CANADA – EXPORT CREDITS AND LOAN GUARANTEES FOR REGIONAL AIRCRAFT
Document: Report of the Panel
Date: 28 January 2002
Document codes: WT/DS222/R
Complainant: Brazil
Respondent: Canada
Third parties: Australia, EU, India, U.S.
Dispute stage: Panel
Agreements cited: Art. 1, 3  Subsidies and Countervailing Measures (SCM)

CANADA – EXPORT CREDITS AND
LOAN GUARANTEES FOR REGIONAL AIRCRAFT
Report of the Panel
The report of the Panel on is
being circulated to all Members, pursuant to the DSU. The report is being circulated as an
unrestricted document from 28 January 2002 pursuant to the Procedures for the Circulation and
Derestriction of WTO Documents (WT/L/160/Rev.1). Members are reminded that in accordance with
the DSU only parties to the dispute may appeal a panel report. An appeal shall be limited to issues of
law covered in the Panel report and legal interpretations developed by the Panel. There shall be no
ex parte communications with the Panel or Appellate Body concerning matters under consideration by
the Panel or Appellate Body.
Note by the Secretariat: This Panel Report shall be adopted by the Dispute Settlement Body (DSB) within
30 days after the date of its circulation unless a party to the dispute decides to appeal or the DSB decides by
consensus not to adopt the report. If the Panel Report is appealed to the Appellate Body, it shall not be
considered for adoption by the DSB until after the completion of the appeal. Information on the current status
of the Panel Report is available from the WTO Secretariat.

I. INTRODUCTION
A. COMPLAINT OF BRAZIL
1.1 On 22 January 2001, Brazil requested consultations 1 with Canada pursuant to Article XXIII:1 of
the General Agreement on Tariffs and Trade 1994 ("GATT 1994"), Article 4 of the Understanding on
Rules and Procedures Governing the Settlement of Disputes ("DSU"), and Article 4 of the Agreement
on Subsidies and Countervailing Measures ("SCM Agreement") regarding certain alleged subsidies
granted by the Government of Canada and the Province of Québec that support the export of regional
aircraft from Canada.
1.2 Brazil and Canada held consultations on 21 February 2001, but failed to reach a mutually
satisfactory solution.
1.3 On 1 March 2001, Brazil requested the establishmen t of a panel pursuant to Article XXIII of the
GATT 1994, Article 6 of the DSU, and Article 4.4 of the SCM Agreement.
2
B. ESTABLISHMENT AND COMPOSITION OF THE PANEL
1.4 The Dispute Settlement Body ("DSB") established a panel on 12 March 2001, with standard terms
of reference. The terms of reference of the Panel are:
To examine, in the light of the relevant provisions of the covered agreements cited by
Brazil in document WT/DS222/2, the matter referred to the DSB by Brazil in that
document, and to make such findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in those agreements.
1.5 On 7 May 2001, Brazil requested the Director-General to determine the composition of the Panel,
pursuant to paragraph 7 of Article 8 of the DSU. This paragraph provides:
If there is no agreement on the panelists within 20 days after the date of the
establishment of a panel, at the request of either party, the Director-General, in
consultation with the Chairman of the DSB and the Chairman of the relevant Council
or Committee, shall determine the composition of the panel by appointing the
panelists whom the Director-General considers most appropriate in accordance with
any relevant special or additional rules or procedures of the covered agreement or
covered agreements which are at issue in the dispute, after consulting with the parties
to the dispute. The Chairman of the DSB shall inform the Members of the
composition of the panel thus formed no later than 10 days after the date the
Chairman receives such a request.
3

1 See WT/DS222/1.
2 See WT/DS222/2.
3 Paragraph 12 of Article 4 of the SCM Agreement provides:
For purposes of disputes conducted pursuant to this Article, except for time-periods
specifically prescribed in this Article, time-per iods applicable under the DSU for the conduct
of such disputes shall be half the time prescribed therein.

1.6 On 11 May 2001, the Director-General accordingly composed the panel as follows:
Chairman: Prof. William J. Davey
Members: Prof. Seung Wha Chang
Ms. Usha Dwarka-Canabady
1.7 Australia, the European Communities, India, and the United States reserved their rights to
participate in the panel proceedings as third parties.
C. PANEL PROCEEDINGS
1.8 The Panel met with the parties on 27 and 28 June 2001, and on 31 July 2001. The Panel met with
the third parties on 27 June 2001.
1.9 The Panel submitted its interim report to the parties on 19 October 2001. Comments from the
parties on the interim report were received on 26 October 2001, and on each other's comments on 2
November 2001 ( See Section VI, infra). The Panel submitted its final report to the parties on
9 November 2001.
II. FACTUAL ASPECTS
2.1 This dispute concerns various Canadian measures which Brazil alleges are subsidies inconsistent
with Canada's obligations under Article 3.1(a)
4 of the SCM Agreement in that they are contingent in
law or in fact, whether solely or as one of several other conditions, upon export performance.5
2.2 The measures as identified in Brazil's request for the establishment of a panel are export
credits, including financing, loan guarantees, or interest rate support provided by or through the
Export Development Corporation ("EDC") – both Ca nada and Corporate Accounts thereunder – to
facilitate the export of civil aircraft, and export credits and guarantees, including loan guarantees,
equity guarantees, residual value guarantees, and "first loss deficiency guarantees", provided by
Investissement Québec ("IQ"), a programme operated by the Province of Québec.
III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS
A.
BRAZIL
3.1 In its request for establishment, Brazil requests that the panel find that:
1. Export credits, including financing, loan guarantees, or interest rate support by or through the
Canada Account are and continue to be prohibited export subsidies within the meaning of
Articles 1 and 3 of the SCM Agreement.
2. Canada has not implemented the report of the Article 21.5 panel, adopted by the DSB,
requesting that Canada withdraw Canada Account subsidies.
3. Canada, in defiance of the rulings and recommendations of the Dispute Settlement Body,
continues to grant or offers to grant export credits to the regional aircraft industry through the

4 We understand Brazil's reference in its request for the establishment of a panel to Article 3 of the
SCM Agreement to mean Article 3.1(a) of the Agreement.
5 See footnote 14, infra.

