loan guarantee at a high premium. When the lender is inside Brazil, it is the
lender itself who must obtain the dollars on the market. 46 These separate justifications required
separate analyses, a fact that Canada's argument s ignore. Moreover, while the question whether a
payment is made to an institution inside or outside Brazil may have a bearing on the issue of material
advantage, it has no bearing on the issue of payment. The payment is the same in either case.
45. Brazil risk is a genuine phenomenon that seriously handicaps financial institutions in Brazil in
raising funds internationally, just as a similar risk handicaps comparable institutions in virtually all
developing countries. The Article 21.5 Panel confirmed this, noting that, "developing countries' costs
of borrowing are almost inevitably higher than those of developed countries." 47 It observed, in a
footnote appended to this statement, that "[a]ccording to Brazil – and Canada has not challenged
Brazil's assertion – Brazil's cost of borrowing as of 1 February 2000, based on 10-year bond yields –
was more than twice that of Canada."48
46. Brazil justifies PROEX, when the lender is outside Brazil, on grounds that are totally different
from those used to justify PROEX when the lender is inside Brazil. A conclusion that Brazil's
justification in one instance must be rejected says nothing about Brazil's justification in the other
instance. For all of these reasons, the Panel should conclude that payments under PROEX are
"payments " within the meaning of the first paragraph of item (k).
4. PROEX III Does Not Secure a Material Advantage
47. The heart of Canada's argument is that even when the net interest rate for PROEX supported
transactions does not fall below the CIRR, PROEX nevertheless is used to secure a material
advantage in the field of export credit terms. Contrary to Canada's arguments, PROEX III payments
do not confer a material advantage in the field of export credit terms on the recipient within the
meaning of item (k) first paragraph.
48. Brazil already has noted that this position directly contradicts the approach taken by Canada
in the previous stages of these proceedings, where Canada sought to require Brazil to limit PROEX to
the CIRR, even though Canada took advantage of perceived loopholes (so-called "market window"
operations) in the Arrangement to provide official support for transactions at rates that were below the
CIRR. Thus, in its answers to the questions of the first Article 21.5 Panel, Canada unambiguously
stated that "the relevant benchmark against which a net interest rate must be compared to determine
whether a material advantage has been secured is CIRR." 49 This Panel should hold Canada to that
statement.
49. In the first Article 21.5 proceedings in this matter, the Appellate Body stated that, to establish
that PROEX payments are not used to secure a material advantage, 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 is appropriate."50 PROEX III stipulates that the net interest rates must

46 Original 21.5 Report, Annex 2-3, para. 37 (emphasis added).
47 Id., para. 6.58.
48 Id., para. 6.58, footnote 56.
49 Id., page 89 (Canada's Response to Question 12 of the Panel)
50 Article 21.5 AB Report, para. 67 (emphasis in original).

be at or above the relevant CIRR. 51 Thus, PROEX III complies fully with the CIRR – the preferred
benchmark of Canada, and one determined by the Appellate Body not to secure a material advantage.
50. Canada's present claim that the CIRR provides a material advantage does not withstand
scrutiny. In the first Article 21.5 proceedings, Canada admitted that the CIRR was sometimes above
market rates. Moreover, Canada asserted that when it offered official support at rates below the
CIRR, it nevertheless was operating at market terms.
52 It is difficult to understand, therefore, how
Canada can maintain that the CIRR is no longer an appropriate benchmark for determining whether or
not PROEX III secures a material advantage.
51. Moreover, nothing in Canada's First Submission contradicts the evidence provided in Brazil's
First Submission showing that the CIRR was intended to represent a market rate. Indeed, Brazil
submitted evidence that, consistent with Canada's statements in the previous Article 21.5 proceedings,
the CIRR presently is above the market rates, and that expert observers believe the CIRR may from
time to time be higher than the market.
53
52. Canada nevertheless argues that PROEX secures a material advantage because it does not
reflect the rates available in the marketplace, which Canada claims demand "spreads" that put the
rates available to buyers at or above the CIRR rates. This argument must fail, for several reasons.
First, Brazil is entitled – indeed, effectively is required – to establish a benchmark rate and to use that
rate as the benchmark in assessing applications for PROEX assistance. Canada's reaction to Brazil's
decision to limit PROEX III equalization to the CIRR highlights the double standard Canada seeks to
impose in these proceedings.
53. Canada also argues that PROE X III secures a materi al advantage because it does not comply
with the other terms and conditions of the Arrangement governing the length of the loan and the
amount of the financing. Brazil notes that it ha s explained in its First Submission how PROEX III
complies with all applicable interest rate provisions of the Arrangement and therefore falls within the
safe haven of the second paragraph of item (k). This includes compliance with the maximum
financing amount of 85 percent of the transaction va lue, and with the maximum financing term of 10
years for regional jet aircraft. Thus, Canada errs in stating that PROEX III provides for 100 percent
financing and an unlimited repayment period.
54 The terms of PROEX III, on their face, demonstrate
that Canada's characterization of the measure simply is wrong.
54. Moreover, even though PROEX III by its terms is limited to 10 years, Canada is wrong to
suggest that a longer term would necessarily mean that PROEX III secures a material advantage. In
the previous Article 21.5 proceedings, the Panel indicated that the test of material advantage within
the meaning of the first paragraph of item (k) differs from the safe haven of item (k) second
paragraph, and does not require compliance with all of the provisions of the OECD Arrangement.55
55. By conforming to the CIRR, Brazil has established a minimum threshold that is transparent,
and is set at rates that are, in the words of one expert, a "reasonable compromise in trying to formulate
a proxy market rate." 56 As noted above, Brazil has no control over these rates or the methodology
used to establish them. To the extent that the CIRR is a "proxy market rate," Brazil does not secure

51 Resolution No. 002799, Art. 1, para. 1 (Exhibit Bra-1).
52 Original 21.5 Report, page 82 (Canada's Response to Questions of the Panel).
53 See David Stafford, Wallen, Helsinki, Schaerer et. Al.: Some Major Achievements, Some Challenges
to Meet, in T HE EXPORT CREDIT ARRANGEMENT, ACHIEVEMENTS AND CHALLENGES 1978-1998 (OECD, 1998)
(First Submission of Brazil, at Exhibit Bra-5); Presenta tion by Mr. Fumio Hoshi, Dir ector-General International
Finance Policy Department, Japan Bank for International Cooperation, at the Eximbank 65 th Anniversary
Conference, May 2000 (First Submission of Brazil, at Exhibit Bra-6).
54 Canada First Submission, para. 82.
55 Original 21.5 Report, para. 6.87.
56 See Stafford, supra, Exhibit Bra-5; Article 21.5 AB Report, para. 67.

any advantage by providing equalization at the CIRR. Even if the market were to fluctuate slightly,
Brazil does not secure a material advantage by providing equalization at this level. The ordinary
market definition of "material" is "serious, important, of consequence." 57 Minor market deviations
from the CIRR that are not "serious, important, of consequence" are not "material." The Appellate
Body has noted that the term "material" cannot be read out of the language of the first paragraph. 58
Canada's analysis would do exactly that.
56. Finally, Canada states that the provisions of Resolution 002799, which it describes as
providing for rates "in accordance with" the CIRR, do not necessarily prohibit PROEX III from
supporting a minimum interest rate below the CIRR. 59 Brazil notes that the translation of Resolution
2799 requires interest rates "complying with" the CIRR. 60 Brazil reiterates that the minimum interest
rate specified in PROEX III is the CIRR. This is the purpose of the Resolution. However, the CIRR
is not necessarily the ceiling – Article 8, para. 2 of Resolution 002799 provides that the Committee on
Export Credits is to use "as reference the financing terms practiced in the international market."
61
This provides additional assurance that PROEX III support will not secure a material advantage.
57. For these reasons, the Panel should conclude that PROEX III does not secure a material
advantage in the field of export credit terms and that Brazil has therefore affirmatively shown that
PROEX III is not a prohibited subsidy within the meaning of the first paragraph of item (k) of the
SCM Agreement.
C. CANADA HAS FAILED TO SHOW THAT PROEX III DOES NOT QUALIFY FOR THE
"SAFE HAVEN" OF THE SECOND PARAGRAPH OF ITEM (K)
58. In its First Submission of 16 March 2001, Brazil explained that PROEX III qualifies for the
"safe haven" of the second paragraph of item (k) of the Illustrative List in Annex I of the SCM
Agreement, and is therefore not a prohibited export subsidy within the meaning of the SCM
Agreement. Brazil explained that PROEX III conformed to the minimum interest rate provision of
the Arrangement – by requiring that all PROEX equalization comply with the CIRR – and also to the
provisions governing the term and amount of financing – whether judged against the provisions of the
1992 Arrangement (as Brazil believes proper) or the provisions of the 1998 Arrangement.
59. As noted above, Canada does not in its First Submission address the issue whether PROEX
III qualifies for the safe haven of the second paragraph. Instead, Canada addresses only the issues
raised by item (k) first paragraph. However, the two paragraphs are not coterminous, and Brazil's
arguments regarding the second paragraph are not undermined by Canada's arguments regarding the
first paragraph.
60. The three points at issue under the first paragraph do not arise under the second paragraph.
There is no need for an a contrario interpretation of the second paragraph, which states affirmatively
that "if in practice a Member applies the interest rate 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." Accordingly, Canada's arguments regarding the a contrario issue are
not relevant to the issue whether PROEX III qualifies for the safe haven of the second paragraph of
item (k).
61. Similarly, the "payment" issue raised by Canada regarding the first paragraph of item (k) is
irrelevant in the context of the second paragraph. Regardless of whether PROEX III meets the

57 The New Shorter Oxford Dictionary 1713-14 (1993).
58 Appellate Body Report, para. 177.
59 Canada First Submission, para. 71.
60 First Submission of Brazil, para. 7, Exhibit Bra-1.
61 Id.

definition of "payments" within the first paragraph, PROEX III is indisputably an "export credit
practice" as contemplated by the second paragraph of item (k). As the Article 21.5 Panel in Canada –
Aircraft stated, "we can conceive of 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)." 62
It is not disputed that Brazil's practice of providing interest rate support is an "export credit practice"
of the kind long practiced by various members of the OECD.63
62. Finally, the issue whether the PROEX III payments are used to "secure a material advantage
in the field of export credit terms" does not arise under item (k) second paragraph. There the issue is
not whether the PROEX interest rate support payments are used to secure a material advantage, but
rather whether Brazil complies with the interest rates provisions of the Arrangement. Canada's
arguments that the CIRR may not accurately reflect the market 64 are quite simply irrelevant to the
issue whether PROEX III, by its terms, conforms with the interest rate provisions of the Arrangement
and therefore qualifies for the safe haven of the second paragraph of item (k).
V. CONCLUSION
63. For all of the reasons given in Brazil's First Submission and in this Submission, the Panel
should conclude that:
(a) Canada has not sustained its burden of proving that PROEX III is a subsidy within the
meaning of Article I of the SCM Agreement;
(b) Alternatively, even if PROEX III were co nsidered to be a subsidy, it complies with
the interest rates provisions of the relevant OECD Arrangement and is, therefore,
covered by the "safe haven" of item (k) second paragraph;
(c) Further, even if PROEX III were considered to be a subsidy, and even if it were not
eligible for the safe haven of item (k) second paragraph, PROEX III is not used to
secure a material advantage in the field of export credit terms within the meaning of
item (k) first paragraph.

62 Canada – Measures Affecting the Export of Civil Aircraft – Recourse by Brazil to Article 21.5 of the
DSU, Report of the Panel, WT/DS70/RW (9 May 2000), para 5.81.
63 Ray, supra, at pp. 22-24.
64 The OECD members clearly intended that the CIRR would indeed reflect market rates. Members
that are not participants in the OECD Arrangement, such as Brazil, have no control over these rates and should
not be punished when they comply with the rates only to have OECD participant Members decide that the CIRR
rates do not suit their purpose after all.

LIST OF EXHIBITS
BRA-10. Steve Cutts and Janet West, "The Arrangement on Export Credits," The OECD
Observer No. 211, April/May 1998
BRA-11. J OHN E. RAY, MANAGING OFFICIAL EXPORT CREDITS – THE QUEST FOR A GLOBAL
REGIME, Institute for International Economics (1995)
BRA-12. G ARY CLYDE HUFBAUER AND JOANNA SHELTON ERB, SUBSIDIES IN INTERNATIONAL
TRADE 70 (Washington, D.C., Institute for International Economics 1984)
BRA-13. General Agreement on Tariffs and Trade, Multilateral Trade Negotiations, Group
"Non-Tariff Measures," Sub-Group "Subsidies and Countervailing Duties,"
SUBSIDIES/COUNTERVAILING MEASUR ES, Outline of an Arrangement,
MTN/NTM/W/168, 10 July 1978
BRA-14. General Agreement on Tariffs and Trade, Multilateral Trade Negotiations, Group
"Non-Tariff Measures," Sub-Group "Subsidies and Countervailing Duties,"
SUBSIDIES/COUNTERVAILING MEASUR ES, Outline of an Arrangement,
MTN/NTM/W/210, 19 December 1978

is not Brazil's obligation to prove the negative, to prove that PROEX III does not confer a subsidy.
Canada has failed to sustain its burden of proof on the question of benefit, and the efforts of the
European Communities and the United States, as third parties, to support Canada on this question are
not successful.
5. Canada's "proof" as to benefit consists of several descriptive statements about PROEX I and
PROEX II, which are not relevant to this proceeding, and allegations concerning Brazil's development
bank, Banco Nacional de Desenvolvimento Econom ico e Social ("BNDES"). We are somewhat
confused by Canada's reference to BNDES, Mr. Chairman, and by the point Canada attempts to make.
BNDES has never been within the terms of reference of this dispute. In any event, statements about
PROEX I, PROEX II, or BNDES are not evidence establishing that PROEX III confers a benefit.
6. In the absence of evidence, Canada resorts to faulty logic. For example, at paragraph 12 of its
Second Submission, Canada argues that "PROEX III, like its predecessor schemes, is constructed as a
buy-down of interest rates that have already been freely negotiated by the recipients – Embraer's
customers – in the marketplace." Canada then concludes that " any buy-down below those freely
negotiated rates will necessarily result in net interest rates on terms more favourable than those
available to Embraer's customers in the market."
7. It is misleading, if not inaccurate, to say th at PROEX III is a buy-down of interest rates that
have already been freely negotiated by the recipients in the market place. PROEX III is limited, on its
face, to a maximum payment of 2.5 percent, with a minimum rate of the CIRR, and is, further, subject
to being "compatible with [financing costs] prac ticed in the international market." PROEX is not a
system, as Canada seems to suggest, whereby the customer negotiates for the most favorable rate, and
then receives a "buy-down" of 2.5 percent. To the contrary, PROEX is part of the transaction itself –
a transaction that is limited by the market, as reflected in the CIRR, a 10-year term, and 85 percent
maximum financing, and by the requirement that th e resulting transaction be compatible with the
international market.
8. Thus, PROEX most certainly does not " necessarily result in net interest rates terms more
favourable than those available to Embraer's customers in the market ." Whether the resulting net
interest rate terms are or are not more favourable than those a customer could obtain "in the market" is
a question of fact. PROEX III does not provide for rates that are more favorable than those a
customer could obtain "in the market." The theoretical possibility that more favourable terms could
be offered in some future transaction is not evidence that they would be offered, and is not relevant to
the question of what PROEX III, on its face, as a matter of law, provides.
9. The Panels in the Canada – Aircraft cases, for example, pointed out that the fact that Canada's
export credit agency, the Export Development Corporation – "EDC" – could provide financing on a
preferential basis, does not mean that it would do so. Those Panels also pointed out that the mere fact
that Canada's Technology Partnerships Canada could provide a subsidy contingent on export, does not
mean that it would do so. Likewise, the theoretical possibility that PROEX III could provide terms
more favorable to a customer than could be obtained in the market does not mean that PROEX III
would so provide.
10. Canada claims that financing being provided by BNDES – which, as I have already noted, is
not and never has been within the terms of reference for this dispute – is being offered "in conjunction
with PROEX III." There are several problems with this claim. First, it is simply irrelevant whether
BNDES is involved in financing Brazilian aircraft transactions. The second is that Canada's
"evidence" in support of its claim is a statem ent by a Bombardier employee reporting on what an
airline official allegedly told the Bombardier employee that Embraer allegedly offered to the airline.
11. In law, this kind of evidence is what is referred to as "hearsay" – that is, it is the mere
repetition of what someone claims to have heard another say. In this case, what Canada is offering is

"triple hearsay" – (1) Canada's statement of what a Bombardier employee said about (2) what an
airline official said about (3) what Embraer said.
12. Now, Brazil is willing to acknowledge, Mr. Chairman, that just because evidence is hearsay,
even triple hearsay, does not necessarily mean that it is always wrong. But Brazil does suggest that
the possibility for error in such a lengthy transmission is high, particularly given the fact that an
airline, in this situation, might be said to have an incentive to exaggerate in its statements to one
potential vendor about what another potential vendor is offering.
13. Finally, there is an overriding reason why this evidence is not relevant. It is at most evidence
of what an Embraer sales person said. The Government of Brazil cannot take responsibility for the
alleged statements of Embraer sales persons.
14. Canada concludes its "evidence" on benefit with the statement, in paragraph 17, that "Canada
demonstrated in its First Submission that the CIRR alone, divorced from the other terms and
conditions of the OECD Arrangement such as the ten-year term limit and the limit on financing to
85 percent of the value of the contract, in no way reflects market realities. Brazil has not rebutted
Canada's evidence and submissions on this point."
15. This is a rather surprising statement, Mr. Chairman. As I thought we made clear in our First
Submission, PROEX III is not "divorced" from the 10-year term limit and the limit on financing to
85 percent of the value of the contract. PROEX III specifically includes these requirements.
16. Indeed, if another piece of Canada's hearsay evidence is to be believed, Brazil is financing
considerably less than 85 percent of the value of the contract. Canada's Exhibit 27 is more triple
hearsay – a statement of (1) what another Bombardier employee said that (2) another airline official
said about (3) what Embraer allegedly offered. This evidence shows, however, that the amount of the
financing allegedly offered by Embraer was far less than 85 percent. This hardly seems to be a
"benefit," even under Canada's definition.
17. Canada is also incorrect to say that the only change in PROEX III is to e nsure compliance
with the CIRR. To the contrary, PROEX III now also requires that the Committee on Export Credits
use "as reference the financing terms practiced in the international market."
18. In paragraph 10 of its Second Submission, Canada accused Brazil of failing to recognize the
"critical distinction" between "benefit" and "material advantage." In paragraph 17 of that same
submission, Canada states that paragraphs 87 to 90 of its First Submission demonstrate that
PROEX III confers a benefit. However, the heading to the section of Canada's First Submission that
contains paragraphs 87 to 90 refers only to "material advantage." It does not refer to "benefit." Thus,
to employ the "critical distinction" between "benef it" and "material advantage," paragraphs 87 to 90
of Canada's First Submission do not bear upon the issue of "benefit" at all.
19. More importantly, paragraphs 87 to 90 of Canada's First Submission do not contain any
factual evidence regarding PROEX III. They contain only assertion and argument. The only one of
those paragraphs remotely referring to anything specific is paragraph 88, which asserts that the CIRR
"cannot be conclusive on the issue of material advantage because it does not … take into account
other aspects of the transaction, (i.e., maturity, the loan-to-asset value or minimum cash payment to be
made, etc.) and the creditworthiness of the borrower."
20. But PROEX III does take these factors into account, Mr. Chairman. By its terms, PROEX III
has a 10-year maximum repayment term. By its terms, PROEX III is available only for 85 percent of
the value of the transaction. By its terms, PROEX III transactions must be compatible with the terms
available in the international market, which includes the creditworthiness of the borrower. Canada
simply has not carried its burden of proving the contrary.