Canada Account, that are prohibited subsidies within the meaning of Articles 1 and 3 of the
Agreement.
4. Canada's grant or offer to grant Canada Account export credits to Air Wisconsin is a
prohibited export subsidy within the meaning of Articles 1 and 3 of the Agreement.
5. Export credits, including financing, loan guarantees, or interest rate support by or through the
EDC are prohibited export subsidies within the meaning of Articles 1 and 3 of the Agreement.
6. Canada's grant or offer to grant export credits by or through EDC to Air Wisconsin is a
prohibited export subsidy within the meaning of Articles 1 and 3 of the Agreement.
7. Export credits and guarantees provided by Investissement Québec, including loan guarantees,
equity guarantees, residual value guarantees, and "first loss deficiency guarantees" are
prohibited export subsidies within the meaning of Articles 1 and 3 of the Agreement.6
3.2 Brazil further requested that the Panel recommend that the DSB direct Canada to withdraw these
prohibited subsidies without delay.7
B. CANADA
3.3 Canada requests that the Panel find that Brazil has failed to present a prima facie case that any of
the Canada Account, Corporate Account or IQ programmes, "as such", "as applied" or in respect of
"specific transactions" are inconsistent with Canada's obligations under the SCM Agreement.8
3.4 Canada considers that:
1. There is no basis for this Panel to reverse the findings in Canada – Aircraft 9 that EDC
(Corporate Account) and Canada Account are discretionary;
2. IQ is not "as such" inconsistent with the SCM Agreement;
3. Brazil's "as such" claims would improperly conde mn all ECAs, and are at odds with the facts
and the law;
4. Brazil seeks to make an untenable distinction between its challenges to measures "as applied"
and in respect of "specific transactions"; and
5. Brazil has failed to show that any specific transactions, under Corporate Account, IQ or
Canada Account, including Air Wisconsin, are inconsistent with Canada's obligations under
the SCM Agreement, because they are not inconsistent.
IV. ARGUMENTS OF THE PARTIES
4.1 The arguments of the parties are set out in their submissions to the Panel. The parties'
submissions are attached to this Report as Annexes (See List of Annexes, page v).

6 WT/DS222/2.
7 Id.
8 Canada also raises a number of preliminary objections in respect of the claims of Brazil.
See para. 7.3, infra.
9 Canada – Measures Affecting th e Export of Civilian Aircraft (" Canada – Aircraft "), Report of the
Panel, WT/DS70/R, and Report of the Appellate Body, WT/DS70/AB/R, adopted 20 August 1999.

V. ARGUMENTS OF THE THIRD PARTIES
5.1 The arguments of the third parties – Australia, the European Communities, India, and the
United States – are set out in their submissions to the Panel and are attached to this Report as Annexes
(See List of Annexes, page v).
VI. INTERIM REVIEW
6.1 On 26 October 2001, both parties submitted written requests for review by the Panel of particular
aspects of the interim report issued on 19 October 2001. On 2 November 2001, each party provided
written comments on certain aspects of the other party's request for interim review. Neither party
requested an additional meeting with the Panel. The issues raised by the parties are addressed below.
The Panel deleted paragraph 7.263 of the interim report, and made minor changes to paragraphs
7.243, 7.256, 7.259, 7.262, 7.276, and 7.284 of the interim report.
A. BRAZIL'S REQUEST FOR INTERIM REVIEW
6.2 Brazil drew the attention of the Panel to a number of typographical and factual errors in the
interim report, which we have corrected.
6.3 Brazil requested a change to the Panel's description of Brazil's argument in paragraph 7.221 of the
interim report. Canada denied the need for any such change. In order to avoid any misunderstanding,
we have deleted that paragraph from the final version of our report.
6.4 Brazil requested the inclusion of a note to paragraph 7.226 of the interim report, to the effect that
Brazil was able to obtain details of Embraer's offer to Air Wisconsin. Canada objected to the note
requested by Brazil, in part because Brazil obtained those details in response to a direct request from
the Panel. In our view, the fact that Brazil was able to obtain details of an offer made by Embraer in
response to a request from the Panel has no bearing on the issue of whether or not it would be realistic
to expect the EDC to have access to data regard ing commercial financing transactions involving
Bombardier aircraft. We therefore decline to include the note requested by Brazil.
6.5 With regard to note 278 of the interim report, Brazil relies on Exhibit CAN-61 to suggest that
CQC participated in the Midway transaction as an equity investor. In response, Canada asserted that
"[n]either IQ nor CQC were equity participants in the Midway transaction". Canada also confirmed
the factual accuracy of note 278 of the interim report. In light of Canada's response, we have not
made any changes to note 278 of the interim report.
B.
CANADA'S REQUEST FOR INTERIM REVIEW
6.6 Canada drew the attention of the Panel to a number of typographical and factual errors in the
interim report. In some cases we have corrected the error. In other cases we have made deletions.
6.7 Canada objects to the Panel's statement in para. 7.18 of the interim report that "the legal
framework under which the Canada Account is operated has changed", indicating that it has not and
referring to Canada's oral response to that effect to a question by the Panel at the second meeting with
the parties. Brazil asserts that the legal framework under which the Canada Account operates has
changed.
6.8 The Panel makes the relevant statement in the context of its assessment of Canada's request for a
preliminary ruling under Article 21.5 of the DSU in respect of Brazil's Claims 1 and 3. The basis for
the Panel's statement is that, following the Canada – Aircraft panel's decision, Canada enacted the

Policy Directive GEN 000-004 – Submission of Documents to the Government of Canada 10 and the
EDC Canada Account Policy Guideline 11, which require Canada Account financing to comply with
the OECD Arrangement (See paragraph 7.93, infra). We note also that Brazil disagrees with Canada's
objection, pointing to the policy memorandum enacted by Canada following the first Canada –
Aircraft dispute. Accordingly, we retain the statement in para. 7.18 of the interim report, and have
included note 21 in the final report for clarification.
6.9 Canada requested a change to the Panel's description of its argument in the last sentence of
paragraph 7.145 of the interim report. Brazil has objected to the change requested by Canada. Since
we do not consider that the current version is inaccurate in any way, we decline to make the change
requested by Canada.
6.10 Canada questioned the factual accuracy of a statement made by the Panel in the third sentence
of paragraphs 7.152 and 7.316 of the interim report. Brazil objected to the concern raised by Canada,
largely because Canada failed to make the relevant argument during the substantive part of the
proceedings. In order to avoid any factual error in our findings, we have deleted the third sentence of
paragraphs 7.152 and 7.316 of the interim report.
6.11 With regard to paragraph 7.247 of the interim report, Canada objected to the Panel's addition
of 20-30 basis points to large aircraft EETC spreads to arrive at an appropriate regional aircraft
spread. The Panel made this adjustment in response to Brazil's reliance on statements made by
Canada in the Brazil – Aircraft – Second 21.5 proceedings ( See paragraphs 47 and 50 of Oral
Statement of Brazil at the Second Meeting of the Panel (Annex A-12)). In responding to Brazil's oral
statement
12, Canada made no attempt to deny the need for a 20-30 basis point adjustment when
converting from large aircraft to regional aircraft spreads. Nor did Canada object to Brazil's inclusion
of a 20 basis point adjustment ("for the difference between the regional aircraft used in the financing
at issue and the larger jets used in the typical EETC issue") in its Exhibit BRA-66. Furthermore,
although Canada asserts that "[v]ariations in pricing between similar but non-identical asset classes
are dynamic and subject to change …", Canada does not deny the need for an adjustment per se .
However, although Canada appears to accept the need for an adjustment of some sort, Canada fails to
indicate what would be, in its view, an appropriat e adjustment for the transactions at issue. In
addition, we note that a lesser adjustment would not necessarily change the outcome of our findings.
For these reasons, we see no need to change paragraph 7.247 of the interim report.
6.12 Regarding paragraph 7.255 of the interim report, Canada made a number of arguments as to
why FMC data could be used to assess transactions in certain circumstances. In doing so, however,
Canada "does not [] reject Brazil's observation that the FMC represents an average of current pricing
levels of the bonds of a wide range of similarly rated companies". Since it is the inclusion of average
data that caused the Panel not to base its findings on FMC data, and since Canada has not denied that
average data were included, we make no changes to paragraph 7.255 of the interim report.
6.13 In respect of paragraph 7.276 of the interim report, Canada asserted that the Panel should not
have concluded that EDC financing [] does not include an []. Canada submits that the fixed margin
for credit risk [] on the authority of the President or Senior Vice President Finance and Chief
Financial Officer of the EDC. According to Canada , "an authorized margin [] the identified fixed
margin is [] for that transaction". Brazil object ed to any change to paragraph 7.276 of the interim
report.