21. The arguments of the third parties do not advance Canada's case. The European
Communities, at paragraph 12 of their submission, repeat Canada's claim that PROEX is used to
reduce a commercially negotiated contract by 2.5 percent. I have already pointed out why this
reasoning is wrong. At paragraph 14, the European Communities claim that the CIRR is a rate that
would be available to borrowers only in the presence of a guarantee or other security. But all
transactions involving aircraft are secured – by the aircraft themselves, if not by other means, such as
residual value guarantees.
22. The United States, at paragraph 11, "wishes to note only that interest rate support at or above
CIRR does not, ipso facto, mean no benefit is conferred." This formulation reverses the issue. It is
not for Brazil to show that no benefit is conferred. It is for Canada to show, affirmatively and by
positive evidence, that a benefit is conferred.
23. The United States, at paragraph 12, also raises the point of the creditworthiness of the
borrower, a subject I already have addressed. To support its position, in paragraph 13 the United
States refers to Article 14(b) of the Agreement. However, as a matter of substance, PROEX III does
not provide a loan below a comparable commercial loan which the borrower could actually obtain on
the market, as the United States claims. PROEX III, by its terms, must be compatible with the
market. Neither Canada, nor the United States, nor the European Communities has provided any
evidence to support their claims. On a more technical point, Article 14 is part of Part V of the
Agreement, dealing with countervailing duties. The chapeau of Article 14 specifies that it applies
only "For the purpose of Part V …" By definiti on, therefore, it does not apply to Part I of the
Agreement, dealing with the existence of a subsidy.
II. BRAZIL QUALIFIES FOR THE "SAFE HAVEN " IN ITEM (K) SECOND
PARAGRAPH
A. T
HE 1992 VERSION OF THE OECD ARRANGEMENT IS THE RELEVANT VERSION
24. I would like to turn now, Mr. Chairman, to the safe haven provisions of t he second paragraph
of item (k). While PROEX III does not confer a benefit, it also applies in practice the interest rates
provisions of the OECD Arrangement on Export Credits that are referred to in the second paragraph.
PROEX III therefore qualifies for the safe haven.
25. The first issue presented by the second paragraph is: What version of the Arrangement
applies? Is it the version that was in effect at th e time it was incorporated by reference into the SCM
Agreement, or is it any future version that the OECD issues?
26. In its First Submission, Brazil has demonstrated that the version of the Arrangement that is
relevant to this dispute is the 1992 version, the version that was in effect at the time of adoption of the
SCM Agreement. I will not repeat those arguments in detail, but let me just mention the main points.
27. Following Article 31 of the Vienna Convention, Brazil first addressed the relevant text of the
second paragraph. Brazil pointed out that the second paragraph refers to a "successor undertaking
which has been adopted" by the original Members of the Arrangement. The crucial phrase, "has
been," is in the present perfect tense and refers to a time present, not to a future time. It says "has
been," not "will be" or "may be." Therefore, the reference is to the version in existence at the time it
was incorporated by reference into the SCM Agreement.
28. Second, Brazil examined the context of the second paragraph, a context that includes the
detailed requirements for amending any of the WTO agreements, including the SCM Agreement, and
a context that provides, through Article 3.2 of the Dispute Settlement Understanding, that rulings and
recommendations of the Dispute Settlement Body "cannot add to or diminish the rights and
obligations" of Members. Brazil also pointed out that Article 30 of the Vienna Convention provides

that an existing treaty may be subject to the terms of a later treaty, but only when the terms of the
existing treaty "specify" that this is the case.
29. Further, as part of the context, Brazil referred to the fact that, in the case of Members that
incorporate the WTO Agreements into their domestic law, serious constitutional questions would be
raised if later versions of the Arrangement were included in the second paragraph of item (k). This
would amount to a carte blanche to non-citizens to change the domestic law of these Members. It is
not only Brazil that would be in this position, Mr. Chairman. A substantial number of Members
incorporate WTO Agreements directly into their domestic law.
30. Third, Brazil noted the object and purpose of the SCM Agreement. While the Agreement
does not, on its face, contain a statement of its object and purpose, there can be little dispute that these
include establishing disciplines for the conduct of Members in providing subsidies – disciplines that
are clear, transparent, and fair.
31. There is nothing clear, transparent or fair about an interpretation of the second paragraph that
would permit a small group of developed countries to change the terms of the SCM Agreement
anytime they choose, in whatever way they choose. Certainly there is nothing fair about an
interpretation that, for example, would allow Canada and the other participants in the Arrangement
to provide that interest rate support may not be used for regional aircraft. Canada, however, seems to
think there is nothing wrong with this.
32. This is not a theoretical risk, Mr. Chairman. I will have more to say about the question of
spare parts shortly, but for now let me just note that the handling of spare parts by the participants in
the Arrangement is a clear example of how Canada would have the system work. Under the 1992
version of the Arrangement, its spare parts provisions did not apply to regional aircraft. Under the
1998 version, they do apply – and Canada is citing those provisions as grounds for excluding Brazil
from the safe haven of the second paragraph.
33. The sequence of events in this dispute and in the change in the terms of the Arrangement is
very significant. Let's assume, for purposes of analysis of these events, that the spare parts provision
of the Arrangement is an interest rate provision, and that PROEX III does not in practice apply that
provision – (as I will explain later, Brazil does not agree with either of these assumptions).
34. In 1995, when the SCM Agreement was adopted, Brazil would not have had to apply the
spare parts provision in order to be in compliance with the second paragraph, since the provision
explicitly did not apply to regional aircraft in the version of the Arrangement in effect at that time. In
1996, when Canada began this dispute with its request for consultations, Brazil still would not have
had to apply the provision, since the 1992 version remained in effect.
35. In 1997, while Brazil and Canada were engaged in negotiations with a view to settling these
disputes without formal proceedings, Canada was also engaged in negotiating a new version of the
Arrangement which came into effect in 1998, the year this case began. Brazil had no knowledge of
these OECD negotiations or of their results. Brazil had no knowledge that the rules Canada – as well
as the EC and the US – say apply to Brazil under the second paragraph had been changed, by, among
others, Canada, the EC, and the United States.
36. Even today, Mr. Chairman, Brazil understands that the OECD participants are discussing
rules governing export credits that employ floating rates that would be added to the Arrangement.
Brazil's understanding, I must emphasize, does not come from any official notification, but merely
from press reports. Brazil, the WTO, and non-participants are not notified whether the participants in
the Arrangement are discussing floating rates, or any other issue, and have no say in formulating the
rules that Canada argues would be binding on all of them.

37. From further press reports, Mr. Chairman, Brazil has learned that environmental and labour
standards are on the agenda of the participants in the Arrangement. The Panel should not adopt an
interpretation of the second paragraph of item (k) that would permit participants in the Arrangement
to smuggle environmental or labour standards into "interest rates provisions" by, for example,
permitting concessionary financing for aircraft or other products that are "environmentally friendly"
or that are made under "fair" labour standards.
38. These events led to the fourth point Brazil made on the question of which version of the
Arrangement is relevant. Brazil referred to Article 32(b) of the Vienna Convention, which provides
that an interpretation that "leads to a result whic h is manifestly absurd or unreasonable" should be
avoided. I shall have more to say about this in a moment. First, let me deal with the replies of
Canada and the third parties to Brazil's first three points – the text, the context, and the object and
purpose of the relevant treaty language.
B. T
HE ARGUMENTS OF CANADA, THE EC AND THE US DO NOT REBUT BRAZIL'S ARGUMENT
THAT THE 1992 VERSION OF THE OECD ARRANGEMENT IS RELEVANT
39. What is Canada's answer to these arguments? First, Canada argues that the phrase "has been"
refers to the "time regarded as present" when the financing in question takes effect, not when the
Arrangement was incorporated into the SCM Agreement. Thus, Canada views "has been" as a
perpetually moving goal post that will always be in the present tense. Canada's interpretation requires
the conclusion that the negotiators adopted this convoluted approach instead of saying "will be
adopted" or "may be adopted." There is no justification for such an interpretation.
40. Canada makes much of the fact that the second paragraph refers to a successor undertaking
that has been adopted by the original 12 Members of the Arrangement. Brazil is happy to concede
this point. Brazil had suggested, in its First Submission, that under Canada's approach the 23
participants in the Arrangement would have the power to change the terms of the SCM Agreement for
the entire 140-plus Membership of the WTO. We are now informed that the situation is worse than
that, and that if Canada and the EC and the US have their way, it will take only 12 participants in the
Arrangement to make the change, 12 that include, by coincidence, Canada, the US and many Member
States of the EC.
41. Canada also makes much of the fact that the text of the second paragraph appears in the 1979
GATT Subsidies Code. This is true, but it begs the question of which version applies to the WTO. In
fact, it also begs the question of which version applied in GATT, since that issue was never presented
to a GATT panel or to the CONTRACTING PARTIES for interpretation.
42. Canada concludes its rebuttal to Brazil's argument by stating that the drafters could have
referred to the 1992 version, but did not do so, and that the Canada-Aircraft Article 21.5 Panel
assumed that the 1998 version applied. Both of these statements are accurate, but they hardly resolve
the issue.
43. What the drafters could have said does not address the meaning of what in fact they did say.
They said, "has been" adopted – in the present perfect tense, meaning at a time present on 1 January
1995. As to what they could have said, I have already noted they could have said "will be" adopted or
"may be" adopted, if that is what they meant. They did not use those terms – they said "has been."
44. Brazil notes that the Spanish and French versions of the SCM Agreement support the
argument that item (k) refers to a situation that occurred before 1 January 1995. The " has been
adopted" expression is found in the Spanish text in a past tense construction ( pretérito perfecto de
subjuntivo): "haya sido aceptado." Similarly, the French text uses the passé composé formulation: " a
été adopté. " It is evident that both texts, in using the past tense formulation, support Brazil's
interpretation that a reference is being made to an event that happened before the Agreement entered

into force. Once again, the drafters could have said "will be," or "may be" adopted. But they said
"has been," "haya sido," "a été" adopted.
45. While the Canada-Aircraft Panel did discuss the 1998 version of the Arrangement, the
question of which version was relevant was never at issue in that proceeding. The parties neither
briefed nor argued the question. It was not discussed by the parties in their meetings with the Panel.
Consequently, that Panel's assumptions, which are not binding on this Panel, were clearly for the
purpose of addressing the issue before it. That issue is not the issue here.
46. This ends Canada's rebuttal to Brazil's arguments. Canada did not address Brazil's arguments
regarding the context of the second paragraph, particularly in light of the amendment provisions of the
WTO Agreement. Canada did not address the object and purpose of the SCM Agreement, which, at a
minimum, includes clarity, transparency, and fairness. Canada did not address Brazil's argument
under Article 32(b) of the Vienna Convention that an interpretation of the second paragraph that
applies the 1998 and all later versions of the Arrangement leads to a result that is manifestly absurd
and unreasonable.
47. Even assuming that the interpretation advocated by Canada is a possible interpretation of the
"has been adopted" clause of item (k) second paragraph, there can be no dispute that, at the very least,
the interpretation advocated by Brazil also is a possible interpretation of that clause. In such
circumstances, the Panel should adopt the interpretation that avoids an absurd or unreasonable result.
There is nothing in the text of item (k) that un equivocally specifies that WTO Members have given a
few countries the right to perpetually legislate on behalf of the overwhelming majority of the
membership.
48. The third parties do not salvage the situation for Canada. The United States repeats Canada's
moving goal post argument, that "has been" refers to the time when an export credit is granted. The
United States then goes on to say, at paragraph 7, that Brazil's interpretation is illogical "since it
would suggest that a Member could grant export credits that are not in compliance with the most
recent version of the Arrangement, and yet still benefit from the safe harbour in item (k)."
49. Brazil sees nothing illogical at all in this, Mr. Chairman. There is nothing illogical in an
interpretation of the second paragraph to mean that all WTO Members are bound by the version of the
Arrangement in effect at the time when it was incorporated into the SCM Agreement. If other
Members – whether 23 of them or only the original 12 – wish to agree to stricter standards among
themselves, then by all means they are free to do so. What is illogical, Mr. Chairman, is an
interpretation of the second paragraph that would permit 12 or 23 OECD participants to change the
terms of the SCM Agreement for all of the WTO Members.
50. The United States addresses Brazil's fairness point by referring to Article 27 and its temporary
exemption from Article 3's prohibition for developing countries. Article 27 is hardly relevant to the
interpretation of the second paragraph of item (k). Moreover, as the Panel knows, Article 27 has strict
conditions for the exemption. Further, the exemp tion expires in two years, as the United States
admits. Article 27 does not justify permitting 12 or 23 OECD participants to make rules for the entire
WTO.
51. The United States further argues that the drafters of the Tokyo Round Subsidies Code,
referring to the Arrangement as of 1 January 1979, and then to a "successor undertaking," clearly
referred to a successor undertaking adopted afte r the Tokyo Round. Following the very same logic,
however, the drafters of the Uruguay Round Subs idies Agreement should have referred to the
Arrangement "as of 1 January 1995" and then to a "successor undertaking." They did not do that.
Thus, what may have been clear and explicit in 1980 (and Brazil does not agree that it was) is at best
unclear and ambiguous in 1995. In fact, the Tokyo Round Code came into effect on 1 January 1980, a
full year after the 1 January 1979 effective date of the Arrangement. The reference in item (k) of the

Tokyo Round Code to a "successor undertaking," in Brazil's view, is a reference to any possible
further action within the OECD that might have been taken during that year.
52. The European Communities repeats the arguments raised by Canada and the US, and then
adds two of its own. First, the EC argues that a change in the Arrangement does not amend the SCM
Agreement since the text of the second paragraph itself is not changed by action in the OECD. This
argument ignores the fact that, by virtue of the second paragraph, the Arrangement becomes a WTO
text, just as the major intellectual property conventions are WTO text (in their 1995 versions only),
and just as the Lomé Convention was found to be a WTO text by the Panel in Bananas because it was
incorporated by reference into the WTO by means of a waiver. A change in these documents is a
change in the relevant WTO text. Indeed, the EC concedes as much. At paragraph 30, the EC
observes, "It may appear strange that the WTO Members should have agreed to apply a text that could
only be changed by a small number of them." That it is a text that applies to the WTO that is being
changed cannot be doubted.
53. I have already given a concrete example of how, under Canada' s theory, WTO obligations
could be changed by a change in the Arrangement – the example of the spare parts provisions, which
indisputably did not apply to regional aircraft in the version in existence on 1 January 1995, and
which undisputedly do apply to regional aircraft in the current version. It is difficult to imagine a
clearer example of an effective change in a WTO text. The fact that a text was adopted by the WTO,
rather than being written by it, does not mean that it is not a WTO text.
54. The second argument made by the EC that differs from the arguments made by Canada and
the US concerns other parts of the WTO Agreements that may authorize action by other international
organizations. The EC points to Article XXI of GATT 1994, which allows Members to take action in
pursuance of their obligations under the United Natio ns Charter for the maintenance of international
peace and security. It also points to the TBT and SPS Agreements, which require Members to take
international standards into account in setting their own standards. For that matter, the EC could have
pointed to Articles XIV and XV of GATT 1994, which make certain decisions of the International
Monetary Fund applicable to WTO Members.
55. These are all true and, equally, these are all irrelevant for the issue before you concerning the
second paragraph of item (k).
56. Brazil has never disputed that international organizations may specify that the provisions or
decisions of other treaties or organizations shall apply. The question is whether, in a particular
instance, this has been done. In the case of giving overriding authority to the United Nations on
matters of peace and security there can be little argument. GATT 1994 explicitly does so specify. It
is worth pointing out, as well, that all Members of the WTO are eligible for membership in the UN,
and most, if not all of them, are members. Similarly, GATT 1994 gives certain powers to the
International Monetary Fund. These powers relate to balance of payments issues and were included
in GATT 1947 in the context of the entire Bretton Woods system, which sought to combine freer
trade with fixed exchange rates. There was an obvious need for cooperation among the organizations,
as fixed exchange rates and import quotas established to protect those rates, could have had an
obvious impact on the trading system. Again, it is worth pointing out that all Members of the WTO
are eligible for membership in the IMF, and most, if not all of them, are members.
57. With regard to the TBT and SPS Agreements, the EC greatly overstates its case. It is true, as
the EC states, that provisions of both Agreements call upon Members to base their standards on
international standards. But it is also true that each of those provisions contains exceptions; Members
are not required to follow international standards in order to comply with their WTO obligations. It is
further true that other paragraphs of the same articles of those Agreements, cited by the EC, call upon
WTO Members to play a full part in the international standard-setting organizations, which are open
to membership by all nations. There are no comparable exceptions in the second paragraph of

item (k), and all WTO Members most certainly are not called upon by that paragraph to play a full
part in the OECD. Most WTO Members are not eligib le to join the OECD and, even if eligible, any
effort to join would be rejected.
58. Finally, the EC disagrees with Brazil's argument that changes in the Arrangement occur in a
non-transparent manner. "The current version of the OECD Arrangement is publicly disclosed by the
OECD, " the EC writes at paragraph 29, "and is av ailable on the OECD web site." In a footnote to
this statement, the EC is good enough to supply the internet address of the OECD.
59. Mr. Chairman, it is Brazil's position that Members of the WTO should not be required to
check the web site of the OECD to learn what their WTO obligations are. An interpretation of the
second paragraph of item (k) that results in such a requirement would, in the view of Brazil, be a
result that is manifestly absurd and unreasonable within the meaning of Article 32(b) of the Vienna
Convention. That interpretation should be rejected.
C. PROEX III COMPLIES WITH THE INTEREST RATES PROVISIONS OF BOTH THE 1992 AND 1998
VERSIONS OF THE ARRANGEMENT
60. Mr. Chairman, I will not take the time to repeat here the points made in Brazil's First
Submission that demonstrate that Brazil is in compliance with the interest rates provisions of both the
1992 and the 1998 versions of the Arrangement. Instead, I will address only the points raised by
Canada regarding Brazil's alleged failure to apply those provisions, in practice, through PROEX III.
The third parties, I note, did not address the specifics of Brazil's argument concerning its application
of the interest rates provisions, but rather addressed the broader question of what, in fact, are the
interest rates provisions – a subject Brazil addressed in its First Submission.
61. At paragraph 50 of its Second Submission, Cana da claims that PROEX III does not conform
to what it calls two of the key requirements of both the 1998 and 1992 versions of the Arrangement.
These are the requirements that support be limited to terms of 10 years and cover no more than
85 percent of the value of the goods financed.
62. But PROEX III, on its face, complies with these requirements. As Brazil noted in
paragraph 9 of its First Submission, and as set out in Brazil's Exhibit 3, Directive 374 limits PROEX
interest rate equalization to 85 percent of the value of the transaction, and establishes a maximum
financing term of 10 years for regional jet aircraft. Thus, even by Canada's definition, Brazil in
practice applies the interest rates provisions of the 1992 version of the Arrangement – and also applies
at least these two provisions of the 1998 version as well.
63. The only other specific provisions of the 1998 version cited by Canada as not being addressed
by PROEX III are Article 13 regarding repayment of principal and Article 29(a)-(c) of Annex III
regarding spare parts. Let me address each of these in turn.
64. Article 13 of the Arrangement is entitled "Repayment of Principal." It does not even deal
with interest – it deals only with principal. Even the Canada-Aircraft Panel, which took, in our
opinion, an overly-broad view of the term "interest rates provisions" did not include Article 13 among
them. Very plainly, Article 13 is not an interest rate provision.
65. The Canada-Aircraft Panel did identify Article 29(a)-(c) as among the interest rates
provisions of the Arrangement. Brazil disagrees in part. Only the first sentence of Article 29(a) deals
with interest rates, providing that the financing of spare parts "when contemplated as part of the
original aircraft order may be on the same terms as for the aircraft." Brazil complies with this
provision. To the minimal extent that spare parts are part of an Embraer order, PROEX III provides
that they should be financed on the same terms as the aircraft – at the CIRR, with a maximum of
85 percent financing, for 10 years.

66. However, the remainder of Article 29(a) as well as all of (b) and (c) do not deal with interest
rates. The remainder of (a) deals with the size of the fleet of each aircraft type, which has nothing to
do with interest rates. Similarly, paragraphs (b) and (c), like Article 13 of the Arrangement, deal with
repayment terms. These also have nothing to do with interest rates.
67. Canada's remaining objections to Brazil's compliance with the 1998 version concerns Brazil's
alleged failure to conform to Articles 16 through 19 of the Arrangement. Canada offers no evidence,
argument or explanation for its contention, no doubt because Canada cannot do so. The contention is
without merit.
68. Article 16 deals with the construction of CIRRs. Brazil does not construct CIRRs. It follows
and applies them, particularly the CIRR constructed by the United States for the dollar. Article 17, at
first glance, may appear more relevant since it deals with the application of CIRRs. However,
Article 17(a) is not relevant because PROEX does not fix the interest rate. Article 17(b) also is not
relevant, as it deals with floating rates and PROEX III, by its terms, applies only to fixed rates.
Articles 18 and 19 concern cosmetic interest rates, which are at rates below the CIRR. PROEX III, by
its terms, sets the CIRR as the minimum. In Brazil' s view the term "cosmetic interest rates" might
better be applied to the so-called "market window" operations engaged in by Canada in order to evade
its obligations under the Arrangement than to an interest rate, li ke PROEX III, that , on its face, is
limited by the CIRR.
69. Brazil has addressed the question of just what are the interest rates provisions of the
Arrangement in its First Submission. In Brazil's view, the term should be interpreted narrowly
primarily because the text itself calls for a narrow interpretation. But if the Panel were to conclude
that the 1998 version of the Arrangement is the relevant version, the case for a narrow interpretation
would be all the more compelling.
70. Accordingly, Mr. Chairman, Brazil, through PR OEX III, "in practice" "applies" the interest
rates provisions of both the 1992 and the 1998 versions of the OECD Arrangement.
III. PROEX III DOES NOT SECURE A MATERIAL ADVANTAGE WITHIN THE
MEANING OF ITEM (K) FIRST PARAGRAPH
71. Finally, Mr. Chairman, I will turn – briefly – to the first paragraph of item (k). This is a
subject we all have been through many times, so I will attempt to minimize repetition of points that
are familiar to us all.
72. The parties, and the Panel in its previous report s, appear to agree that in order for Brazil to
invoke the first paragraph of item (k) successfully, it must establish three points. First, as a matter of
legal interpretation, the first paragraph may be interpreted a contrario . Second, that a PROEX
payment is a "payment" within the meaning of the fi rst paragraph. And third, that the payment is not
used to secure a material advantage in the field of export credit terms.
73. On the question of an a contrario interpretation: Brazil has pointed out in its submissions in
this proceeding and in prior proceedings, that failure to interpret the first paragraph of item (k)
a contrario renders treaty language superfluous. This is not a permissible interpretation under the
tests established by the Appellate Body. Korea ha s made this point in its Third Party Submission.
And Korea has noted, as did Brazil in its Second Subm ission, that the Appellate Body, in its report in
the original Article 21.5 dispute, indicated that it was prepared to interpret the first paragraph
a contrario. The Panel should do the same.
74. On the question of payment: Brazil also has pointed out in its prior submissions that PROEX
is a payment of all or part of the costs of exporters or financial institutions in obtaining the credits
they provide. Material advantage occurs, if it occurs at all, when those credits are provided to the

customers. This interpretation is supported by the structure and logic of the first paragraph of
item (k), which addresses two kinds of subsidies. The first kind of subsidy is the grant by a
government itself of credits below its own cost of funds. The relevant issue here is the cost to the
government in obtaining the funds it provides. The second kind of subsidy is governmental assistance
to defray all or part of the costs incurred by exporters or financial institutions in obtaining the funds
they provide. In both situations, funds provided are first obtained. In fact, the parenthetical clause in
the first paragraph, describing the proper measure of the government's cost in obtaining funds is a
description of the costs incurred by exporters or financial institutions in obtaining credits that PROEX
is intended to address. This clause refers to costs that actually are paid or would have to be paid "on
international capital markets in order to obtain funds of the same maturity … denominated in the same
currency as the export credit." Almost all PROEX payments are made to banks in Brazil that incur
costs in obtaining dollars on international capital markets.
75. The United States supports Brazil's position on the definition of "payment" in the first
paragraph of item (k). The United States points out that the term covers not only direct payments, but
also payments that reduce the risk incurred by the exporter or the financial institution. Therefore, in
the view of the United States, PROEX interest rate support is a "payment" under the first paragraph of
item (k). Brazil agrees. In addition, the United States correctly observes that the first paragraph of
item (k) should be interpreted within the context of the Agreement and general export credit practice.
Interest rate support payments, like PROEX, reduce the risk incurred by exporters or financial
institutions, just as such practices as insurance and guarantees reduce the risk.
76. In Brazil's view, one way to look at the payment issue is to go back to the original 1958
language of the OEEC, which is set out in paragraph 24 of its Second Submission: "The government
bearing all or part of the costs incurred by exporters in obtaining credits."
77. This was the initial description of an export subsidy, that eventually found its way into
item (k) first paragraph. One of the 1979 additions to this language was the inclusion of "financial
institutions" as well as exporters as the target recipients of what were deemed export subsides. This
extended the original 1958 prohibition, which covered only suppliers' credits, to buyers' credits as
well. Thus, as modified by this single change, the 1958 example of an export subsidy was: "The
government bearing all or part of the costs incurred by exporters [or financial institutions] in
obtaining credits."
78. The Panel should ask itself, if this language appeared, as it is, without any qualification, in
Annex I to the SCM Agreement, would it apply to PROEX III? In Brazil's view, there can be little
doubt that it would. With PROEX III, the Government of Brazil, in making PROEX payments, bears
all or part of the costs incurred by exporters or financial institutions in obtaining credit. If this were
all that was encompassed by the first paragraph of item (k), PROEX III would be prohibited.
79. But item (k) says more. It says, "in so far as they are used to secure a material advantage in
the field of export credit terms." When this language is given full and complete effect by an
a contrario interpretation, it leaves unresolved only the third point that Brazil must establish: material
advantage.
80. In its August 1999 Report, at paragraph 181, the Appellate Body concluded that interest rates
at or above the CIRR do not confer a material advantage. In paragraph 6.87 of its May 2000 Report
in the original Article 21.5 Review, the Panel fo und that the Appellate Body did not intend to
duplicate, in the first paragraph, all of the elements that were necessary to secure the safe haven of the
second paragraph. PROEX III employs the CIRR as a floor, a floor that may be elevated, as
necessary, to be compatible with the international market. Thus, under the test established by the
Appellate Body and the Article 21.5 Panel, PROEX III is not used to secure a material advantage.

81. In fact, Mr. Chairman, PROEX III does more than the Appellate Body and the Article 21.5
Panel said was necessary to avoid conferring a material advantage because, on its face, PROEX III is
limited not only by CIRR, but by the international market, and by 85 percent maximum financing and
a 10-year limit.
IV. CONCLUSION
82. For all of these reasons, Mr. Chairman, Brazil asks that the Panel find and determine that:
(a) Canada has not carried its burden of establishing that PROEX III is a subsidy within
the meaning of Article 1 of the SCM Agreement;
(b) With PROEX III, Brazil in practice applies the interest rates provisions of the 1992
version of the OECD Arrangement, the version of the Arrangement incorporated by
reference into the second paragraph of item (k) of Annex I of the Agreement;
(c) With PROEX III, Brazil in practice also applies the interest rates provisions of the
1998 version of the Arrangement;
(d) PROEX III is not used to secure a material advantage in the field of export credit
terms.
83. This concludes Brazil's oral presentation, Mr. Chairman. We will do our best to answer any
questions you may have.

ANNEX B-4
CLOSING STATEMENT OF BRAZIL
(5 April 2001)
1. [Minister Patriota] Good afternoon, Mr. Chairman. I would like to thank the Panel for the
opportunity to present these closing remarks this af ternoon. There are just two points I would like to
make before asking my colleague Mr. Azevedo to address some additional points.
2. Mr. Chairman, it was a difficult job to change PROEX III. As you heard this morning from
Mr. Azevedo, who was at the meetings in Brasilia and was involved in the process, there was
opposition in Brazil to making the changes. Indeed, I would go so far as to say that there was
bitterness and anger in some quarters. Some people did not want to make the necessary changes in
response to the previous findings. Nevertheless, we got the job done and what you have before you is
PROEX III. This is what you must review.
3. I would also like to address an issue that is very important to Brazil. This is the issue of what
version of the OECD Arrangement applies. We believe that the Panel should apply the 1992 version
instead of the 1998 version. As we explained in our oral statement, we do not think that the Panel
should prefer an interpretation of the SCM Agreement that would give a small number of members of
the OECD the perpetual power to change the rule s for the remaining Members of the WTO. The
Panel should not follow an interpretation that woul d lead to such an unfair result. You know our
views on this, and I would sum up by simply repeating a sentence from paragraph 47 of our oral
statement yesterday: there is nothing in the text of item (k) that unequivocally specifies that WTO
Members have given a few countries the right to perpetually legislate on behalf of the overwhelming
majority of the membership. This is of particular concern if we are to bear in mind that these few
countries would be acting within the framework of an organization, the OECD, which is not open to
universal accession.
4. I would now ask Mr. Azevedo to make the remainder of Brazil's points.
5. [Counselor Azevedo] Thank you. I would first like to address an issue that we have not
previously talked about but which I think is important. It arises out of one of the questions posed by
the Panel, which is based on an apparent assumption that the second paragraph of item (k) is an
exception to the first paragraph of item (k). We are not sure whether the question intended to give
meaning to such an assumption, but we think it is im portant that we clarify that we do not agree with
the assumption.
6. The second paragraph of item (k) is separate from the first paragraph, which ends with a full
stop. Thus, while the second paragraph begins "Provided that, however," it is a separate sentence
from the first paragraph. Also, the first and the second paragraph talk about two different things. The
first paragraph talks about one form of direct financing and about "payments" of the costs of obtaining
export credits. As we have seen, there is much discussion about what this means. Regardless of what
this means, however, the second paragraph talks about something different. It talks about "export
credit practices." This is a much broader category than the specific items included in the first
paragraph. For this reason, the second paragraph cannot simply be seen as an exception to the first
paragraph. It has a broader scope than the first paragraph.
7. I would also like to address another important point that we have not discussed that was
raised by the EC in its oral statement this morning. This is the definition of "export credits." The EC
claimed in paragraph 26 of its oral statement that PROEX III interest rate support does not fit the

definition of export credits. But the EC's statement just stops there. The EC does not give any reason
why PROEX III does not fit the definition.
8. PROEX III is a form of interest rate support, which is a form of export credits. The OECD
Arrangement does not define "interest rate support." In fact, it says that the Participants themselves
do not agree on the definition of the term. We have tried to find out what they mean by the term. I
called Ms. West at the OECD and got no answer as to the meaning of the term. We sent cables to our
embassies in all of the OECD members countries asking them to try to find out how each member
interpreted the term. No one could tell us the answer. Some referred to internet sites or public
documents that were unhelpful since they did not explain how the countries' mechanisms worked in
practice. Some other members did not even want to talk about what it meant.
9. Anyway, Mr. Chairman, PROEX III payments support the interest rate for a given
transaction. They are clearly interest rate support within any reasonable definition of the term.
10. Mr. Chairman, one issue that arose this morning – a question that the Panel asked and Brazil
answered – is worth emphasizing again. It is this: The rules of PROEX III are clear and
unambiguous. Interest rates support can be provided for up to 85 percent of the value of the contract,
for a period no longer than 10 years and at a rate no lower than the applicable CIRR. The Committee
administering PROEX III is permitted to depart from those rules only in cases where the Committee is
satisfied that the terms of interest rates support provided under PROEX III are terms that are
compatible with the terms available in the intern ational market. The applicant requesting interest
rates support will have to persuade the Committee that the terms requested are terms that are
consistent with the international market. If the applicant fails to persuade the Committee, if the
Committee is not satisfied that the terms requested comply with that requirement, the Committee will
have no authority to use the exception and to approve the application on terms different from those
provided in the general rules. The Committee me mbers are subject to review by the Brazilian
government's Tribunal de Contas da União , which is responsible for ensuring that Brazilian
government agencies do not spend public monies except in accordance with law.
11. I am not in a position today to say exactly what the Committee will look at, exactly how this
determination will be made, but I can clearly state that this is the standard. In sum, the Committee,
operating under PROEX III w ill either operate under the safe haven of the second paragraph of
item (k) or, when providing terms of interest rates support consistent with the market under the
exception, will confer no "benefit."
12. Mr. Chairman, Canada has admitted that it bears the burden of proof to show that Brazil is in
breach of its obligations under the SCM Agreement. Further, Canada has admitted that the issue
before this Panel is PROEX III, i.e., whether PROEX III is in conformity with the provisions of the
SCM Agreement. To meet its burden of proof, Canada has submitted only press reports and affidavits
about what Embraer sales persons allegedly offered in the context of a transaction that did not take
place. By contrast, Brazil has submitted all of the documents that, taken together, constitute
PROEX III. It is the review of these documents that, in our view, is the primary task of the Panel
because, again – as Canada has itself admitted – the issue before the Panel is the conformity of
PROEX III to the SCM Agreement. The evidence that the Panel has is, on the one hand, PROEX III,
submitted by Brazil, and, on the other hand, press reports, submitted by Canada. It is up to the Panel
to evaluate the evidence on the merits and decide what is the weight and significance of the evidence
submitted by each of the Parties. It is the view of Brazil, however, that no press report can rebut the
provisions of PROEX III, the very programme that this Panel must examine and evaluate.
13. I also would like to point out again that Brazil denies that any PROEX III assistance was
offered by Brazil under the terms alleged by Canada through the "evidence" Canada submitted: the
claims of sales persons and the press reports. In addition, once again, I would like to note that, even if
some of the hearsay evidence submitted by Canada were true, Brazil is not responsible for what a

sales person might offer to a customer. Brazil is only responsible for interest rates support approved
under PROEX III. A sales person might offer terms that would not be subsequently approved by the
Committee. An offer in itself, even if such an offer were made by a sales person, is not in itself
evidence of breach of Brazil's obligations under the SCM Agreement.
14. In conclusion, Mr. Chairman, Brazil would like once again to emphasize that PROEX III
conforms to Brazil's WTO obligations. PROEX III confers no benefit and, therefore, is not a subsidy.
Alternatively, through PROEX III, Brazil in practice applies the interest rates provisions of the OECD
Arrangement and, therefore, PROEX III is covered by the safe haven of the second paragraph of
item (k) of the Illustrative List. Finally, in case the Panel disagrees with both of these arguments,
PROEX III is a payment under the first paragraph of item (k) which is not used to provide material
advantage and, consequently, is not a prohibited subsidy.