10 Exhibit CAN-16.
11 Exhibit CAN-17.
12 See Response of Canada to Oral Statement of Brazil at the Second Meeting of the Panel (Annex B-
12).

6.14 We note that the EDC offered financing [] to Comair in two instances: in July 1996 and
August 1997. Canada submitted EDC Pricing Documentation regarding these offers in the form of
Exhibit CAN-59. This exhibit does not contain any details regarding the basis on which the President
or Senior Vice President Finance and Chief Financial Officer of the EDC may have authorised [] the
fixed margin for credit risk. Nor does it contain any data indicating that any margin authorised by the
President or Senior Vice President Finance and Chief Financial Officer of the EDC was [] for the two
transactions at issue. For these reasons, we reject Canada's assertion that the Panel should not have
concluded that the relevant EDC financing [] does not include [].
VII. FINDINGS
A. INTRODUCTION
7.1 This dispute concerns export credits, including financing, loan guarantees, or interest rate
support provided by or through the Canada-owned EDC – both Canada and Corporate Accounts
thereunder – to facilitate the export of civil aircraft as well as export credits and guarantees, including
loan guarantees, equity guarantees, residual value guarantees, and "first loss deficiency guarantees",
provided by IQ, a programme operated by the Province of Québec. Brazil claims that the EDC and
IQ programmes "as such" and "as applied" are prohibited export subsidies, in violation of
Article 3.1(a)
13 of the SCM Agreement. Brazil also claims that specific transactions under those
programmes constitute prohibited export subsidies.14
7.2 After addressing certain preliminary issues raised by Canada, we shall begin our substantive
review by examining Brazil's claims regarding the EDC programmes "as such" and "as applied". We
shall then turn to Brazil's claims regarding specific transactions under those programmes. In
examining specific transactions, we shall first re view Brazil's claims regarding EDC support to Air
Wisconsin. We shall then address Brazil's claims regarding other EDC support, before turning to
Brazil's claims regarding support provided by IQ.
B. PRELIMINARY ISSUES
7.3 Canada raises the following preliminary objections in respect of the claims of Brazil:
1. Claims 1, 2, and 3 raise issues of compliance or implementation related to another dispute.
These claims are inconsistent with Article 21.5 of the DSU. This panel does not have the
jurisdiction to examine compliance issues that have arisen in other disputes; and

13 As noted above, we understand Brazil's reference in its request for the establishment of a panel to
Article 3 of the SCM Agreement to mean Article 3.1(a) of the Agreement.
14 The Panel asked Brazil to "identify the specific measures in respect of which Brazil is requesting the
Panel to make findings. In particular, is Brazil requesting findings (1) on the Canada Account, EDC and IQ
programmes as such, (2) on the Canada Account, EDC and IQ programmes as applied (on the basis of evidence
regarding specific transactions), (3) on the specific Canada Account, EDC and IQ transactions identified in its
first submission, or (4) on some combination of (1), (2 ) and (3)?" Brazil replied that it "is requesting findings
by the Panel on points (1), (2), and (3). Brazil is requesting that the Panel find the Canada Account, EDC and
IQ programmes as such inconsistent with Canada's obligations under the SCM Agreement. Brazil is also
requesting that the Panel find the Canada Account, EDC and IQ programmes inconsistent with Canada's
obligations under the SCM Agreement as applied on the basis of evidence regarding specific transactions.
Finally, Brazil is requesting that the Panel find the specific Canada Account, EDC and IQ transactions identified
in its First Written Submission as breaching Canada's obligations under the SCM Agreement" (Response of
Brazil to Question 25 from the Panel, Responses of Brazil to Questions from the Panel Following the First
Meeting of the Panel (Annex A-9)).

2. Claims 1, 2, 5, and 7 are inconsistent with the requirements of Article 6.2 of the DSU, which
require a complaining party to identify the spec ific matters at issue and to provide a brief
summary of the legal basis of the complaint, sufficient to present the problem clearly. Brazil
has not met the minimum standards of this provision.
1. Disputes over implementation – Article 21.5 of the DSU (regarding claims 1, 2, and 3 of
Brazil)
(a) Arguments of the parties
(i) Canada
7.4 Canada argues that the DSU provides that disputes over implementation are to be resolved
through expedited proceedings provided for in Article 21.5, rather than through new panel
proceedings. Canada further points out that Article 21.5 uses mandatory, not hortatory, language.
Where there is disagreement over implementation, such a dispute "shall be decided through recourse
to these dispute settlement procedures, including wherever possible resort to the original panel".
Canada submits that, in all cases to date in which there has been a dispute over the existence or WTO-
consistency of measures taken to comply with DS B recommendations or rulings, resort has been had
to Article 21.5. In Canada's view, to allow a Member to ignore the specific requirements of
Article 21.5 and instead to resort to de novo panel proceedings to determine issues of implementation
would be contrary to Article 21.5. Moreover, an y panel established through the regular dispute
settlement procedures of Article 6 of the DSU would not have the jurisdiction to make findings on
issues of compliance arising from other cases.
Claim 1
7.5 Canada recalls that Claim 1 states:
Export credits, including financing, loan guarantees, or interest rate support by or
through the Canada Account are and continue to be prohibited export subsidies within
the meaning of Articles 1 and 3 of the Agreement.
7.6 Canada points out that, in this claim, Brazil asserts in part that certain export credits "continue to
be" prohibited export subsidies. Canada argues that all measures of a Member are presumed to be
WTO-consistent absent a specific DSB ruling to the contrary. Therefore, the reference by Brazil to
export credits that "continue to be" prohibited export subsidies must refer back to earlier DSB rulings
that certain "export credits" granted by Canada are not WTO-consistent. According to Canada, this
would appear to be a claim that Canada has not complied with the DSB rulings in Canada – Aircraft.
Canada argues that this panel does not have the jurisdiction to determine issues of compliance related
to other cases.
Claim 2
7.7 Canada recalls that Claim 2 states:
Canada has not implemented the report of the Article 21.5 panel, adopted by the
DSB, requesting that Canada withdraw Canada Account subsidies.
7.8 Canada submits that Claim 2 fails to specify which "report of the Article 21.5 panel" is the subject
of the current Brazilian complaint. Canada presumes that it is the report of the Article 21.5 panel in
Canada – Measures Affecting the Export of Civilian Aircraft ("Canada – Aircraft "). In any event,
argues Canada, a complaint that Canada "has not implemented" the Article 21.5 panel report is clearly