ANNEX B-5
RESPONSES BY BRAZIL TO QUESTIONS
OF THE PANEL AND CANADA
(17 April 2001)
For Brazil
Q1. Please address whether, compared to the PROEX programme under consideration in
the first Article 21.5 proceedings, the legal framework of the PROEX programme has
undergone any revision other than that effectuated through BCB Resolution 2799, in so far as it
relates to financing the export of regional aircraft. If so, please submit relevant evidence.
BCB Resolution 002799 makes significant changes to PROEX III. One of the most important
changes is the requirement that interest rate support should not bring the interest rate below the CIRR.
This requirement, coupled with the previous amendment, reflected in Circular-Letter 002881, that the
maximum percentage of interest rate support shall not exceed 2.5 percent, may in fact often produce a
result where, after the interest rate support is provided, the resulting interest rate is still above the
CIRR. Moreover, the Resolution specifically allows the Committee on Export Credits to establish the
terms of interest rate equalization for exports of regional aircraft on a case-by-case basis, at levels that
may vary according to the specifics of each tran saction, but always in compliance with the CIRR.
Thus, BCB Resolution 002799 does not require that the resulting interest rate shall be always at the
CIRR; instead, it sets the CIRR as the floor and anticipates that interest rate equalization will be
provided at or above the level of the CIRR.
Another important change introduced by Resolution 002799 (Article 8, para. 2) is the
requirement that the Committee shall use "as reference the financing terms practiced in the
international market" when "analyzing received requests for eligibility." This provision has a twofold
effect. On the one hand, it requires the Committee to use the terms practiced in the international
market as an additional criterion even when all the other eligibility criteria are met. In other words,
when the Committee evaluates requests for interest rate equalization, it must use the market as a
reference, in addition to the specific eligibilit y criteria of PROEX III. On the other hand, this
provision allows the Committee to provide interest rate support on terms that may depart from the
specific eligibility requirements of PROEX III provided, however, that those terms are consistent with
the terms practiced in the international market.
These new requirements, introduced by Resolution 002799, together with the previously
existing requirements bring PROEX III in compliance with Brazil's obligations under the SCM
Agreement.
Q2. In the original dispute, Brazil stated in respect of PROEX I that "PROEX presumably
would always be more favorable to the purchaser than the terms it could obtain on its own;
otherwise, the purchaser would have no interest in PROEX " (Panel Report on Brazil – Aircraft
(WT/DS46/R), para 7.35). Does Brazil contest that payments under PROEX III allow a
purchaser of regional aircraft to obtain financin g for Embraer regional aircraft on terms more
favourable than those otherwise available to that purchaser in respect of the particular
transaction in the commercial marketplace? If so, please explain in what relevant respect
PROEX III differs from PROEX I.
As questions 2 and 3 for Brazil raise similar issues, Brazil will answer the two questions
together. It is important to understand how PROE X III works in the context of a transaction as a
whole. The conclusion of the Article 21.5 Panel quoted in question 3 to the effect that under

PROEX II "a borrower negotiates the best interest rate it can obtain in international financial markets,
and then benefits from a buy down of that interest rate" does not accurately reflect the process,
particularly with respect to PROEX III. The process of negotiating a sale and obtaining PROEX
support is not a linear process, and does not result in a commercially-negotiated interest rate that is
then further reduced by PROEX support. Put another way, the parties do not negotiate a commercial
rate and then use that as the starting point in applying for PROEX support, which, if granted, would
further reduce the commercially negotiated rate.
To the contrary, the negotiations are a complex process that involve several parties –
including at a minimum the seller, the lender, and the buyer. There may be equity investors,
guarantors, insurers and other parties also involved in the transaction. Frequently, the buyer also may
be negotiating with several potential sellers and other lenders. These negotiations are controlled by
the prevailing commercial rates in the market place. However, the possibility of PROEX involvement
in the transaction does not reduce the net interest rate below what would otherwise be available in the
marketplace; it simply places the rates available to purchasers of Brazilian aircraft at the same level as
rates available for other regional jet aircraft from other vendors with their financial institutions.
This may arise in three situations. In the first, a buyer – assume a Chinese buyer – may be
quoted an interest rate of eight percent (assume this is at/above the CIRR) by an international
financial institution, such as Chase Manhattan or Citibank, to purchase Brazilian aircraft. A Brazilian
bank may not be able to offer eight percent without PROEX support. In this case, PROEX may
enable the Brazilian bank to provide the Chinese buyer the same terms as are available for that
transaction in the international marketplace ( i.e., Chase Manhattan or Citibank) but with the added
convenience of dealing with a bank with whom the seller is familiar, and a bank that is more familiar
with transactions of that kind. In financial terms, however, PROEX would not place the buyer in any
better situation or give it any better terms for the transaction than are available in the international
marketplace.
In the second situation, the Chinese buyer may be offered eight percent terms by an
international financial institution (again, assume this is at/above the CIRR) to finance a purchase of
Brazilian aircraft. The Chinese buyer, however, would prefer to finance the transaction through a
Chinese bank. The Chinese bank, however, is able to offer credit only at 10 percent. In this case,
PROEX support may enable the Chinese bank to provide credit at eight percent and thereby facilitate
the buyer's preference for its own bank. Again, however, PROEX would not place the buyer in any
better situation or give it any better terms for the transaction than are available in the international
marketplace.
In the third situation, assume that an airline is quoted a rate of eight percent for a purchase of
regional aircraft by an international financial institution (assume also that this rate is at the CIRR).
Brazil's manufacturer, Embraer, may want to compete for the sale and offer the same financing
package. However, a Brazilian bank may not be able to provide financing at eight percent because of
its higher cost of dollars, but rather might quote a rate of nine percent. In those circumstances,
Embraer may apply for PROEX support to enable it to offer financing at the eight percent rate.
Again, this would enable Embraer to offer terms that are equal to, though not more favourable than,
the terms that are available to the borrower in the international marketplace.
Accordingly, in each of these three situations, the first Article 21.5 Panel's conclusion that
PROEX reduces a previously-negotiated rate below the commercial rate does not reflect how the
market operates and how PROEX becomes involved in transactions.
Brazil's statement that PROEX would always "be more favorable to the purchaser than the
terms it could obtain on its own, otherwise the purc haser would have no interest in PROEX" must be
read in the context of the examples given above. If PROEX were not involved in the transaction, the
purchaser would be offered a financing package at 9 percent by the Brazilian bank. In that case, the

purchaser would likely take the financing package offered by the competitor rather than the PROEX-
supported package. However, the PROEX-support would still not result in a net interest rate that is
lower than either the CIRR or the terms that might otherwise be available in the marketplace.
Thus, Brazil does indeed contest that PROEX III payments would allow a purchaser to
"obtain financing on terms more favorable than those otherwise available to that purchaser in respect
of the particular transaction in the commercial marketplace." While PROEX III payments may allow
the purchaser a broader range of financing options, the rates offered with PROEX support would not
allow the purchaser to obtain regional aircraft at terms more favorable than would be available
through other financial institutions in the commercial marketplace. The requirement that the
minimum interest rate must be the CIRR, of course, reinforces this fact.
These questions go to the issue of whether, as Canada claims, PROEX III confers a benefit in
every case. For the reasons explained above, PROEX III does not reduce the interest rate below the
commercial market rates. Rather, it enables Brazil's manufacturer and financing institutions to
participate in the transaction at the market rates. Brazil notes in this regard that the Appellate Body
framed the issue as whether PROEX reduced the net interest rate below the CIRR or other appropriate
market benchmark. The Appellate Body thereby implicitly rejected the presumption that PROEX
always and necessarily reduced the net interest rate below the market rates.
With respect to the final sentence of question 3, as explained above, Brazil contests the
accuracy of the first Article 21.5 panel's description of the process for both PROEX I and PROEX III.
While the panel's description may have sufficed as a shorthand description of the process, when the
process itself was not the issue, it did not accurately reflect the complexity of these transactions. That
said, there are nevertheless significant differences between PROEX III and previous iterations of the
programme. First, PROEX III requires a minimum interest rate of the CIRR for all PROEX-
supported transactions. This is the floor rate that the Appellate Body, and, indeed, Canada, have
previously said that PROEX must apply. In c ontrast, PROEX I had no requirement of any minimum
interest rate. Similarly, the minimum interest rate under PROEX II (T-bill plus 20 basis points) was
below the CIRR. Moreover, PROEX III requires that the Committee on Export Credits must follow
the rates prevailing in the market place in deci ding whether to approve PROEX III support. This
requirement was not present in either PROEX I or PROEX II.
Finally, even if PROEX III did bring the interest rate below the commercial rate in particular
instances, the fact that PROEX III applies the interest rates provisions of the OECD Arrangement
means that it is eligible for the safe haven of the second paragraph of item (k).
Q3. In the first Article 21.5 proceedings, the Panel found that, under PROEX II, "… a
borrower negotiates the best interest rate it ca n obtain in international financial markets, and
then benefits from a buy down of that interest rate… " (Article 21.5 Panel Report on Brazil –
Aircraft, para. 6.89). In its oral statement to the Panel (para. 7), Brazil appears to contest that
this is the case in respect of PROEX III. If this is correct, in what relevant respect does
PROEX III differ from PROEX I and II?
Please refer to the response to question 2 above. Because of the similarity of the issues raised
by questions 2 and 3, Brazil has provided a single response to the two questions.

Q4. Is Brazil through its benefit arguments suggesting that in some cases financial
institutions receiving PROEX III payments receive the payments without in any way improving
the terms and conditions of the financing in respect of which PROEX III payments are made,
i.e., that PROEX III payments are in some cases exclusively a subsidy to a financial institution?
If so, and given that PROEX III payments may be provided where financing is provided by
non-Brazilian banks, is Brazil suggesting that PROEX III is a subsidy for foreign banks?
As explained in the answer to question 2 abov e, PROEX III payments would enable Embraer
to provide a net interest rate at the rates prevailing in the market place. This does not enable the seller
to provide financing at terms more favorable than are otherwise available in the marketplace.
However, it must be borne in mind that in the international aviation market, it is important that
manufacturers are in a position to offer competitive financing at prevailing market rates. No aircraft
manufacturer in the world tells airlines, "This is the price. Pay cash, or go borrow the cash from a
bank." It is the custom in the trade, established long before Brazil began producing aircraft, for the
manufacturers to have available a financing package for their sales, and these packages generally
include some form of official government support for export credits.
Other manufacturers in other countries all have export credit support available – Canada
through EDC, the United States through Eximbank . PROEX payments enable Embraer to avoid a
competitive disadvantage in the marketplace by enabling it to offer financing at the CIRR and market
rates. To the extent that PROEX III results in one bank rather than another providing the financing
for a particular transaction, then it is the case that the bank profits or benefits from the PROEX
support. This applies even where the bank is not a Brazilian bank, but is in another country,
particularly a developing country. PROEX III support enables that bank to participate at international
market rates in a financing transaction in which it would not otherwise be able to participate.
Q5. Is the Committee on Export Credits re quired to approve operations meeting the
eligibility criteria set forth in BCB Resolution 2799 and Directive 374 and the National Treasury
thus required to provide equalisation (i.e. is there a conditional entitlement to PROEX III
support)? Or does the Committee retain discretion regarding whether or not PROEX III
support is provided even where the eligibility criteria are met?
The Committee on Export Credits is not required to approve interest rate support financing
even in the case of transactions where all the eligibility criteria provided by PROEX III are met.
There is nothing in PROEX III that imposes on the Committee an obligation automatically to approve
the granting of interest rate support once the Committee establishes that the eligibility criteria of
PROEX III are met. The Committee thus retains discretion regarding whether or not PROEX III
support is provided.
Article 1 of BCB Resolution 002799, for example, states that " … the National Treasury may
provide to the financing or re-financing agency, as the case may be, equalization enough to render
financing costs compatible with those practiced in the international market." (Emphasis ours.)
Further, Article 2 of Resolution 002799 states: "Equalization 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." Resolution 002799 therefore imposes no obligation on the Committee to provide
interest rate support even when all the eligibility criteria are met. The Committee must comply with
certain mandatory requirements (e.g., the CIRR, 85 percent of the value of the sale, 10 year period of
financing) but retains the authority – subject to the terms of the international marketplace – to
determine the specific terms of the interest rate support "on a case by case basis, at levels that may
vary according to the characteristics of each operation" as provided in Article 1, para. 1 of
Resolution 002799.

Q6. Is there a requirement, under Brazilian intern al law, for the executive branch of the
government to interpret provisions of internal law and exercise discretion conferred on it under
internal law in such a way as to conform to Braz il's WTO obligations? If so, please explain and
submit evidence.
The Congress of Brazil has the power to ratify treaties signed by the Executive. When the
Congress does so, it normally adopts legislation incorporating the treaty's text into Brazilian law.
However, treaties may not have direct effect in Brazil unless, in addition to the legislation
incorporating the treaty, the Executive also issues regulations giving internal effect to the treaty. The
WTO Agreements have been incorporated and implemented into the domestic law of Brazil in this
manner.
Because Brazil's WTO obligations have been implemented and have become part of Brazil's
domestic law, the executive branch must comply with those obligations as it does in the case of any
other obligations imposed on it by any other provision of Brazil's domestic law. If other provisions of
Brazil's domestic law allow the Executive to act in a way that may be inconsistent with its WTO
obligations, the potential conflict would be resolved in favor of consistency with Brazil's WTO
obligations. The Executive, even if permitted to act in a manner inconsistent with the WTO by other
provisions of Brazil's domestic law, would still have the duty under domestic law to comply with its
WTO obligations because the WTO Agreements have been implemented in Brazil' s domestic law.
The only situation where a conflict would arise is if another provision of Brazil's domestic law
requires the Executive to act in a manner inconsistent with Brazil's WTO obligations. In such a case,
there would be a conflict between one provision of Brazil's domestic law and another provision of
Brazil's domestic law. This is not the case with PROEX III. There is nothing in PROEX III that
requires Brazil's executive branch to act in a manner inconsistent with Brazil's WTO obligations. In
applying PROEX III, the executive branch remains bound by Brazil's WTO obligations as
implemented in Brazil's domestic law.
Q7. In the Canada – Aircraft Article 21.5 panel proceedings (Article 21.5 Panel Report on
Canada – Aircraft, Annex 1-2, para. 62, p. 75), Brazil argued that "Canada's 'Policy Guideline'
merely suggests that prohibited export subsidies via Canada Account might not be granted; as
noted above, to be sufficient, an implementation measure must instead ensure that prohibited
subsidies cannot be granted. " Should the same standard ap ply to Brazil in the context of
Brazil's item (k) second paragraph defence in these proceedings? If not, why not?
In the Canada – Aircraft Article 21.5 Panel proceedings, Brazil argued that the standard
referred to in the question should apply to the implementation measures announced by Canada with
respect to Canada Account because Canada Account was found by the original Panel to be
inconsistent with Canada's WTO obligations not only de jure, but also as applied. In the Article 21.5
proceedings, Canada argued that it had implem ented the recommendations and rulings of the DSB
because: (i) no new transactions had been financed through Canada Account; and (ii) it adopted a
"Policy Guideline" stating that the Minister of International Trade would, as a policy matter, not
approve transactions that are not in compliance with all of the provisions of the OECD Arrangement
1
Canada argued that because Canada Account was found inconsistent as applied, Canada had no
obligation and bore no burden to demonstrate how it complies with the second paragraph of item (k)
unless, at some time "in the future, there is a fi nancing transaction under Canada Account in relation
to which Canada claims the exception in Item (k) and the claim to that exception is challenged. 2
Further, Canada argued that the "Policy Guideline" st ated an intention to "meet the criteria to qualify
for an exception under the second paragraph of Item (k).3

1 See Canada – Measures Affecting th e Export of Civilian Aircraft , Recourse by Brazil to Article 21.5
of the DSU, WT/DS70/RW, 9 May 2000, paras. 5.57-5.58 ("Article 21.5 Panel Report").
2 Id., Annex 2-1 (Canadian First Submission), para. 67.
3 Id., para. 68.