an issue of compliance or implementation relate d to an earlier dispute, which is outside the
jurisdiction of the present panel.
Claim 3
7.9 Canada recalls that Claim 3 provides:
Canada, in defiance of the rulings and recommendations of the Dispute Settlement
Body, continues to grant or offers to grant export credits to the regional aircraft
industry through the Canada Account, that are prohibited subsidies within the
meaning of Articles 1 and 3 of the Agreement.
7.10 Once again, argues Canada, Brazil has referred to "the rulings and recommendations of the
Dispute Settlement Body", without any reference as to which such rulings or recommendations are the
subject of the current complaint. Again, Canada surm ises that Brazil is referring to the rulings and
recommendations of the DSB in Canada – Aircraft. The reference to the alleged granting of, or offers
to grant, prohibited subsidies "in defiance of" the DSB rulings clearly indicates, in the opinion of
Canada, that this claim raises issues of compliance with earlier rulings. Such claims are outside the
jurisdiction of the current panel according to Canada.
(ii) Brazil
7.11 Brazil disagrees that it cannot challenge, in proceedings brought pursuant to Article 6 of
the DSU, the existence or consistency of measures taken to comply with the earlier recommendations
and rulings of the DSB with respect to the Canada Account. While it is the case, in the view of
Brazil, that a Member may challenge under Article 21.5 "measures taken to comply" with DSB
recommendations and rulings, the ordinary meanin g of Article 6.2 of the DSU and Articles 4.1, 4.4,
and 4.5 of the SCM Agreement do not preclude a Member from similarly bringing a new dispute
settlement proceeding under those provisions. Brazil argues that, if a Member chooses to forego the
expedited procedures under Article 21.5, it is its prerogative to do so, and requiring Members to avail
themselves of only those expedited procedures would be contrary to the object and purpose of
Article 21.5. Brazil further posits that, in the circumstances of this particular case, it "considered it
efficient to forego Article 21.5's expedited procedures"
15, as Brazil's challenge to Canada Account
support for regional aircraft involves claims against the measure both as such and as applied in
particular transactions, and a panel constituted under Article 21.5 would not be authorised to review
the consistency of Canada Account support as applied in particular regional aircraft transactions.
7.12 Further, Brazil considers that Canada is incorrect to identify each of the numbered paragraphs
regarding the Canada Account in Brazil's request for the establishment of a panel as a separate claim.
Brazil submits that it makes one overarching claim with respect to Canada Account support in its
request for establishment, in paragraph 1. Paragraphs 2-4 of the request explain the nature of that
claim, according to Brazil.
7.13 Brazil submits that the Canada – Aircraft panel did not rule that Canada Account as such was
consistent with the SCM Agreement. It found that Brazil had failed to make a prima facie case and,
as a result, the Panel could not "make any findings on the Canada Account programme per se ."
16
With respect to Canada Account, Brazil argues that it has now presented additional information and
evidence that presents a prima facie case.

15 Response of Brazil to Submission of Canada Regarding Jurisdictional Issues, para. 8 (Annex A-4).
16 Canada – Aircraft, Report of the Panel, footnote 9, supra, para. 9.213.

(b) Evaluation by the Panel
(i) Claims 1 and 3
7.14 We recall that Claims 1 and 3 read as follows:
Claim 1
Export credits, including financing, loan guarantees, or interest rate support by or
through the Canada Account are and continue to be prohibited export subsidies within
the meaning of Articles 1 and 3 of the Agreement.
Claim 3
Canada, in defiance of the rulings and recommendations of the Dispute Settlement
Body, continues to grant or offers to grant export credits to the regional aircraft
industry through the Canada Account, that are prohibited subsidies within the
meaning of Articles 1 and 3 of the Agreement.
7.15 In essence, Canada argues that Claims 1 and 3 are claims related to the implementation of the
DSB recommendations in Canada – Aircraft , and that this panel does not have the jurisdiction to
determine issues of compliance related to other cases. In our view, however, the use of the words
"continue to be" and "in defiance of the rulin gs and recommendations of the [DSB]" do not
necessarily indicate that what is sought by Brazil is a review of "measures taken to comply with" the
DSB recommendations, as that term is used in Article 21.5 of the DSU. Indeed, Brazil, in its response
to our question, submits that it "is not asking this Panel to review the findings of the
DS70 Article 21.5 Panel or to uphold or confirm the find ings of that Panel. Similarly, Brazil is not
asking this Panel to draw conclusions as to what Canada should have done." Thus, in our view, the
present panel has not been asked to rule on whether Canada implemented the DSB recommendations
in the Canada – Aircraft case.
7.16 In our view, the wording of both Claims 1 and 3 alleges current violations of Article 3.1(a) of
the SCM Agreement, which sets out the prohibition on export subsidies and reads as follows:
subsidies contingent, in law or in fact, whether solely or as one of several other
conditions, upon export performance, including those illustrated in Annex I
(footnotes deleted);
To prove the existence of an export subsidy within the meaning of this provision, a Member must
therefore establish (i) the existence of a subsidy within the meaning of Article 1 of the
SCM Agreement and (ii) contingency of that subsidy upon export performance. It is these elements
that must be set out for purposes of a claim under Article 3.1(a). In this regard, we consider that the
phrases "continue to be" and "in defiance of the rulings and recommendations of the [DSB]" – which
form the basis for Canada's preliminary objection in respect of Claims 1 and 3 – are surplus. What
Brazil must prove to carry its Article 3.1(a) claims are the elements necessary under that provision. In
our view, the above phrases used by Brazil in its request for establishment and subsequently cited by
Canada are simply not relevant to Brazil's claims under Article 3.1(a). Accordingly, our focus must
be on whether Brazil has set out the elements necessary under Article 3.1(a), and that is what we shall
address.
7.17 We note that, in respect of Claims 1 and 3, Brazil states that "Brazil simply is requesting a
factual finding that, since the adoption of the DS70 Article 21.5 Report, Canada has not made any

changes in Canada Account" 17. With regard to this "factual finding" requested by Brazil, we recall
that Article 11 of the DSU – which sets out the function of panels – states in relevant part:
The function of panels is to assist the DSB in discharging its responsibilities under
this Understanding and the covered agreem ents. Accordingly, a panel should make
an objective assessment of the matter before it, including an objective assessment of
the facts of the case and the applicability of and conformity with the relevant covered
agreements, and make such other findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in the covered agreements
(emphasis added).
We further note that the terms of reference of this panel are:
To examine, in the light of the relevant provisions of the covered agreements cited by
Brazil in document WT/DS222/2, the matter referred to the DSB by Brazil in that
document, and to make such findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in those agreements.
We do not consider that the "factual finding" requested by Brazil is a "matter" we should objectively
assess or examine in this case. It is simply not relevant to whether Brazil has established its
Article 3.1(a) claims in this proceeding, which we consider to be "such other findings as will assist the
DSB in making the recommendations or in giving the rulings provided for in the
[SCM Agreement]".
18
7.18 Finally, we note that, whether or not the phrases "and continue to be" and "in defiance of the
rulings and recommendations of the [DSB]" are viewed as irrelevant surplus in respect of Claims 1
and 3, we view the claims in this proceeding to be different and broader than those that were the
subject of the Canada – Aircraft ruling. The Canada – Aircraft panel held that "the Canada Account
debt financing at issue constitutes 'subsid[ies] contingent in law . . . upon export performance'
prohibited by Article 3.1(a) of the SCM Agreement" 19. The Panel had found that "the Canada
Account debt financing in issue takes the form of export credits" 20. Claims 1 and 3 of Brazil are
made, respectively, in relation to "[e]xport credits, including financing, loan guarantees, or interest
rate support, by or through the Canada Account" and "export credits . . . through the Canada
Account". Brazil's claims in this proceeding do not concern the specific financing transactions "at
issue" in the Canada – Aircraft case. Rather, different transactions are at issue. Moreover, the legal
framework under which the Canada Account is operated has changed, as noted below.21 The scope of
the Canada – Aircraft ruling is therefore different and narrower than that of the ruling requested of the
present panel.
7.19 For the foregoing reasons, we reject Canada's objection to Claims 1 and 3.
(ii) Claim 2

17 Response of Brazil to Question 27 from the Panel, Responses of Brazil to Questions from the Panel
Following the First Meeting of the Panel (Annex A-9).
18 Brazil's request for a factual finding seems to be based on Claim 2, which we find is not within our
terms of reference ( See paras. 7.45-7.49, infra.). To the extent that it might also be based on other claims of
Brazil, we address it as such.
19 Canada – Aircraft, Report of the Panel, footnote 9, supra, para. 9.231.
20 Id., para. 9.230.
21 In this regard, we note the fact that, following the ruling of the Canada – Aircraft panel, Canada
enacted the Policy Directive GEN 000-004 – Submission of Documents to the Government of Canada
(Exhibit CAN-16) and the EDC Canada Account Policy Guideline (Exhibit CAN-17), which require Canada
Account financing to comply with the OECD Arrangement (See para. 7.93, infra).

7.20 We note that Canada has also requested a preliminary ruling under Article 6.2 in respect of
Claim 2 (See paragraph 7.25, infra). In light of our ruling in that regard ( See paragraph 7.49, infra),
we need not, and do not, address Canada's request for a preliminary ruling under Article 21.5 in
respect of Claim 2.
2. Specificity of the Request for the Establishment of a Panel – Article 6.2 of the DSU
(regarding claims 1, 2, 5, and 7 of Brazil)
(a) Arguments of the parties
(i) Canada
7.21 Canada recalls that requests for the establishment of a panel must comply with the
requirements of Article 6.2 of the DSU, which provides in part:
The request for the establishment of a panel . . . shall indicate whether consultations
were held, identify the specific measures at issue and provide a brief summary of the
legal basis of the complaint sufficient to present the problem clearly.
7.22 Citing various Appellate Body statements, Ca nada emphasises the due process objective of
Article 6.2 and submits that a deficiency in the request for the establishment of a panel cannot be
cured by later submissions. Further, Canada recalls that, in determining whether Article 6.2 has been
violated, panels and the Appellate Body have taken into account whether there has been prejudice to
the rights of defence of the defending party during the course of the panel proceedings.
Claim 1
7.23 Canada recalls that Claim 1 states:
Export credits, including financing, loan guarantees, or interest rate support by or
through the Canada Account are and continue to be prohibited export subsidies within
the meaning of Articles 1 and 3 of the Agreement.
7.24 Canada considers that the reference to "export credits" in Claim 1 is extremely broad. Any
practice that allows payment to be deferred for an exported good or service could conceivably qualify
as an "export credit" according to Canada. Moreover, argues Canada, the term "export credits" is
limited neither to the Air Wisconsin transaction nor to the regional aircraft industry. The scope of
"export credits", without any further clarification, is infinite. Brazil has failed to specify either the
meaning or the scope of its claim. Further, Canada submits that the term "Canada Account" is not
limited in any way in Brazil's claim. It is limited neither to the Air Wisconsin transaction nor to the
regional aircraft industry. It appears to Canada from the terms of the claim that Brazil is challenging
the whole of Canada Account, transactions under which number in the hundreds and vary from tied-
aid transactions to insurance products.
Claim 2
7.25 Canada recalls that Claim 2 states:
Canada has not implemented the report of the Article 21.5 panel, adopted by the
DSB, requesting that Canada withdraw Canada Account subsidies.

7.26 Canada indicates that, in Claim 2, Brazil has failed to identify any treaty provision that
Canada is alleged to have violated. It makes no reference to any provision of the WTO Agreements.
In the view of Canada, it thus fails to meet the "minimum prerequisite" of Article 6.2.
Claim 5
7.27 Canada recalls that Claim 5 states:
Export credits, including financing, loan guarantees, or interest rate support by or
through the EDC are prohibited export subsidies within the meaning of Articles 1
and 3 of the Agreement.
7.28 Canada makes the same argument in respect of the reference to "export credits" in Claim 5 as
in Claim 1, that is, that the reference is extremely broad. Further, Canada considers that "Brazil's
reference to 'the EDC' is similarly so broad as to defy definition" 22. The term "EDC" in this claim,
points out Canada, is limited neither to the Air Wisconsin transaction nor the regional aircraft
industry. The claim appears to Canada to be an ill-defined attack on the whole of the EDC, a claim
that could potentially cover hundreds of clients and many thousands of transactions since 1995.
Claim 7
7.29 Canada recalls that Claim 7 states:
Export credits and guarantees provided by Investissement Québec , including loan
guarantees, equity guarantees, residual value guarantees, and "first loss deficiency
guarantees" are prohibited export subsidies within the meaning of Articles 1 and 3 of
the Agreement.
7.30 Canada makes the same argument in respect of the reference to "export credits" in Claim 7 as
in Claim 1, that is, that the reference is extremely broad. Further, Canada considers that the reference
to "Investissement Québec" in Claim 7 is limited neither to the Air Wisconsin transaction nor to the
regional aircraft industry.
7.31 In sum, Canada submits that it "does not know the violations Brazil is alleging and the case it
has to answer"
23. In the opinion of Canada, Brazil's violations of the mandatory requirements of
Article 6.2 of the DSU prejudice Canada's ability to prepare and present a full defence in this
proceeding.
7.32 Canada considers Brazil's "overarching claim" theory an attempt to cure the deficiencies of
Brazil's request for the establishment of a panel. Canada points out that Brazil did not request
findings that Canada Account, Corporate Account, and IQ "as such, as applied, and in individual
transactions" constitute prohibited export subsidies.
24 Canada also goes to some length to highlight
differences between Brazil's request for establishment and statements in subsequent submissions,
differences which, in Canada's view, demonstrate further the failure of Brazil to abide by the
requirements of Article 6.2. Specifically, Canada argues that Brazil's request uses all-encompassing
language and only in its response to Canada's preliminary submission has Brazil advised Canada that
certain measures were not included.