Brazil responded to these arguments by pointing out that what Canada had done was
insufficient. First, Brazil argued that Canada could not simply state that it had brought Canada
Account in compliance only because there had been no new transactions. Second, Brazil argued that
the "Policy Guideline" referred neither to the "interest rates provisions" of the OECD Arrangement
nor to conformity with the second paragraph of item (k). It only stated an intention to comply with
the Arrangement in its entirety, without any indication of the specific provisions with which it
intended to comply4 Brazil suggested that Canada should specify how it intended to comply with the
interest rates provisions of the Arrangement and the particular interest rates provisions of the
Arrangement with which it intended to comply 5 Brazil suggested that "[t]he minimum burden
accorded to Canada must be to explain with some precision what 'comply with the OECD
Arrangement' will mean. 6 Instead, Canada issued a one sentence "Policy Guideline" that merely
suggested that under Canada Account prohibited export subsidies might not be granted. Under the
Guideline, for example, Canada would have been free to utilize the "matching" provisions of the
Arrangement. The Panel had found that these were not "interest rates provisions.7
PROEX III does considerably more than did Canada's implementation measures with respect
to Canada Account and meets the standard proffered by Brazil, as described above. PROEX III is not
a blanket statement that the programme complies with the Arrangement. PROEX III contains specific
requirements that are consistent with the specific criteria set out in the interest rates and other relevant
provisions of the Arrangement (e.g., the CIRR as a floor, financing up to 85 percent of the export
value of a sale, financing for a period of up to 10 years). PROEX III imposes on the Committee
specific eligibility criteria that meet or exceed the disciplines contained in the interest rates provisions
of the Arrangement. Therefore, PROEX III does ensure that financing under its terms qualifies for
the safe haven of the second paragraph of item (k).
Brazil also notes that the Appellate Body in Canada – Aircraft Article 21.5 proceedings found
that "the words 'ensure' and 'future,' if taken too literally, might be read to mean that the Panel was
seeking a strict guarantee or absolute assurance" as to the future application of the revised
programme. The Appellate Body concluded that "[a] standard …, if so read, would … be very
difficult, if not impossible, to satisfy since no one can predict how unknown administrators would
apply, in the unknowable future, even the most conscientiously crafted compliance measure.
8 Brazil
can thus do no more than adopt an implementation measure that specifically addresses the way in
which it will, as a matter of law, comply with its WTO obligations – which is exactly what
PROEX III does.
Q8. Brazil argues that "the maximum percentage allowed under PROEX III for the purpose
of interest rate equalisation is 85 per cent of the export value of the sale " (Brazil's first
submission, para. 43). Is it Brazil's position that PROEX III would not allow Brazil to exceed
this maximum percentage in respect of regional aircraft? If so, why? When responding to this
question, please specifically address:
(a) Article 5 of Directive 374;
(b) Article 8 of Directive 374;

4 Id., Annex 1-2 (Brazil Rebuttal Submission), para. 69.
5 Id., para. 72.
6 Id., para. 76.
7 Id., paras. 5.125, 5.126, 5.132-5.134, and 5.147(d) and (f).
8 Canada – Measures Affecting th e Export of Civilian Aircraft , Recourse by Brazil to Article 21.5 of
the DSU, Report of the Appellate Body, WT/DS70/AB/RW, 21 July 2000, para. 38.

(c) the statements reported by Canada in paragraph 11 of its first written
submission and paragraphs 20-26 of its rebuttal submission.
(a) Brazil's position is indeed that PROEX III would not allow Brazil to exceed the maximum
percentage for the purpose of interest rate equalization – 85 percent of the export value of the sale –
with one possible exception. The rule is contained in Article 5 of Directive 374. Article 5 of
Directive 374 prohibits interest rate equalization for more than 85 percent of the export value of the
sale. The exception is contained in Article 8, para. 2 of BCB Resolution 002799, which allows
departure from the specific eligibility criteria in PROEX III only when interest rate support is
provided on terms consistent with the international market. Thus, if the Committee is satisfied by the
applicant and its own research that interest rate equalization based on more than 85 percent of the
export value of the sale would nonetheless be consistent with the terms prevailing in the international
market, the Committee could (but would have no obligation to) provide interest rate support on the
same terms as those available in the international market. In that instance, PROEX III would not
confer a benefit, since it would provide support consistent with that available to the recipient in the
market.
(b) Article 8 of Directive 374 does not allow Brazil to exceed the maximum percentage of
85 percent of the export value of the sale. This Article actually applies to requests of PROEX support
that concern products that are not included in the Annex, or whose commercialisation in the
international market require terms that exceed thos e set out in the programme. For example, the
repayment term practiced in the international market could exceed the one stipulated in the Annex for
that particular product. Article 8 ensures that the Secretaria de Comércio Exterior (SECEX) is aware
of such situations with a view to reassess the operation of the programme in light of these
circumstances. SECEX has no authority to approv e the requests that do not conform to the basic
guidelines of the programme. Such authority is vested on the Comitê de Crédito às Exportações, as
established in Article 8 (c) of Banco Central Resolution 2799.
(c) Canada ignores the very text of the documents that constitute PROEX III and submits instead
"evidence" that is based on newspaper articles and reports. In paragraph 11 of its first written
submission, Canada refers to a newspaper report of a statement by then-Foreign Minister Lampreia.
First, there is no guarantee that the newspaper accurately reported what Minister Lampreia actually
said. Second, even if accurate, the statement was made before PROEX III was approved and adopted.
Third, again even if accurate, the statement expresses the view of a Brazilian official who may or may
not have approved of the proposed revisions of PR OEX. Moreover, Minister Lampreia's Ministry is
not involved in administering PROEX. Finally, whatever Minister Lampreia's views might have been
at the time, PROEX III subsequently was approved and enacted. The relevant documents have been
submitted to this Panel. This programme, rather than the Minister's statement, is before the Panel.
In paragraphs 20 through 26 of its rebuttal submission, Canada similarly uses newspaper
reports that may or may not accurately reflect the statements made by Brazilian officials. For
example, the statement by Ambassador Graça Lima, as reported, may be interpreted in different ways.
Even if reported correctly, the statement in fact contains nothing objectionable from Canada's
perspective because even before December 2000, PROEX required terms of financing of up to
10 years and up to 85 percent of the export value of the sale, and those terms in themselves do not
depart from Brazil's WTO obligations. In addition, this statement also was made prior to adopting
and enacting PROEX III. The other two press reports referred to in paragraphs 23 and 24 of Canada's
rebuttal submission do not even cite names of Brazilian officials. They either express the views of the
newspaper or the reporter or cite anonymous "Brazilian authorities."
Brazil does not suggest that newspaper articles and reported statements by government
officials should ab initio be discarded without assessing their evidentiary value. In some cases, there
may be no other evidence available. In this case, however, the newspaper articles (even assuming
everything they report is accurate) provide at best evidence of the divergence of views in the Brazilian

Government about revising PROEX and of some public comments about Brazil's negotiations with
Canada. They do not provide evidence of what PROEX III actually requires . This evidence is
provided by the documents constituting PROEX III. Brazil has subm itted those documents to the
Panel. There is no better evidence about what PROEX III is and what PROEX III requires than the
evidence contained in the PROEX III documents themselves.
Finally, Canada grossly misstates and misinterprets the positions and views expressed by
Brazil during their negotiations. Canada states that Brazil publicly insisted that it would not abide by
the provisions of the OECD Arrangement and that, during the negotiations, Brazil refused to consider
adjusting PROEX to the interest rates provisions of the Arrangement. Canada ignores the fact that
Brazil consistently has adhered to the view that the second paragraph of item (k) does not require
compliance with all of the provisions of the Arrangement. In addition, Canada omits to note that
Canada and Brazil disagree on what are the interest rates provisions of the Arrangement. With those
points in mind, Brazil's position is clear and consistent: Brazil has pledged to comply with the CIRR
and has established the CIRR as a floor, complies with those provisions of the Arrangement that
Brazil believes are the interest rates provisions, and does not believe it has an obligation to comply
with the other provisions of the Arrangement.
Q9. Brazil argues that "the maximum length of the financing term under PROEX III is ten
years" (Brazil's first submission, para. 48). Is it Brazil's position that PROEX III would not
allow Brazil to exceed this maximum financing term in respect of regional aircraft? If so, why?
When responding to this question, please specifically address:
(a) Article 3, paragraphs 1 and 2, of Directive 374;
(b) the statements reported by Canada in paragraph 11 of its first written
submission and paragraphs 20-26 of its rebuttal submission;
(c) your statement in the first Brazil - Aircraft Article 21.5 proceedings that, under
PROEX I and II, the ten-year maximum "was waived, and continues to be
waived, for regional jet aircraft only " (Article 21.5 Panel Report on Brazil –
Aircraft, Annex 2-4, question 6, p. 135). In this regard, does Brazil contend that
the legal provisions allowing such a waiver no longer exist? If they still exist, (i)
which are they and (ii) what is the basis for Brazil's assertion that the maximum
length of the financing term under PROEX III is ten years?
(a) Brazil's position is indeed that PROEX III – and in particular Directive 374 – would not
allow Brazil to exceed the maximum period of 10 years for the purpose of interest rate equalization.
The only possible exception is contained in Arti cle 8, paragraph 2 of BCB Resolution 002799 which
allows departure from the specific eligibility crite ria in PROEX III only when interest rate support is
provided on terms consistent with the internatio nal market. Thus, presumably, if the Committee is
satisfied by the applicant and its own research that interest rate equalization is provided in the
international market for a period longer than 10 years, the Committee could (but would have no
obligation to) provide interest rate support on the same terms as those available in the international
market. In that instance, PROEX III would not confer a benefit, since it would provide support
consistent with that available to the recipient in the market.
Article 3.1.I of Directive 374 simply ensures that the equalization payments will not exceed
the financing term of the contract signed by the exporter, even if it is shorter than the term allowed in
the Annex. Article 3.1.II limits the repayment term to that indicated in the Annex, except as provided
in paragraph 2 of the same Article and Article 4.
Article 3.2 indicates that the repayment terms indicated in the Annex may be extended up to
96 months if warranted by the unit values, as indicated in the table reproduced in that paragraph. This

provision obviously applies to products with repayment terms under 96 months in the Annex. This is
not the case for regional aircraft.
Article 4 deals with exports that involve more than one product and the application of the
methodologies set out in items (a), (b), and paragraph 1 could not mathematically result in repayment
terms longer than the 10 year maximum.
(b) See response to Question 8(c) above.
(c) The basis for Brazil's assertion that the maximum length of the financing term is 10 years is
the specific requirement to that effect in Directive 374, and the requirement of Article 1.1 of BCB
Resolution 002799 that interest rate equalization must be provided in compliance with the CIRR. As
explained in (a) above, the possibility for a waiver does exist. It is provided in Article 8, para. 2 of
BCB Resolution 002799 which allows departure from the specific eligibility criteria in PROEX III but
only when interest rate support is provided on terms consistent with the international market. Thus,
the waiver is permissible only when the Committee is satisfied by the applicant and its own research
that interest rate equalization is provided in the international market for a period longer than 10 years.
In such a case, the Committee could (but would have no obligation to) provide interest rate support on
the same terms as those available in the international market. Thus, if the length of the term of
financing available in the international financial market exceeds 10 years, the Committee would have
the discretion to apply the same length of the term of financing. Again, in that instance, PROEX III
would not confer a benefit, since it would provide support consistent with that available to the
recipient in the market.
Q10. Has Brazil issued any letters of commitment under PROEX III in respect of regional
aircraft? If yes, did the transactions in ques tion involve financing of greater than 10-years'
duration and/or financing in excess of 85 per cent of the amount of the sale? Please provide
supporting details with respect to each transaction.
No, Brazil has not issued any letters of comm itment under PROEX III in respect of regional
aircraft.
Q11. To the extent you have not done so, please address specifically whether and why
PROEX III is "in conformity with " Articles 8, 9, 12-14, 16-26 of the 1998 OECD Arrangement
as well as Articles 18-20, 23-24, 27-28, 29(b) and (c) of Annex III to the 1998 OECD
Arrangement. Please substantiate your view.
Brazil notes that in its view, the provisions referred to above are not properly considered as
interest rates provisions. Therefore, in order to qualify for the safe haven of the second paragraph of
item (k), PROEX III should not be required to conf orm with each and every one of these provisions.
Nevertheless, for the reasons explained below, Brazil submits that PROEX III does in fact conform to
the provisions listed in the question.
Articles 8 and 9 of the Arrangement provide that the repayment term runs from the starting
point of the credit, defined as the date on which the buyer takes possession of the goods in his own
country, to the date of the final payment. PROEX III is in conformity with these requirements, in that
Article 3 of Directive 374 stipulates that the payment term is the period from the date of shipment or
delivery to the date of maturity of the last equalization payment. Since PROEX payments are
normally made in 6-month increments over the term of the loan, this will coincide with the date of the
last payment.
Article 12 (together with Article 10) of the Arrangement sets out maximum repayment terms
for categories of countries. These provisions are superseded by the provisions of Article 21 of the
Annex to the Arrangement, which establishes a maximum repayment term of 10 years for regional jet

aircraft. PROEX III is consistent with this in that the Annex to Directive 374 establishes a maximum
repayment term of 10 years for regional jet aircraft.
Article 13 of the Arrangement calls for repayment of principle in regular instalments not less
than six months in frequency. Similarly, Article 14 of the Arrangement calls for the payment of
interest on a six-monthly basis. Article 4 of Resolution 2799 conforms with these requirements in that
it provides for calculation of the amounts due for equalization purposes on a six-month basis and calls
for the issuance of NTN-I bonds on a six-monthly basis.
Articles 16 and 17 govern the calculation of the CIRR. Resolution 2799 provides that the net
interest rate for a PROEX-supported transaction may not be below the CIRR. Since Brazil is not a
Participant in the Arrangement , however, Brazil does not play any role in calculating the CIRR and
therefore PROEX III does not contain parallel prov isions to Articles 16 and 17 governing how the
CIRR is to be calculated.
Articles 18 through 24 of the Arrangement govern cosmetic interest rates and minimum
premiums. These provisions do not apply to interest rate support and, therefore, are not relevant to
PROEX III.
Article 25 of the Arrangement refers to local costs. PROEX does not provide for financing of
such costs.
Article 26 governs validity periods for lines of credit. This also does not apply to interest rate
support such as PROEX.
Article 18 of the Annex to the Arrangement states that Part 2 of the Sector Understanding
applies to aircraft other than large aircraft. The Article does not have any mandatory aspect.
PROEX III may provide officially supported export credits for aircraft other than large aircraft and in
that sense conforms with the Article.
Article 19 of the Annex imposes a hortatory burden on Participants to use best endeavours to
respect the terms of the Arrangement. Since PROEX III requires a minimum interest rate of the
CIRR, PROEX III is in conformity with this article.
Article 20 of the Annex divides the aircraft su bject to part two of the sector understanding
into three categories, and must be read in conjunction with Article 21 establishing maximum
repayment terms. As explained in Brazil's Fi rst Submission (paragraph 55), PROEX III conforms
with these articles in that the regional jets at issue in this dispute are Category A aircraft, for which, in
accordance with Article 21, PROEX III establishes a maximum repayment term of 10 years.
Article 23 of the Annex stipulates that the Participants shall not waive insurance premium or
guarantee fees. Since PROEX does not involve guarantees, this provision does not apply.
Article 24 stipulates that the Participants shall not provide aid support. PROEX III does not
contain provisions permitting aid support.
Articles 27 and 28 of the Annex provide that, for used aircraft, the credit terms shall not be
more favorable than for new aircraft. Article 28 provides specific repayment terms for used aircraft.
PROEX III does not contemplate the issue of used ai rcraft or the possibility of PROEX support for
used aircraft sales, and Brazil is not aware that the Brazilian industry has made any sales of used
aircraft. There have been no PROEX commitments made to support sales of used aircraft.
Accordingly, these provisions are not relevant to PROEX.

Article 29 of the Annex provides for the financing of spare parts and engines. Brazil has
stated its views on the applicability of Article 29(a) to PROEX in its First Submission (at
paragraphs 59-61) and in its oral statement (at paragraphs 33-35). Articles 29(b) and (c) establish
repayment terms of five years for spare engines and two years for other spare parts when not ordered
with the new aircraft. Brazil notes that it does not manufacture engines and therefore does not sell
engines separately from the aircraft. In any event, PROEX III conforms with these provisions to the
extent that it establishes (in the Annex to Directive 374) that the maximum financing term for parts of
aircraft shall be limited to five years (NCM Heading 8803) and one year (NCM Heading 8803.90).
While the classification of goods is not entirely clear from the schedules, these classifications are
consistent with – and indeed more stringent than – the requirements of Article 29 of the Annex to the
Arrangement. Brazil notes again that spare parts financing has been a de minimis element of
PROEX III support in the past and that spare parts financing has been provided only in connection
with sales of new aircraft.
Q12. With respect to Article 6 of Directive 374, what is the basis for Brazil's contention that
this provision confers discretion on the Committee on Export Credits? (Brazil's first
submission, para. 61) If the term "may" provides the basis for Brazil's contention, please also
address the meaning of the term "may" in Article 2 of Directive 374.
Article 6 permits applicants to include spare parts financing in their application for
equalization support and grants the Committee discretion to approve equalization for spare parts
financing. Article 2, in contrast, is a general provision regarding exports, which must be read as being
limited by the maximum payment tenures referred to in Article 1 and listed in the Annex to
Directive 374.
Q13. With reference to Article 1, paragraph 1, of BCB Resolution 2799, please elaborate on
the precise meaning of the phrase "interest rate equalisation shall be established on a case-by-
case basis, at levels that may vary according to the characteristics of each operation". What are
the characteristics at issue and how would they determine the level of interest rate equalisation?
This phrase means that applications for PROEX III support will be considered on a case by
case basis. While Resolution 2799 establishes a minimum net interest rate – the CIRR – and
PROEX III support is limited to a maximum amount of 2.5 percent, the Committee is not required to
approve a net interest rate as low as the CIRR in every case. In addition, the Committee is not
required to approve 2.5 percent PROEX support in every case (and, in fact, may not do so where that
would reduce the net interest rate below the CIRR). Thus, the question of whether to approve
PROEX support and, if so, to what extent, must be determined based on the individual merits, or
"characteristics," of each proposal.
Q14. Regarding Brazil's reference to Article 8, paragraph 2, of BCB Resolution 2799, please
answer the following questions:
(a) What is the relevant "international market"? Is this a reference to the market
for the product for which PROEX eligibility is requested?
Because the international market for differen t products may vary, the term "international
market" should be read as referring to the market in which the product for which PROEX support is
requested competes.
(b) What is meant by the "financing terms"? Please give examples.
The phrase "financing terms" should be interpre ted as referring to all of the terms on which
financing is offered. The terms may, of course, vary from transaction to transaction.

(c) What are the benchmark "financing terms"? (Those available to the borrower
in question? The industry sector in question?)
The financing terms in question refer to the terms that would be available for a comparable
transaction for that buyer in the commercial marketplace. Please refer to the answer to question 2
above for further details.
(d) Do the financing "practices" referred to include officially supported financing?
As explained previously, there is no accepted definition of "officially supported financing."
Article 88 of the OECD Arrangement, for example, states that it was not possible for the Participants
to agree on a definition of the term. Moreover, as indicated in Article 86 of the Arrangement, there is
considerable debate as to whether so-called "market window operations" – where government export
credit agencies purport to be purely commercial actors in the market – are properly considered as
"officially supported financing."
Furthermore, there are many different types of officially supported financing, and it will not
always be clear what, if any, official support is included in a transaction in the market place. To the
extent that a transaction appears to conform with the marketplace, then that transaction would be
deemed to be part of the "practices" that would be examined by the Committee.
(e) What is the meaning of the phrase "shall have as reference"? Does this language
enable the Committee to approve fina ncing of operations on terms more
favourable than those prev ailing in the international market at the relevant
time?
This phrase means the Committee must conform to the financing terms of the international
market. The language prevents the Committee from approving financing on terms more favorable
than those prevailing in the international market. Brazil notes, however, that there may be situations
in which the CIRR is below the marketplace rates (Canada has previously explained that due to time
lags in calculating the CIRR, the CIRR may be above or below the market at a given point in time)
9
In those circumstances, the Committee could provid e PROEX support according to the interest rates
provisions of the OECD Arrangement, and nevertheless benefit from the save haven of the second
paragraph of item (k).
(f) Specifically, how would the Committee determine the net interest rate for
eligible operations involving the export of regional aircraft in situations where
the financing terms practised in the international market "justified" repayment
terms of, e.g., 15 years?
The Committee would have to consider any proposal for financing that deviated from the
CIRR based on the evidence placed before the Committee on a case-by-case basis. Brazil cannot
comment on what that evidence may be for a future transaction. Brazil would note, however, that the
CIRR may nevertheless be an appropriate rate for such a transaction, given that Canada has
previously told the Panel that the terms in the marketplace may include interest rates below the CIRR
(for Canada's "market window" financing) and loans with 15-18 year terms
10 In this instance, of
course, the transaction would not be eligible for the safe haven of the second paragraph.

9 Brazil -- Export Financing Programme for Aircraft -- Recourse by Canada to Article 21.5 of the DSU,
WT/DS46/RW para. 6.99 (9 May 2000).
10 Article 21.5 Panel Report, page 81 (Canada's response to Question 2 posed by the Panel) and page 94
(Canada's response to Question 8 posed by Brazil).

(g) What is the relationship between Article 8, paragraph 2, and Article 1,
paragraph 1? What of a case where reference to the financing terms practised
in the international market would indicate an above-CIRR rate? Could the
Committee still approve net interest rates at CIRR level?
The CIRR is intended to be the floor, or minimum possible net rate that may be approved by
the Committee. As explained above, where the market is above the CIRR, the Committee
nevertheless may approve financing at a net interest rate equal to the CIRR and still qualify for the
safe haven of the second paragraph of item (k).
(h) What is the relationship between Article 8, paragraph 2, and Directive 374? In
particular, which would take precedence if the financing terms practised in the
international market "justified" (i) repayment terms in excess of 10 years, (ii)
loan-to-asset values in excess of 85 per cent?
Article 8, paragraph 2 grants the Committee discretion to approve PROEX support so long as
that support is consistent with the international market. Thus, the Committee would enjoy discretion
under that paragraph to deviate from the terms of Directive 374. However, as discussed above, this
discretion is not unlimited.
(i) With reference to para. 17 of Brazil's oral statement, please explain in what way
Article 8, paragraph 2, of BCB Resolution 2799 adds to what is already stated in
Article 1 thereof. In addition, does the reference to Article 8, paragraph 2, add
anything to Article 2 of Provisional Measure 1629?
Article 1 of Resolution 2799 establishes the general framework for equalization payments
under the PROEX programme. Article 8, paragraph 2, imposes a specific affirmative requirement on
the Committee to ensure that any PROEX support, in addition to meeting the specific criteria
enumerated elsewhere, is consistent with the terms practised in the international markets. Thus,
Article 8 paragraph 2, uses the mandatory verb "shall" in describing the Committee's obligations.
Article 2 of Provisional Measure 1629 deals with types of financing not covered by Article 1
of the same Provisional Measure. Article 1 refers to post-shipment PROEX operations. These are the
only types of operations for which regulations have been issued and that PROEX currently supports.
They could involve both direct financing and equalization payments. Resolution 2799 implements
Provisional Measure 1629 with regard to equalization payments only. Article 8.2 of Resolution 2799
ensures that the financing terms practiced in the inte rnational market will be used as the reference by
the Comitê de Crédito às Exportações, when approving equalization payments concerning post-
shipment financing transactions that do not conform to the general rules of the programme.
Article 2 of Provisional Measure 1629 contempl ated equalization payments for pre-shipment
financing. This mechanism has never been implemented and PROEX has never made equalization
payments under this mechanism.
(Addressed to Both Parties)
Q21. On the assumption that the second paragraph of item (k) provides for an exception to
the first paragraph thereof, would a Member invoking the second paragraph need to establish
(i) that its internal law allows it to act in conformity with the interest rates provisions of the
relevant OECD Arrangement or (ii) that its internal law requires it to act in conformity with the
aforementioned interest rates provisions? If (ii) is correct, how does this view fit with the
traditional distinction between mandatory and discretionary legislation in the GATT/WTO?

As a preliminary matter, Brazil wants to emphasize that it disagrees with the assumption that
the second paragraph of item (k) provides for an exception only to the first paragraph of item (k).
Under the second paragraph of item (k) "an export credit practice" which is in conformity with the
interest rates provisions of the OECD Arrangement "shall not be considered an export subsidy
prohibited by" the SCA Agreement. If the second paragraph of item (k) provided for an exception
from the first paragraph only, "an export credit practice" must be understood to cover only practices
within the scope of the first paragraph. In other words, "an export credit practice" must either be a
"grant by governments" or a "payment" within the meaning of the first paragraph of item (k). Nothing
in the plain meaning of the text can be interpreted to mean or even suggest that "an export credit
practice" under the second paragraph of item (k) (or, indeed, under the OECD Arrangement) should
be construed so narrowly. An export credit practice is a concept that is much broader than the scope
of the first paragraph of item (k). The assumption that the second paragraph of item (k) provides for
an exception only to the first paragraph would require Members to show that their export practices are
a "grant" or a "payment" as defined by the first paragraph of item (k) before they can claim the safe
haven.
The safe haven is thus an exception from Article 3 of the SCM Agreement. A subsidy
contingent on exports that would otherwise be a prohibited subsidy would not be in breach of the
SCM Agreement if it qualifies for the safe haven of the second paragraph of item (k) regardless of
whether it is a "grant" or a "payment" as defined by the first paragraph of item (k).
Whether the second paragraph of item (k) allows an exception from the first paragraph or
from the SCM Agreement as a whole, PROEX III does not allow the relevant Brazilian authorities the
discretion to act in breach of Brazil's obligati ons under the SCM Agreement. On the contrary,
PROEX III requires conformity with the SCM Agreement: it requires that the Committee on Export
Credits act in conformity with the specific disc iplines of the interest rates provisions of the OECD
Arrangement unless financing is provided on terms available in the market, in which case no benefit is
conferred. Nevertheless, even assuming that PROEX III is discretionary and allows Brazil to act in a
manner inconsistent with its obligations under the SCM Agreement, PROEX III cannot be challenged
unless and until it is applied in such a manner.
Under the traditional GATT/WTO doctrine rega rding the distinction between mandatory and
discretionary legislation, "discretionary legislation" refers to legislation that gives the Executive the
ability to apply a law either consistently or in consistently with the country's treaty obligations
11
Under traditional GATT/WTO jurisprudence, "discretionary" legislation cannot be challenged until it
is actually applied in a GATT/WTO-inconsistent manner.
In Brazil's view, the mandatory/discretionary doctrine has its roots in general or customary
principles of international law. It derives both from a rule of construction (i.e., that two potentially
conflicting provisions of law will be interpreted in such a way as to make them consistent) and a
presumption (i.e., that the WTO Member will in fact apply its law in a WTO-consistent manner). As
explained by the United States in United States - Antidumping Act of 1916 , WT/DS136/R
(31 March 2000) (challenge brought by the EC):

11 See, e.g. , United States – Measures Aff ecting Alcoholic and Malt Beverages , DS23/R, adopted
19 June 1992, BISD 39S/206, para. 5.39 ("Recent panels addressing the issue of mandatory versus discretionary
legislation in the context of both [GATT] Articles III:2 and III:4 concluded that legislation mandatorily
requiring the executive authority to take action inconsistent with the General Agreement would be inconsistent
with Article III, whether or not the legislation were being applied, whereas legislation merely giving the
executive authority the possibility to act inconsistently with Article III would not, by itself, constitute a violation
of that Article").

3.33 . . . the distinction in GATT 1947/WTO jurisprudence between discretionary and
mandatory legislation is not based upon a particular provision of the WTO
Agreement, nor is it limited in its application to a particular WTO provision . . .The
distinction is a general principle developed by panels that most likely has its origin in
the presumption against conflicts between national and international laws. It is both
general international practice and that of the United States that statutory language is
to be interpreted so as to avoid conflicts with international obligations. There is thus
a presumption against a conflict between international and national law. In general
[according to O
PPENHEIM'S INTERNATIONAL LAW (hereinafter "OPPENHEIM'S")],
"[a]lthough national courts must apply national laws even if they
conflict with international law, there is a presumption against the
existence of such a conflict. As international law is based upon the
common consent of the different states, it is improbable that a state
would intentionally enact a rule conflicting with international law. A
rule of national law which ostensibly seems to conflict with
international law must, therefore, if possible always be so interpreted
as to avoid such conflict."
12
Both GATT and WTO Panels have relied on similar reasoning in applying the doctrine.
Thus, in Canada - Aircraft , the Panel reviewed Brazil's allegation that two of the challenged
programmes (Export Development Corporation and Canada Account) required Canada to grant
subsidies. The Panel determined, however, that Brazil had not offered evidence demonstrating that
subsidization was required under these programmes. Rather, "the grant of subsidies would be the
result of the exercise of the administering authority's discretion in interpreting its mandate.
13 In these
circumstances, the traditional distinction between discretionary and mandatory legislation prevented
the Panel from making findings on the programmes per se, and instead required that Brazil establish
that the programmes, as applied, granted subsidies.
In addition, a Member may apply legislation in a manner that is consistent with its WTO
obligations when it takes action affecting a fellow Member, but may apply the legislation in a manner
that is inconsistent with the provisions of a WTO agreement when it acts against a non Member.
Therefore, even assuming that PROEX III gives the Committee on Export Credits the ability to act in
a manner inconsistent with Brazil's obligations under the SCM Agreement (which Brazil denies),
PROEX III certainly does not require that Brazil act in a manner inconsistent with the SCM
Agreement. Under this assumption, PROEX III is discretionary and cannot be challenged unless
applied in a manner inconsistent with Brazil's WTO obligations.

12 OPPENHEIM'S INTERNATIONAL LAW, 9th ed., pp. 81-82 (footnote omitted).
13 Canada - Measures Affecting the Export of Civilian Aircraft, WT/DS70/R (14 April 1999),
para. 9.128. For GATT cases applying the doctrine, see, e.g., United States - Taxes on Petroleum and Certain
Imported Substances, adopted on 17 June 1987, BISD 34S/136 (the Panel found that a U.S. law could not be
challenged until it was applied because the U.S. execut ive possessed authority to apply the law in a GATT-
consistent fashion); Thailand - Restrictions on Importation of an Internal Taxes on Cigarettes, adopted on
7 November 1990, BISD 37S/200 (the Panel found that the mere existence of a higher tax ceiling on imported
cigarettes did not violate Article III:2 of GATT 1947 because an implementing regulation had established an
identical tax on both imported and domestic cigarettes); EEC - Regulation on Imports of Parts and Components,
adopted on 16 May 1990, BISD 37S/132 (the Panel ruled that a measure that allowed, but did not require, the
imposition of a tax on certain imported products to avoid circumvention of an antidumping duty order could not
be challenged under Article III of GATT 1947 until it was applied and recommended that the EEC never apply
the measure); United States - Measures Affecting the Importation, Internal Sale and Use of Tobacco, adopted
on 4 October 1994, BISD 41S/131 (the Panel found that a U.S. statute was susceptible to many interpretations,
including one that would violate Article VIII:1(a) of GATT 1947, but did not find it inconsistent with the GATT
because it could also be interpreted and applied in a GATT-consistent manner).

Q22. The Panel in United States – Section 301 (WT/DS152/R, para. 7.96) found legislation
presumptively inconsistent with the WTO Agreement in a case where legislation provided
discretion to act in a WTO-inconsistent manner. Do the findings of this Panel on this issue have
any relevance to this dispute? Please elaborate.
Again, as Brazil noted above and during the m eeting of the Panel, PROEX III does not allow
Brazil to act in a manner that would be inconsistent with Brazil's WTO obligations. It requires that
the authorities act in conformity with the prov isions of the SCM Agreement. Therefore, the
discretionary v. mandatory distinction and the findings in the Section 301 case are irrelevant.
However, even under the assumption that PROEX III is discretionary and allows Brazil to act in a
manner inconsistent with the SCM Agreement, the findings of the Section 301 Panel are not
applicable because they are based on very different facts.
In Section 301 , the EC challenged a provision of US law that, in certain circumstances,
required the US Trade Representative to determine whether another country was complying with its
WTO obligations before a WTO dispute settlement Panel had issued a ruling on that very question.
The EC argued that the US law was inconsistent with Article 23 of the Dispute Settlement
Understanding, which specifically states that "Members shall not make a [unilateral] determination to
the effect that a violation has occurred" before such a determination is made by the Dispute
Settlement Body. The United States defended the measure on grounds that the USTR had the
discretion to find that the other country was not acting in a manner inconsistent with its obligations.
Consequently, according to the United States, the measure could not be challenged until the USTR
had acted, i.e., until it had issued a determination, prior to the completion of the WTO dispute
settlement process, that another country had acted inconsistently with its WTO obligations. Thus, the
United States explicitly retained the right to ma ke unilateral determinations that were expressly
prohibited by the DSU and was, indeed, required by the statute to make such determinations.
The Panel, without departing from the mandatory/discretionary doctrine, found that the
vesting of discretion in the government could constitute a violation of the WTO obligations when the
discretion is, in itself, a direct violation of an express provision of a WTO agreement. These facts are
very different from the facts of PROEX III, as the SCM Agreement does not contain any provision
expressly preventing a Member from granting some discretion to its Executive.
Brazil does not believe that any provision of PROEX III allows a violation of Brazil's
obligations under the SCM Agreement. Canada, howev er, has raised the issue of spare parts. This
issue would arise only if the Panel decides that PROEX III does confer a benefit and that, in order to
qualify for the safe haven of the second paragraph of item (k), PROEX III must comply with the
interest rates provisions of the 1998 version of the OECD Arrangement. In that case, the distinction
between the Section 301 case and the current case is apparent. PROEX III allows financing of spare
parts up to 20 percent of the aggregate value of the other goods. It does not expressly reserve the right
of Brazil or require Brazil to finance spare parts for regional aircraft in excess of the requirements of
the 1998 OECD Arrangement.
Q23. What relevance, if any, does the language of Article 3.2 to the SCM Agreement ( "A
Member shall neither grant nor maintain subsidies referred to in paragraph 1 ") have to the
consideration of PROEX III in this dispute.
The "grant" nor "maintain" language in Article 3.2. of the SCM Agreement is not relevant to
the consideration of PROEX III in this dispute. PROEX III allows neither granting nor maintaining
prohibited subsidies. In fact, as Brazil stated before this Panel and in its response to Question 10
above, to date no support has been granted under PROEX III and, therefore – obviously – no subsidies
could have been granted or maintained under PROEX III. Subsidies that may have been granted or
maintained under the previous versions of PROEX are not at issue in this dispute. Canada has sought
and obtained the authorization to retaliate against those subsidies, and they are not within the terms of

reference of this Panel. The only question before this Panel is whether PROEX III is consistent with
Brazil's WTO obligations.
Q24. Please discuss how, if at all, the concept of minimum premiums as reflected in Article 20
of the 1998 OECD Arrangement applies to interest rate support. Why is interest rate support
not identified in Article 20 of the 1998 OECD Arrangement? Are minimum premium
benchmarks under the 1998 OECD Arrangement available to non-Participants?
The language of Article 20 of the Arrangement expressly limits the application of the
minimum premiums to official support provided through direct credits/financing, refinancing export
credit insurance and guarantees. Interest rate support, such as PROEX, is expressly omitted from the
application of the minimum premiums.
Brazil is, of course, not a Participant in the Arrangement and was not involved in the drafting
or negotiation of the terms of its terms. Brazil can therefore only offer speculation as to why interest
rate support was excluded from the application of the minimum premiums. It is Brazil's
understanding that the minimum premiums do not apply to interest rate support because the
government providing interest rate support simply makes interest payments and does not assume any
of the risk of the transaction. In contrast, go vernments providing direct financing or guarantees
necessarily assume all or part of the risk of the transaction.
While the OECD makes available some information regarding how premiums are to be
calculated (the so-called Knaeppen Package), as far as Brazil is aware, the actual premiums are not
available to non-Participants in the Arrangement.
Q25. Please state clearly for the Panel your view regarding which provisions of the 1992 and
1998 Arrangement are "interest rates provisions" within the meaning of the second paragraph
of item (k).
As explained in Brazil's First Submissio n, Brazil understands that the panel in Canada –
Aircraft used an overly broad approach to identify what it believed were the interest rates provisions
of the 1998 OECD Arrangement
14 As explained in its First Submission, Brazil submits that the
interest rates provisions of the 1998 version of the Arrangement are Articles 15 through 19 of the
main text and Article 22 of the Annex 15 Further, Brazil believes that the interest rates provisions of
the 1992 version of the Arrangement are those set out in Article 5 of the main text and Article 21 of
Annex IV: Sectoral Understanding on Export Credits for Civil Aircraft 16 These are the only
provisions of the Arrangement governing the interest rate for a given transaction. The other
provisions described by the Canada – Aircraft panel as interest rates provisions do not affect the
interest rate for the transaction.
For example, Article 7 of the 1998 Arrangement requires that purchasers make cash payments
equal to a minimum of 15 percent of the export contract value ( i.e., only 85 percent of the transaction
value may be financed)17 This is not an "interest rates provision" because the amount to be financed
does not affect the interest rate, but simply the amount of the loan.
Similarly, Article 29(a) of the Annex provides that spare parts financing shall be limited to
20 percent of the value of the transaction. This provision also affects only the amount of the loan;

14 Canada – Measures Affecting the Export of Civilian Aircraft – Recourse by Brazil to Article 21.5 of
the DSU, WT/DS70/RW (9 May 2000), para. 5.78.
15 Brazil's First Submission, 16 March 2001, para. 52.
16 Id., para. 40.
17 The corresponding provision of the 1992 version of the Arrangement is Article 3.

there is no commercial reason why the level of spare parts financing in a given transaction would
affect the interest rate for the transaction.
For these reasons, Brazil submits that the ordinary meaning of the term "interest rates
provisions" in the second paragraph of item (k) is that it refers only to the provisions of the
Arrangement that specify the interest rates. If the ne gotiators had meant to include other terms and
conditions, they would have said so.
Brazil also notes that the second paragraph of item (k) purposefully refers to the "interest
rates provisions" of the Arrangement rather than simply to the "provisions" of the Arrangement. In
order to give meaning and effect to the inclusion of the words "interest rates" before the word
"provisions," the Panel must interpret the second paragraph as requiring that Members that are not
Participants in the Arrangement apply some, but not all, of the provisions of the Arrangement. The
only provisions that must be applied are those relating to "interest rates." Accordingly, Brazil submits
that the only interpretation of the term "interest ra tes provisions" that would be consistent with the
text would be to limit the term to the provisions of the 1992 and 1998 versions of the Arrangement
listed in paragraphs 40 and 52 of Brazil's First Submission and above.
Brazil believes that it is especially important to construe the term "interest rates provisions"
narrowly if the Panel interprets the second paragra ph of item (k) of the SCM Agreement as referring
to the 1998, rather than the 1992, version of the Arrangement. If the 1998 version is deemed to apply,
the Participants in the Arrangement will be empowered to change the rules governing officially
supported export credits that affect well over a hundred WTO Members that are not Participants in the
Arrangement and have no say in the formulation of OE CD rules. This power must be limited to
setting the interest rates governing officially supported export credits only, and should not be
expanded to permit unlimited changes in the rules governing export credits.