22 Submission of Canada Regarding Jurisdictional Issues, para. 51 (Annex B-3).
23 Id., para. 44.
24 Response of Canada to Question 5 from the Panel, Responses of Canada to Questions from the Panel
Following the First Meeting of the Panel (Annex B-7).

(ii) Brazil
7.33 Brazil considers that its request for the establishment of a panel meets the four criteria set out
by the Appellate Body in Korea – Dairy, that is, that the request must: (i) be in writing; (ii) indicate
whether consultations were held; (iii) identify the specific measures at issue; and (iv) provide a brief
summary of the legal basis of the complaint sufficient to present the problem clearly25.
7.34 Brazil argues that its request identifies the three Canadian programmes at issue and, for them,
the specific categories of support subject to its challenge. Further, for Brazil, the request specifically
not only covers challenges to these measures as such, but states clearly that it is also a challenge to the
measures as applied in, for instance, the Air Wisconsin transaction. With regard to Canada's
complaint that Brazil's claims are extremely broad, Brazil considers that it is a Member's prerogative
to challenge any measure, no matter how broad, that it considers inconsistent with another Member's
WTO obligations.
7.35 Brazil also recalls that it states expressly in paragraphs 1, 5, and 7 of its request for
establishment that the measures at issue are prohibited export subsidies within the meaning of
Articles 1 and 3 of the SCM Agreement.
7.36 Finally, Brazil submits that the "attendant circumstances" in this case demonstrate that
Canada's ability to defend itself has not been prejudiced.
(b) Evaluation by the Panel
(i) Claim 1
7.37 We recall that Claim 1 states:
Export credits, including financing, loan guarantees, or interest rate support by or
through the Canada Account are and continue to be prohibited export subsidies within
the meaning of Articles 1 and 3 of the Agreement.
7.38 Canada's request for a preliminary ruling in respect of Claim 1 is based on the breadth of the
terms "export credits" and "Canada Account" in the request for the establishment of a panel as it
relates to the requirements set out in Article 6.2. That provision reads, in relevant part:
The request for the establishment of a panel shall be made in writing. It shall indicate
whether consultations were held, identify the specific measures at issue and provide a
brief summary of the legal basis of the complaint sufficient to present the problem
clearly.
We note that the request for the establishment of a panel was made in writing in the present dispute,
and that the request indicates that consultations were held. What the parties disagree on with regard
to Claim 1 is whether the request identifies the spec ific measures at issue, in that Canada considers
Claim 1 too broad.
7.39 In European Communities – Computer Equipment , the Appellate Body was required to
consider the specificity of the US panel request, which referred, inter alia, to "all types of LAN [Local
Area Network] equipment". In doing so, the Appellate Body stated:

25 Korea – Definitive Safeguard Measure on Imports of Certain Dairy Products (" Korea – Dairy "),
Report of the Appellate Body, WT/DS98/AB/R, adopted 12 January 2000, para. 120.

LAN equipment and PCs with multimedia capacity are both generic terms. Whether
these terms are sufficiently precise to "identify the specific measure at issue" under
Article 6.2 of the DSU depends, in our view, upon whether they satisfy the purposes
of the requirements of that provision.
In European Communities – Bananas, we stated that:
It is important that a panel request be sufficiently precise for two
reasons: first, it often forms the basis for the terms of reference of the
panel pursuant to Article 7 of the DSU; and, second, it informs the
defending party and the third parties of the legal basis of the
complaint.
The European Communities argues that the lack of precision of the term, LAN
equipment, resulted in a violation of its right to due process which is implicit in the
DSU. We note, however, that the European Communities does not contest that the
term, LAN equipment, is a commercial term which is readily understandable in the
trade.26
7.40 In applying the analysis of the Appellate Body to this case, we find that the term "export
credits", which has a definite meaning and is found in the Illustrative List of Export Subsidies
contained in Annex I to the SCM Agreement, is "readily understandable" in the context of a dispute
under Article 3.1(a) of the SCM Agreement. The term "export credits" is also explained by the
language following the word "including" in Brazil's request for establishment, i. e., the examples set
out by Brazil. We note, further, that it is quite clear from Brazil's request for consultations that the
measures at issue were limited to Canada's regional aircraft industry
27. It is therefore difficult,
considering these attendant circumstances, to accept that Canada could not know that the terms
"export credits" and "Canada Account" were related in particular to the regional aircraft industry.
7.41 With regard to the comparison Canada makes between the language in Brazil's request for
establishment and its response to Canada's preliminary submission, it is clear that Article 6.2 imposes
certain requirements on the contents of a request for establishment, not on how these contents
compare with subsequent articulations of the complainant's claims. We are of the view that such
arguments by Canada, while perhaps illustrative, are not legally relevant to any assessment under
Article 6.2.
7.42 Thus, in our view, Brazil's request for the establishment of a panel satisfies the requirement
under Article 6.2 of the DSU to "identify the specific measures at issue".
7.43 In European Communities – Computer Equipment
28, as well as other cases 29, the Appellate
Body has considered whether a lack of specificity in a request for the establishment of a panel has
prejudiced the respondent. In that regard, we do not accept Canada's assertion that a lack of

26 European Communities – Customs Classific ation of Certain Computer Equipment , Report of the
Appellate Body, WT/DS62/AB/R-WT/DS67/AB/R-WT/DS68/AB/R, adopted 22 June 1998, paras. 68-70
(footnotes deleted, emphasis added).
27 WT/DS222/1. (We also note that the title of Brazil's request for establishment, which reads , albeit assigned by the WTO Secretariat, was
accepted by Brazil.)
28 European Communities – Computer Equipment , Report of the Appellate Body, footnote 26, supra,
paras. 58-73.
29 See Thailand – Anti-dumping Duties on Angles, Shapes, and Sections of Iron or Non-Alloy Steel and
H-Beams from Poland , Report of the Appellate Body, WT/DS122/AB/R, adopted 5 April 2001, paras. 80-97,
and Korea – Dairy, Report of the Appellate Body, footnote 25, supra, paras.114-131.

specificity in Brazil's request for establishment prevented Canada from preparing and presenting a full
defence in this proceeding. We note, in this regard, Brazil's statement that, as indicated in its request
for establishment, its claims against the EDC Ca nada Account (and the EDC Corporate Account and
IQ) are limited to the examples cited therein. Brazil submits that it "has neither asserted any right to
expand, nor has it in fact expanded, its claims beyond the specific forms of EDC, Canada Account,
and IQ export credits listed in its request for establishment" 30. Similarly, Brazil's actual claims have
been limited to the regional aircraft industry. Thus, given the scope of the claims that Brazil
ultimately made in this proceeding, we do not consider that there has been prejudice to the rights of
defence of Canada.
7.44 We therefore reject Canada's objection to Claim 1.
(ii) Claim 2
7.45 We recall that Claim 2 states:
Canada has not implemented the report of the Article 21.5 panel, adopted by the
DSB, requesting that Canada withdraw Canada Account subsidies.
7.46 Canada's request for a preliminary ruling in respect of Claim 2 is based on the lack of
reference to a treaty provision in the request for the establishment of a panel as it relates to the
requirements set out in Article 6.2 ("a brief summary of the legal basis of the complaint sufficient to
present the problem clearly").
7.47 In this regard, we recall that the Appellate Body stated in Korea – Dairy that "[i]dentification
of the treaty provisions claimed to have been violated by the respondent is always necessary both for
purposes of defining the terms of reference of a panel and for informing the respondent and the third
parties of the claims made by the complainant; such identification is a minimum prerequisite if the
legal basis of the complaint is to be presented at all"
31. Further, as noted by the European
Communities – B ed Linen panel, "[f]ailure to even mention in the request for establishment the treaty
Article alleged to have been violated . . . constitutes failure to state a claim at all".32
7.48 We further note that Article 7.1 of the DSU – which sets out the standard terms of reference
for panels – refers to examination of the ma tter referred to the DSB "in the light of the relevant
provisions in (name of the covered agreement(s) . . . )".
7.49 We note that Claim 2 contains no reference at all to a WTO provision and it is therefore clear
that even the "minimum prerequisite" of Article 6.2 is not fulfilled. Brazil has not supplied the
elements necessary for Claim 2 to fall within our terms of reference. Accordingly, we find that
Brazil's Claim 2 does not fall within our terms of reference.
(iii) Claim 5
7.50 We recall that Claim 5 states:

30 Response of Brazil to Oral Statement of Canada Regarding Jurisdictional Issues at the First Meeting
of the Panel, para. 12 (Annex A-8).
31 Korea – Dairy, footnote 25, supra, para. 124 (emphasis added).
32 European Communities – Anti-Dumping Measures on Imports of Cotton-Type Bed Linen from India
("European Communities – B e d Linen "), Report of the Panel, WT/DS141/R, adopted 12 March 2001,
para. 6.15.

Export credits, including financing, loan guarantees, or interest rate support by or
through the EDC are prohibited export subsidies within the meaning of Articles 1
and 3 of the Agreement.
7.51 Canada's request for a preliminary ruling in respect of Claim 5 is based on the breadth of the
terms "export credits" and "EDC" in the request for the establishment of a panel as it relates to the
requirements set out in Article 6.2.
7.52 In respect of this preliminary objection, we consider that our analysis of the objection to
Claim 1 ( See paragraphs 7.37-7.44, supra) applies here as well. We therefore reject Canada's
objection to Claim 5.
(iv) Claim 7
7.53 We recall that Claim 7 states:
Export credits and guarantees provided by Investissement Québec , including loan
guarantees, equity guarantees, residual value guarantees, and "first loss deficiency
guarantees" are prohibited export subsidies within the meaning of Articles 1 and 3 of
the Agreement.
7.54 Canada's request for a preliminary ruling in respect of Claim 7 is based on the breadth of the
terms "export credits" and "Investissement Québec" in the request for the establishment of a panel as it
relates to the requirements set out in Article 6.2.
7.55 In respect of this preliminary objection, we consider that our analysis of the objection to
Claim 1 ( See paragraphs 7.37-7.44, supra) applies here as well. We therefore reject Canada's
objection to Claim 7.
C.
PROGRAMMES "AS SUCH"
1. Mandatory/discretionary distinction
7.56 We recall that Brazil claims that the EDC Canada and Corporate Accounts and IQ are "as
such" prohibited export subsidies contrary to Article 3.1(a) of the SCM Agreement. Given that
Brazil's claims are in respect of the programmes as such, the mandatory/discretionary distinction
would traditionally apply. Under that distinction – employed in both GATT and WTO cases over the
years33 – only legislation that requires a violat ion of GATT/WTO rules could be found to be
inconsistent with those rules.

33 See United States – Anti-Dumping Act of 1916 , Report of the Panel, WT/DS136/R-WT/DS162/R,
and Report of the Appellate Body, WT/DS136/AB/R-WT/DS162/AB/R, adopted 26 September 2000, United
States – Measures Affecting the Importation, Internal Sale, and Use of Tobacco , Report of the Panel,
BISD 41S/131, adopted 4 October 1994, Thailand – Restrictions on Importation of and Internal Taxes on
Cigarettes, Report of the Panel, BISD 37S/200, adopted 7 November 1990, European Economic Community –
Regulation on Imports of Parts and Components , Report of the Panel, BISD 37S/132, adopted 16 May 1990,
United States – Taxes on Petroleum and Certain Imported Substances (Superfund) , Report of the Panel,
BISD 34S/136, adopted 17 June 1987.
We also note the statement of the Appellate Body in United States – Hot-Rolled Steel that "[t]he
captive production provision does not, by itself, require an exclusive focus on the merchant market, nor does it
 compel a selective approach to the analysis of the merchant market that excludes an equivalent examination of
the captive market. The provision also does not itself mandate that particular weig ht be accorded to data
pertaining to the merchant market. Rather, as explained above, the provision allows the USITC to examine the

7.57 In this regard, we recall that the panel in United States – Export Restraints stated:
There is a considerable body of dispute settlement practice under both GATT and
WTO standing for the principle that only legislation that mandates a violation of
GATT/WTO obligations can be found as such to be inconsistent with those
obligations. This principle was recently noted and applied by the Appellate Body in
United States – Anti-Dumping Act of 1916 ("1916 Act"):
[T]he concept of mandatory as distinguished from discretionary
legislation was developed by a number of GATT panels as a
threshold consideration in determining when legislation as such –
rather than a specific application of that legislation – was inconsistent
with a Contracting Party's GATT 1947 obligations.