Additional question for both parties
Q32. With respect to Brazil exhibit 3, please co nfirm the accuracy of the English translation
of Article 3, paragraph 2 of Directive 374. In particular, is the phrase "may be extended to" an
accurate translation of "poderà ser ampliado, para até"?
There is a small typographical error in the translation of Article 3 paragraph 2 of
Directive 374. The phrase "poderá ser ampliado, para até" should be translated as "may be extended
up to." The word "up" is missing from the translation provided in Exhibit Bra-3.

Questions from Canada to Brazil
Q1. In Exhibit CDA-24, an executive on behalf of Air Wisconsin Airlines Corporation states
that Embraer has offered financing to Air Wisconsin but that Air Wisconsin cannot offer
further details due to confidentiality commitments to Embraer. Will Brazil obtain Embraer 's
consent to waive these confidentiality commitments?
As Brazil explained in its closing statement to the Panel, dated 5 April 2001, Brazil is not
responsible for what a sales person from Embraer might say. Brazil is responsible only for interest
rate support approved under PROEX III. Brazil has not received an application for interest rate
support for sales by Embraer to Air Wisconsin and has not approved any support for this transaction.

Published reports confirm that Air Wisconsin has bought Canadian, rather than Brazilian, regional
jets.
Q2. Canada has provided evidence that Em braer recently offered PROEX financing to
SA Airlink for a 15 year term. On 14 December 2000 Embraer announced the sale of up to
70 regional jets to SA Airlink. Has Brazil issu ed any letter(s) of commitment in respect of the
SA Airlink sale other than under PROEX III ? If so, will Brazil provide it/them to the Panel?
Have any applications been made to the Committee on Export Credits or to any other authority
of the Government of Brazil to provide financing in support of the SA Airlink sale? If so, will
Brazil provide it/them to the Panel?
As Canada itself has acknowledged, the sole issue before this Panel is whether PROEX III
constitutes a prohibited export subsidy. As stated above, Brazil has not issued any letters of
commitment under PROEX III. Accordingly, none of the information requested by Canada is
relevant to the matters before this Panel.

ANNEX B-6
BRAZIL'S COMMENTS ON RESPONSES
TO QUESTIONS BY CANADA AND THIRD PARTIES
(20 April 2001)
Canada's Replies
Question 15
1. Brazil finds Canada's response difficult to understand. Canada seems to be saying that
PROEX can never be in conformity with the SCM Agreement because, "however it is delivered, it
enables Brazil to continue to grant prohibited export subsidies." This contradicts prior statements of
Canada. In its second oral statement to the original Panel, Canada stated that it "would not have
brought this case" if only "PROEX simply reduced the net interest rate offered to an airline to one that
is above LIBOR or OECD rates." 1 In responding to the questions of the first Article 21.5 Panel,
Canada unambiguously stated that "the relevant benchmark against which a net interest rate must be
compared to determine whether a material advantage has been secured is CIRR." 2 Canada's response
appears to be just one more example of Canada's practice, indulged in throughout these proceedings,
of constantly moving the goal post.
2. Canada also states that it "is also challenging PROEX III payments made in support of
regional aircraft exports." Yet, Canada has been unable to point to a single instance of a PROEX III
payment made in support of regional aircraft exports, for the very good reason that there have been
none.
3. Canada's moving of the goal posts, and its reliance on non-existent transactions cannot
obscure the fact that the sole issue before this Panel is not what PROEX I and II, provided, or how
they were applied in practice. The sole issue is whether PROEX III, on its face, by its terms, conforms
to Brazil's obligations under the SCM Agreement.
Question 16
4. Brazil believes that Canada has misinterpreted both Article 13 of the OECD Arrangement and
the provisions of PROEX. While Brazil is not a Participant in the Arrangement and therefore was not
privy to the intent of the Participants in its drafting, Article 13 does not appears to contain any
mandatory provisions. Unlike, for example, Article 15 governing minimum interest rates (the parties
"shall apply"), Article 13 merely states that parties shall "normally" require the repayment of principal
to begin within six months. Further, Article 13(c) describes this as a "practice" rather than a "rule" or
"requirement."
5. Brazil previously has explained that it does not consider Article 13 to be an "interest rates
provision" of the Arrangement within the meaning of the second paragraph of item (k). Even
assuming that Article 13 is an "interest rates provision," however, the Article does not establish any
mandatory requirement. Therefore, the fact that a Member's export credit practices may not conform
exactly with the discretionary provisions of Article 13 should not prevent that Member's practices
from qualifying from the safe haven of the second paragraph of item (k). Brazil further notes that
Article 13(c) requires Participants in the Arrangement that do not intend to follow the "practice" of
Article 13 to notify other Participants. There is no requirement that WTO Members that are not

1 Brazil - Export Financing Programme for Aircraft, Canada' Second Oral Submission to the Panel,
para. 109.
2 Original Article 21.5 Panel Report, page 89 (Canada's Response to Question 12 of the Panel).

Participants in the Arrangement be notified, and no means by which they could obtain this
information. In these circumstances, WTO Members should not be required to conform to a
"practice" of which they may not even be informed in order to qualify for the safe haven.
6. Brazil also disagrees with Canada's interpretation of the language of Article 13, in that the
phrase "shall normally" qualifies both the reference to "equal and regular instalments" and the
reference to "first instalment" later in the same sentence. The text does not support Canada's
interpretation. Moreover, the subsequent language of Article 13 (b) and (c) refers to subsection (a) in
the singular ("this profile" and "this practice"), indicating that Article 13(a) is to be read as a unitary
whole, rather than establishing separate degrees of obligation for the "equal and regular" instalments
and the "first instalment," as Canada suggests.
7. Canada's reference to Article 27(a) is also misplaced in that Article 27(a) states that
Participants may not extend the repayment term of a loan by delaying the first payment of principle.
This merely confirms the language of Article 10 governing maximum repayment terms, but does not
appear to affect the interpretation of the word "normally" in Article 13(a).
8. Canada's interpretation in paragraph 3 of its answer of Article 2 of Brazil's Directive 374 is
also misplaced. Brazil notes that Article 3, paragraph 1 of Resolution 2799 requires that interest shall
be payable every six months on the outstanding balance of principal, starting from the date of
shipment or delivery of the goods. Article 4 provides that the amounts due and payable for interest
rate support shall be based on the same terms as the interest accrual term, including a maximum grace
period of six months for the repayment of the principal.
3 Brazil notes also that this is consistent with
the approach of the Article 22.6 Arbitrators, who assumed "semi-annual constant instalments for
capital reimbursement" under PROEX. 4 These requirements limit any flexibility granted under
Article 2 of Directive 374 regarding the terms and grace periods for principal. It is, therefore,
incorrect for Canada to assert that PROEX III would not "respect" the "normal" practice of
Article 13(a) of the Arrangement.
Question 17
9. The real answer is admitted by Canada in the first sentence of its response: "The 1998 OECD
Arrangement does not define ‘interest rate support.'"
10. Canada states that PROEX III payments "are significantly different from the interest rate
support practices of the Participants." Canada claims that interest rate support provided by the
Participants varies according to the difference between the prevailing short-term rate and the rate that
was fixed for the borrower. Brazil has no basis for agreeing with or disputing this statement, as the
Arrangement is silent on the point, and Canada has never offered any evidence concerning the interest
rate support practices of Participants. Regardless of the practices of Participants, however, the
practices of the Participants do not exhaust the field, and, even if they differ from PROEX, do not
mean that PROEX is not interest rate support.
11. As Canada describes the interest rate support practices of Participants, it would appear that
PROEX may place more risk on the lender than do those practices. PROEX is a fixed amount, and
will not be adjusted upward if short-term rates rise. Thus, under PROEX, lenders are required to
assume the entire risk of interest rate changes during the life of the loan.

3 Brazil notes that there is a typographical error in the English version of Resolution 2799 in Exhibit
Bra-1, which rendered the Portuguese "máxima" into the English "minimum" in describing the permitted period
of grace for the repayment of principal. The translation should read "maximum grace period."
4 Brazil – Export Financing Programme for Aircraft – Recourse to Arbitration by Brazil under
Article 22.6 of the DSU and Article 4.11 of the SCM Agreement, WT/DS46/ARB (28 August 2000), para. 3.82.

12. In the second bullet point to its second paragraph, Canada seems to suggest that PROEX III
does not qualify as "interest rate support" because it is a one-way flow from the government to the
bank instead of a two-way flow, "associated with in terest rate equalization." Canada neglects two
important points. First, whatever the flow between the government and the bank is, the effect on the
borrower is the same: the borrower always receives funds at the same rate. Second, in the case of a
"two-way flow" the bank is always guaranteed its margin of profit. If it makes more than the agreed
margin, it will have to pay the difference to the government, but if it makes less the government will
compensate it for the difference. In the case of a "one-way" flow, the bank takes all of the risk: its
profit margin is not guaranteed and it can still incur losses depending on how the market moves.
13. In the third bullet-point to paragraph 1 of its response, Canada appears to criticize Brazil for
not providing enough support through PROEX. It may well be, as Canada says, that "Participants
provide credit risk insurance or guarantees in conjunction with interest rate support to cover [the risk
of non-repayment from the borrower]." If so, this is support that PROEX does not provide. PROEX
provides no protection to the lender for possible default by the borrower.
14. Finally, Canada's assertion that "PROEX is divorced from the interest rate that prevails in the
market when the transaction is approved," is contradicted by the express terms of PROEX which, on
their face, explicitly make the market a reference for PROEX.
Question 18
15. Brazil believes Canada's response does not make clear that the question of a "benchmark" is
relevant only to Brazil's item (k) first paragraph defense. Benchmarks are not relevant to Brazil's
other defenses (1) that PROEX III does not confer a benefit and therefore is not a subsidy and (2) that,
in any event, PROEX III is eligible for the safe haven of item (k) second paragraph. As Brazil
pointed out during the hearing, PROEX III does not confer a benefit because the CIRR is not the
mandatory interest rate but the minimum, the floor, rate. Under Article 8, paragraph 2 of Resolution
002799, the interest rate must be determined on the basis of the rate available in the international
market. Thus, under Resolution 2799 it is the international market, not the CIRR, that is the
benchmark. As for Brazil's second defense – that PROEX III is eligible for the safe haven of item (k)
second paragraph – that defense does not require establishing a benchmark. All Brazil needs to show
is that it complies with the interest rates provisions of the OECD Arrangement which, as far as the
rate of interest rate support, requires the CIRR.
16. The substance of Canada's response with regard to the benchmark is contradictory. It is quite
clear that, as the Panel's question suggests, the Appellate Body was aware of the financing spreads
required from airlines purchasing regional ai rcraft when it concluded that the CIRR was an
appropriate benchmark. The Appellate Body stated that, "We believe that the OECD Arrangement
can be appropriately viewed as one example of an international undertaking providing a specific
market benchmark by which to assess whether payments by governments, coming within the
provisions of item (k) are ‘used to secure a material advantage in the field of export credit terms.'"
5
Yet Canada states that it "has challenged Brazil's selection of the CIRR as an appropriate benchmark."
17. The Appellate Body made it abundantly clear th at the CIRR would serve as a benchmark and
that, while other rates in fact might or might not confer a material advantage, it was up to the party
urging that fact to prove it. This, in Brazil's view, was the basis of the original Article 21.5 Panel's
determination that Brazil had not established that PROEX II, in adopting a benchmark lower than
CIRR, did not confer a material advantage.6

5 Brazil – Export Financing Programme for Aircraft , AB-1999-1, WT/DS46/AB/R, para. 181
(2 August 1999).
6 See, e.g., Brazil – Export Financing Programme for Aircraft – Recourse by Canada to Article 21.5 of
the DSU, WT/DS46/RW paras. 6.92 and 6.93 (9 May 2000).

18. Brazil must confess to some confusion about just what Canada's position is regarding the
CIRR and the market. In paragraph six of its response to Question 18, Canada states that the airline
with the best credit rating is American Airlines, and that the CIRR is 35 basis points lower than the
rate American Airlines is able to achieve in the market. Canada made this point as well at paragraph
78 of its First Submission. As authority for the statement in its First Submission, Canada refers to
page 13 of its Exhibit 17 which ostensibly shows that the debt of American Airlines trades at between
135 and 200 basis points above US Treasury rates which is, at a minimum, 35 basis points above the
CIRR.
19. First, Brazil would point out that the securitization of aircraft leases is an operation that does
not directly reflect the terms of the original loan itself. This complex and recently developed
financial operation involves a number of additional steps. The enhanced equipment trust certificate
("EETC") securitization enhances the creditworthiness of traditional equipment trust certificates
("ETCs") secured by lease receivables and the leased aircraft as follows: first, the issuer of the EETCs
is bankruptcy remote (and insulated from a bankruptcy of the lessee) to the satisfaction of the rating
agencies; second, the EETCs are tranched to take advantage of the expected residual value of the
aircraft, i.e., the lower the advance level, the higher the ra ting; third, a liquidity facility is provided to
ensure the continued payment of interest on the EETCs during the remarketing period following a
possible default by the lessee. The term of the liquidity facility in an EETC securitization relies on
the ability of a lessor to repossess an aircraft from a bankrupt lessee, if the lessee does not elect to
perform.
20. The first EETC structure was closed by Northwest Airlines in 1994. As described above, the
rating agencies concluded that the underlying corporate credit of a single airline could be enhanced
through a combination of the ability to repossess and remarket the leased aircraft within a limited
eighteen month period during which interest would continue to be paid by a liquidity facility. This
was combined with tranched debt, to achieve ratings for all of the EETC classes of debt that were
higher than that of the airline.
21. The securities of the EETC structure are offered in the secondary market and their prices then
oscillate according to the financial market trends, with spreads that respond to various economic and
market indicators (such as the behavior of the markets of stocks and bonds) that maintain no
relationship whatsoever with the original financial structure of the loan obtained by the lessor when
purchasing the aircraft. The spreads mentioned by Canada reflect nothing more than investors return
expectations based on a range of commercial papers, with comparable coupons, yields, maturities,
credit ratings, etc.
22. Canada's Exhibit 17 itself demonstrates the flaws in Canada's reasoning. With regard to its
American Airlines illustration, on page 6 of Exhibit 17, it is stated that American Airlines "was placed
on Watchlist negative by Moody's and CreditWatch negative by S&P after it proposed to acquire the
assets of TWA and a portion of the assets of US Airways." This demonstrates that the papers from
American Airlines today do not enjoy the same credit ratings that the airline once enjoyed.
23. Moreover, Canada's reliance on the January 2001 spread for American Airlines – or any
airlines – is misplaced. That spread simply represents the current yield on the instrument. It has
nothing to do with the original spread, at the time the EETCs were issued. In the case of American
Airlines these ranged 112 to 147, considerably lower, but still above CIRR. However, as Exhibit 17
itself shows, many of the original spreads were below CIRR. This is the case for the very first
transactions listed, for America West. It is also the case for a number of the Continental Airlines
transactions listed.
24. One of the Continental transactions is particularly instructive – those issued on September 12,
1997 covering nine Embraer 50 seat 145 regional jets. This is set out on page 14 of Canada's

Exhibit 17. The offering spread on those transactions ranged from 90 to 100 – in other words, from
10 basis points below the CIRR to the CIRR. This transaction, as Exhibit 17 shows, was comparable
to other rates at the time. It was also before PROEX III. More important, following Canada's logic
with its American Airlines example, Embraer'rs paper today is trading at 115 to 160 points above the
CIRR – so what is Canada's problem?
25. These distinctions between the securitization of leases and the terms of the original loan may
be the key to understand Canada's departure from its previous statements defending the adequacy of
the CIRR as a benchmark. As the panel recalls, before the Canada – Aircraft Panel, Canada said that
the CIRR is, "by definition, ‘close to commercial rates.'"7 Moreover, before the Article 21.5 Panel in
Brazil – Aircraft, Canada said that financing offered by its Export Development Corporation ("EDC")
at rates below the CIRR were, nevertheless "commercial" and did not confer a benefit within the
meaning of Article 1 of the SCM Agreement.8
26. Finally, simply taking Canada's analysis as it is given, Canada does not explain how it is
possible for the debt of the airline with the best credit rating to trade at 35 to 100 basis points above
the CIRR when, at the same time, its own lending to airlines below the CIRR is "commercial."
27. Beyond this, Brazil cannot clarify this situation, but fortunately, Canada is in a position to do
so. The American Airlines debt reported in Canada's Exhibit 17, at page 13, concerns only large civil
aircraft manufactured by Boeing. No regional aircraft are included. However, the Canadian
producer, Bombardier, itself has sold its 70-seat ai rcraft, the CRJ 700, to American Airlines' wholly
owned regional carrier, American Eagle. Brazil understands that financing for this transaction was
provided by EDC through its "market window" op erations. In Canada's view its market window
operations do not provide "official support," and are purely "commercial." Canada could, therefore,
shed light on this matter by providing the Panel with the terms and conditions, including the interest
rate, it offered or provided to support Bombardier's sale of the CRJ 700 to American Eagle.
28. Brazil would note that at the time of the transaction, Bombardier was the only producer in the
world offering a 70-seat regional jet. Therefore, its transaction with American Eagle would have been
on terms uninfluenced by competition.
Question 19
29. Brazil disputes Canada's claim that it "has demonstrated that the CIRR is not an appropriate
generalized market benchmark because it does not generally reflect the rates available in the
commercial marketplace for the financing of regional aircraft." Canada has produced no evidence
concerning "the commercial marketplace for the financing of regional aircraft" despite the fact that
Canada's EDC participates in that market. As Brazil noted above in its comment to Canada's response
to Question 18, the only market evidence Canada has offered concerns the secondary market for
American Airlines debt secured by large commercial aircraft.
Question 20
30. In Brazil's view, the Appellate Body considered the CIRR as a generalized market benchmark
both because it is based on reasonably current market interest rates, and is a published, objectively
derived rate that is easily administrable in the context of item (k) first paragraph. While a WTO
Member is free to urge another rate, that Member has the burden of proof, a burden that Brazil in the

7 Canada – Measures Affecting th e Export of Civilian Aircraft , WT/DS70/R at paras. 6.167, 9.223 (14
April 1999).
8 Brazil – Export Financing Programme for Aircraft – Recourse by Canada to Article 21.5 of the DSU ,
para. 6.99 (9 May 2000).

original Article 21.5 proceeding found difficult to meet, as does Canada here, albeit for different
reasons.
31. The burden was impossible for Brazil because, while it was established that Canada provided
support below the CIRR, Brazil could not establish with the required precision how far below
Canada's rate was, and how that rate related to the market overall. Lack of transparency on the part of
Canada and others in the market was a barrier Brazil could not surmount. Here, the barrier Canada
cannot surmount is based on its unwillingness to disclose to the Panel the details of its own market
operations. The consequence is, as Brazil noted above in its comment on Canada's response to
Question 19, that Canada has offered only evidence of the secondary market for debt on large civil
aircraft produced by Boeing, not for the original market for regional aircraft produced by Bombardier
in which Canada participates.
Question 21
32. Canada's response admits that under the traditional distinction between mandatory and
discretionary measures it is not sufficient to show that a measure might allow a Member to violate its
WTO obligations but rather that the measure requires a Member to violate its WTO obligations. But
then Canada argues that this distinction applies to every WTO provision with one exception: the
second paragraph of item (k). Canada states that the mandatory v. discretionary distinction does not
apply here because Brazil has the burden to establish an affirmative defense.
33. The premise of Canada's argument is false for several reasons. To begin with, Brazil's first
argument is that PROEX III does not confer a benef it. This is not an affirmative defense. Canada
must establish a prima facie case that PROEX III does confer a benefit.
34. Further, it is true that Brazil's second defense – the safe haven under the second paragraph of
item (k) – is an affirmative defense and Brazil has the burden of proof. However, the mandatory v.
discretionary distinction has nothing to do with the burden of proof. It is a substantive standard.
Once Brazil establishes a prima facie case that PROEX III allows co mpliance with the interest rates
provisions of the OECD Arrangement, PROEX III should, under the traditional mandatory v.
discretionary distinction, be considered to be in conformity with Brazil's WTO obligations until
Canada proves otherwise. As Brazil has shown, PROEX III allows the Executive to comply with the
interest rates provisions of the Arrangement even if it might also allow Brazil not to comply with
those provisions.
35. Brazil notes that when a WTO Member decides to challenge a measure of another Member, it
has two options. It can challenge the measure either as applied or the measure as such. When making
that choice the Member also makes a choice concer ning the evidence it needs to submit in order to
establish a prima facie case. Canada chose to challenge PROEX III as such. Therefore, under
GATT/WTO jurisprudence and the mandatory v. discretionary doctrine, Canada imposed on itself the
burden to prove that PROEX III requires action that would constitute a violation of Brazil's WTO
obligations. This was Canada's choice, not Brazil's. It was Canada's choice to rush and file this
dispute – accusing Brazil of dragging its feet – without an appropriate opportunity for bilateral
consultations.
36. Thus, contrary to Canada's assertions, under the mandatory v. discretionary doctrine, the
burden of proof is quite different. Canada must establish that PROEX III requires Brazil to violate its
WTO obligations. Brazil, on the other hand, needs on ly to show that PROEX III is discretionary and
allows the Executive to apply it in a manner fully consistent with the WTO. Once Brazil meets that
burden of proof, PROEX III, under the traditional mandatory v. discretionary doctrine, must be
considered to be in conformity with Brazil's WTO obligations.

37. In this answer, Canada again refers to "evidence" that "establishes" Brazil's failure to comply
with the interest rates provisions of the Arrangement. One assertion – that Directive 374 on its face
allows financing for a period exceeding 10 years – will be addressed in Brazil's comments on
Canada's response to Question 32. Brazil would like to point out, however, that Canada keeps
referring to "unrebutted evidence" about Brazil' s non-compliance without identifying that evidence.
Brazil has submitted the evidence that must prevail in these proceedings: the documents constituting
PROEX III. All Canada has subm itted in exchange is newspaper reports. Canada has now – for the
first time – attempted in its answers to claim that Directive 374 on its face allows financing for a
period exceeding 10 years. As Brazil will show in its comment on Question 32, this assertion is
untenable.
Question 22
38. Canada repeats its unsubstantiated assertion that Brazil has not shown that PROEX III allows
for an application that is consistent with the SCM Agreement. Canada, however, has not, by any
reasonable standard, even remotely made a prima facie case that PROEX III requires a violation of
Brazil's WTO obligations.
39. Further, Canada misinterprets the Section 301 case. It is incorrect to state, as Canada does,
that "the Section 301 panel found legislation to be presumptively inconsistent with the WTO
Agreement in a case where legislation provided discretion to act in a WTO-inconsistent manner." In
Section 301 , the US legislation required USTR, under certain circumstances, to make a unilateral
determination on whether another government acted in compliance with its WTO obligations. While
USTR retained the discretion to determine whethe r another government acted in compliance with its
WTO obligations, it was required by the legislation to make that determination unilaterally. Thus, the
Section 301 finding is not inconsistent with the traditi onal mandatory v. discretionary distinction and
is not applicable to the facts of this case. PROEX III, contrary to Canada's assertion, does not require
that Brazil act in a manner inconsistent with its WTO obligations.
Question 23
40. Brazil has not granted any subsidies under PROEX III; therefore, Brazil does not maintain
any subsidies under PROEX III.
Question 24
41. Brazil would like to refer the Panel to the answer provided by Korea, as a third party, to
Question 27. Korea's answer contains a detailed and persuasive explanation as to why the concept of
minimum premiums does not apply to interest rate support.
42. Canada seems to provide support for Brazil's view, also shared and supported with detailed
arguments by Korea. In the second paragraph of its answer to Question 24, Canada argues that
interest rate support does not remove the risk of non-payment by the borrower for the lending
institution. Brazil agrees. That risk is removed only when the government assumes it by providing
interest rate support in association with a guaran tee or insurance. PROEX III does not do that (and
Canada has never argued that it does). This is precisely why Article 20 of the 1998 Arrangement does
not apply to PROEX.
43. Finally, as Canada is compelled to admit, the minimum premium benchmarks defined by the
participants in the OECD Arrangement are not available to non-Participants. Yet Canada – and the
EC and the US – argues that the 1998 version of the Arrangement is the relevant version. They would
require Members of the WTO to comply with commitments that they cannot even know about.

Question 25
44. Brazil already has enumerated the provisions of the OECD Arrangement it considers as
"interest rates provisions" and will not now restate those provisions. However, Brazil disagrees with
Canada's views on this issue and has the following comments.
45. Canada states that its interpretation encompasses provisions that "affect what the interest rate
and the amount of interest payable will be in a given transaction." However, many of the provisions
listed by Canada have nothing to do with the interest rate or even the amount of interest. Thus,
provisions of the Arrangement such as Article 7, governing cash payments, and Article 9, governing
the starting point of credit, affect important – indeed even critical – terms of a transaction, but they
simply to do affect the interest rates.
46. A more significant problem with Canada's definitions is that Canada continues to include in
its definition the matching provisions of Article 29 of the Arrangement. The matching provisions of
Article 29 require that Participants notify each other in the event that they depart from the provisions
of the Arrangement in order to match terms and conditions offered by either Participants or non-
Participants. Brazil does not agree that a decision not to follow the interest rates established in the
Arrangement and the provisions governing that decision can in themselves constitute interest rates
provisions. This is clear from the language of the Arrangement itself, which allows Participants to
match "credit terms and conditions." This term must necessarily be broader than the term "interest
rates provisions" as used in the second paragraph of item (k), as it appears to encompass all the credit
terms and conditions of a transaction, rather than simply the interest rates provisions referred to in
item (k). The Canada - Aircraft Article 21.5 Panel also found that the term "interest rates provisions"
could not be read to refer to all of the provisions of the Arrangement, as that would "seriously
undermine the disciplines of the SCM Agreement."9
47. Moreover, the Arrangement does not require Participants to notify non-Participants of their
intent to "match" non-conforming offers either by other Participants or by non-Participants. If
Canada's definition of the term "interest rates provisions" is correct, therefore the second paragraph of
item (k) means either that (1) the second paragraph of item (k) creates different rules for Participants
in the Arrangement (who may match) and non-Participants (who may not), or that (2) non-Participants
in the Arrangement must also be permitted to match. There is no legal basis for the first
interpretation, as the entire purpose of the second paragraph is to enable Members that are non-
Participants in the Arrangement to abide by the same rules as the Participants; an the second
interpretation would render the safe haven of the second paragraph redundant, in that non-Participants
could simply match in every instance.
48. For these reasons, the term "interest rates provisions" as used in the second paragraph must be
interpreted literally to refer to the provisions of the Arrangement that establish interest rates, and not
to provisions that govern the other terms of the transaction. Had the drafters of the SCM Agreement
intended otherwise, they would have referred to "the provisions of the relevant undertaking" or "the
credit terms and conditions of the relevant undertaking" making it clear that all the provisions of the
Arrangement must be complied with.
Question 32
49. Canada's translation of this provision is simply wrong. This is the first time Canada advances
the argument that PROEX III on its face allows financing for a period of 10 years to be extended for
an additional period of 8 years . Such a reading of the text of Directive 374 is incorrect. This is not

9 Canada - Measures Affecting the Ex port of Civilian Aircraft - Recourse by Brazil to Article 21.5 of
the DSU, WT/DS70/RW (9 May 2000), para. 5.113.

what the drafters said or intended to day. In fact, such an interpretation would probably have never
occurred to them had Canada not advanced it in these proceedings.
50. The Portuguese phrase "poderá ser ampliado para até" means "may be extended up to"
("jusqu'à" in French, "hasta" in Spanish). The Annex to Directive 374 provides for the maximum
term of financing for the specific categories of goods, category by category. For aircraft, it is a
maximum of 10 years. Article 3, paragraph 2 of Directive 374 provides that the term of interest rate
support may be extended up to a certain period contingent upon the value of the goods.
51. Thus, for example, according to the Annex, the term for interest rate support for balloons
cannot exceed 7 months. Under Article 3, paragraph 2, assuming balloons are in the first category,
between $1,000 and $5,000, the maximum tenure can be extended from 7 months up to a maximum of
12 months. The provision of Article 3, paragraph 2, is not relevant for aircraft. The maximum term
under that provision is 8 years. The provision of the Annex, specific to aircraft, allows financing for a
maximum term of up to 10 years. Thus, the ceiling under the Annex is higher than the ceiling of
Article 3, paragraph 2, and no further extension is allowed. As Brazil has stated on numerous
occasions, the exception from this rule can be based only on the provision of Article 8, paragraph 2 of
Resolution 2799 which allows the Committee to extend the term of financing if different terms are
available in the international market.
Third Party Responses
European Communities' Responses
Question 27
52. Brazil agrees with the EC's statement in its response to Question 26 that PROEX III "is
therefore interest rate support within the meaning of Article 2." However, Brazil does not agree with
several points raised by the EC in its response to Question 27.
53. The EC at great length discusses risk premiums, but the 1998 version of the Arrangement
refers only to country risk, not to company risk, and, as the EC admits, those country risk benchmarks
are not available to non-participants. There are no references to risk premiums in the 1992 version of
the Arrangement, the version that was incorporated by the WTO in 1995.
54. In Brazil's view, the point made by the EC in paragraph 7 of its response demonstrates
forcefully why the term "interest rates provisions" in the Arrangement should be interpreted narrowly,
and why the Panel should conclude that it is the 1992 version of the Arrangement that is relevant, not
the 1998 version, adopted three years after the WTO came into being.
55. The EC describes the OECD and its Arrangement as if it were an exclusive club, which
perhaps it is. The Arrangement is a "gentlemen's agreement" and, "One consequence of this is that
circumvention of its provisions is not considered legitimate." However, WTO Members are entitled
to know with reasonable clarity and precision what rules they are and are not expected to observe.
They are not to be left to the vague standards of etiquette that a group of gentlemen sitting in Paris
consider appropriate.
Korea's Response
Question 26
56. Note 53 from the original Article 21.5 Panel Report, quoted by Korea in its response, is a
generally accurate description of PROEX III.

Question 27
57. Korea accurately observes that, "The concept of minimum premiums does not apply to
interest rate support" and that the Arrangement's minimum premium benchmarks are not even
available to non-Participants.
United States' Response
Question 26
58. Brazil agrees with the statement of the United States, in the first paragraph of its answer, that,
"The purpose of the [OECD] arrangement is to allow the commercial bank to provide fixed rate
financing at the appropriate CIRR rate." This is precisely what PROEX III does.
59. The United States goes on, in that paragraph, to describe much of what PROEX III does not
do. PROEX does not compensate the bank for its own floating rate funding risk. Beyond its fixed,
maximum 2.5 percent payment, PROEX does not pay interest rate shortfalls to the bank depending
upon the relationship between the fixed rate of the loan and the floating rate during the life of the
loan. If, as the United States maintains, "most OECD governments offering interest rate support"
also offer this kind of protection, they are offering much more than PROEX III offers.
60. PROEX III meets the criteria the United States sets out in the second paragraph of its
response: (a) the interest rate the borrower sees after the interest rate support is the appropriate CIRR
and (b) PROEX is not offered in a manner or at a level that is used to cover other costs of the
borrower.
Question 27
61. The US states that "when a government does offer interest rate support in conjunction with
insurance or a guarantee, the government must charge the appropriate minimum premium rate
because it is providing insurance or guarantee cover." Thus, the US acknowledges that the only
reason to charge a premium rate is to cover insurance or a guarantee – not for interest rate support.
Since PROEX III does not provide insurance or guarantee cover, there is no need for a premium.
62. In the second paragraph of its answer (paragraph 4 of the document) the United States
provides the web address of the OECD for the benefit of Brazil and the other 110 or more non-
participant WTO Members. The EC, in its Third Party Submission – noblesse oblige – was good
enough to do the same. While it is kind of the US and the EC to tell Brazil and the rest of the
developing world how to find the OECD on the we b, the point is that WTO Members should not be
required to check the web site of the OECD in order to learn the nature of their WTO obligations.
This is all the more reason why the Panel should conclude that the 1992 version is the relevant version
of the Arrangement for purposes of item (k) second paragraph.
Question 29
63. The US admits that Arrangement Participants make notifications of non-conforming terms
available to each other, but not to non-participants . While the US states its willingness to support
reform of this procedure within the OECD, this is hardly a compelling argument for concluding that
non-participants should be bound by the provisions concerned. It also demonstrates the elusive and
changing character of the "gentlemen's agreement," and is further argument why the more clear, and
now fixed, terms of the 1992 version of the Arrangement are those that were incorporated into
item (k) second paragraph.

Question 30
64. The argument of the United States in support of its contention that the negotiators meant
"provisions" of the Arrangement rather than the "interest rates provisions" suggests that the Panel
should impose added disciplines on WTO Members in order not to inconvenience the 30 Members
who choose to belong to the OECD. To permit Members to qualify for the safe haven by applying
only the "interest rates provisions," the US claims, "would undermine the disciplines of the
Arrangement."
65. It is not the task of this Panel to undermi ne or to avoid undermining the OECD and its
Arrangement. It is the task of this Panel to interpret item (k) second paragraph, a provision adopted
by the entire Membership of the WTO in light of their objects and purposes, which had nothing
whatsoever to do with the objects and purpose of the OECD. If a sub-set of WTO Members wishes to
participate in other international organizations, they are, of course, free to do so. But they should not
be heard to suggest that WTO Panels have any responsibility whatsoever to interpret WTO provisions
in light the "disciplines" of those other organizations.
66. The WTO Membership did not adopt the entire Arrangement and the Participants should be
permitted to drag that entire Membership into whatever non-interest rates provisions the Arrangement
may contain, or into future amendments of the interest rates provisions themselves.