[P]anels developed the concept that mandatory and discretionary
legislation should be distinguished from each other, reasoning that
only legislation that mandates a violation of GATT obligations can
be found as such to be inconsistent with those obligations.
34
7.58 We note that Brazil expressly "agrees . . . that the distinction between discretionary ('as
applied') and mandatory ('as such') legislation is an established principle of GATT and
WTO jurisprudence"35. There is, therefore, no disagreement between the parties regarding the
applicability of the mandatory/discretionary distinction.36
7.59 Accordingly, we shall apply the mandatory/dis cretionary distinction in this dispute in
determining whether the Canadian programmes at issue are as such inconsistent with WTO
obligations, i. e., whether the legal texts governing the establishment and operation of these
programmes are mandatory in respect of the violations alleged by Brazil. In other words, to assess

merchant market and the captive market, with the same degree of care and attention, as part of a broader
examination of the domestic industry as a whole . . . Accordingly, if and to the extent that it is interpreted in a
manner consistent with our reasoning, as set forth in paragraphs 203 to 208 of this Report, we see no necessary
inconsistency between the captive production provision, on its face, and the Anti-Dumping Agreement" (United
States – Anti-Dumping Measures on Certain Hot-Rolled Steel Products from Japan (" United States – Hot-
Rolled Steel"), Report of the Appellate Body, WT/DS184/AB/R, adopted 23 August 2001, para. 208) (footnote
omitted, emphasis in original).
34 United States – Measures Treating Export Restraints as Subsidies (" United States – Export
Restraints"), Report of the Panel, WT/DS194/R, adopted 23 August 2001, para. 8.4 (footnotes omitted).
35 Response of Brazil to Question 28 from the Panel, Responses of Brazil to Questions from the Panel
Following the First Meeting of the Panel (Annex A-9). We further note that the panels in Canada – Aircraft as
well as Brazil – Aircraft applied the mandatory/discretionary distinction as did the Appellate Body in those
cases (Canada – Aircraft , Reports of the Panel and the Appellate Body, footnote 9, supra, and Brazil – Export
Financing Programme for Aircraft (" Brazil – Aircraft "), Reports of the Panel and the Appellate Body,
WT/DS46/R and WT/DS46/AB/R respectively, adopted 20 August 1999). Finally, we note that Brazil argued
that the mandatory/discretionary distinction should be applied in Brazil – Aircraft – Second Article 21.5 (Brazil
– Export Financing Programme for Aircraft – Second Recourse by Canada to Article 21.5 of the DSU ("Brazil –
Aircraft – Second Article 21.5"), Report of the Panel, WT/DS46/RW/2, adopted 23 August 2001).
36 We note that the Section 301 Panel found that even discretionary legislation may violate certain
WTO obligations ( See United States – Sections 301-310 of the Trade Act of 1974 , Report of the Panel,
WT/DS152/R, adopted 27 January 2000, para. 7.53). We recall that the Panel's analysis in that dispute focused
on the nature of the obligations imposed by Article 23.2(a) of the DSU. Neither party has suggested that similar
considerations apply in respect of the provisions of the SCM Agreement that Brazil alleges were violated in this
dispute.

Brazil's claim against the EDC as such, we must determine whether the EDC programme mandates
the grant of prohibited export subsidies in a manner inconsistent with Article 3.1(a) of the
SCM Agreement.
7.60 Brazil argues, however, that the mandatory/discretionary distinction should be applied in the
"substantive context" of the EDC, i. e., the fact that the EDC is an export credit agency, and that the
very purpose of ECAs is to subsidise exports. Brazil explains that its reference to "substantive
context" is drawn from the following statement by the panel in United States – Export Restraints:
We are not aware of any GATT/WTO precedent that would require a panel to
consider whether legislation is mandatory or discretionary before examining the
substance of the provisions at issue. To the contrary, we note that a number of
panels, in disputes concerning the consistency of legislation, have not considered the
mandatory/discretionary question in the abstract and as a necessarily threshold issue.
Rather, the panels in those cases first resolved any controversy as to the requirements
of the GATT/WTO obligations at issue, and only then considered in light of those
findings whether the defending party had demonstrated adequately that it had
sufficient discretion to conform with those rules. That is, the mandatory/discretionary
distinction was applied in a given substantive context.
37
7.61 We note, however, that the Panel in that case was primarily addressing the issue of whether
the mandatory/discretionary distinction had to be addressed by a panel as a threshold matter as argued
by the United States in that case, or whether a panel could address this distinction after considering
the legal requirements of the applicable provisio ns of the WTO Agreement. In other words, the
phrase "substantive context" refers to Articles 1 and 3 of the SCM Agreement 38, and not the measure
under review. The point made by the panel in United States – Export Restraints is simply that it may
be difficult to determine whether non-conforming conduct is mandated, without first determining
what the obligations are against which conformity is measured. In the present case, the relevant
"substantive context" in applying the mandatory/discretionary distinction would be the obligations set
forth in Article 3.1(a) of the SCM Agreement, and not the programmes under review.
7.62 We shall therefore apply the mandatory/discretionary distinction in light of Article 3.1(a) of
the SCM Agreement. In other words, the question we must address is whether the EDC – the EDC
Canada Account and the EDC Corporate Account – or IQ requires Canada to provide subsidies
contingent upon export performance within the meaning of Article 3.1(a) of the SCM Agreement.
7.63 We recall that Article 3 of the SCM Agreement states, in relevant part:
Except as provided in the Agreement on Ag riculture, the following subsidies, within
the meaning of Article 1, shall be prohibited:
(a) subsidies contingent, in law or in fact, whether solely or as one of several other
conditions, upon export performance, including those illustrated in Annex I;
(footnotes deleted)

37 United States – Export Restraints , footnote 34, supra, para. 8.11 (emphasis in original, footnote
omitted).
38 The Panel in United States – Export Restraints stated: "[I]dentifying and addressing the relevant
WTO obligations first will facilitate our assessment of the manner in which the legislation addresses those
obligations, and whether any violation is involved. That is, it is after we have considered both the substance of
the claims in respect of WTO provisions and the relevant provisions of the legislation at issue that we will be in
the best position to determine whether the legislation requires a treatment of export restraints that violates those
provisions" (United States – Export Restraints, footnote 34, supra, para. 8.12).

7.64 We further recall that Article 1 of the SCM Agreement states:
1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if:
(a)(1) there is a financial contribution by a government or any public body within
the territory of a Member (referred to in this Agreement as "government"), i.e. where:
(i) a government practice involves a direct transfer of funds (e.g. grants, loans,
and equity infusion), potential direct transfers of funds or liabilities (e.g. loan
guarantees);
(ii) government revenue that is otherwise due is foregone or not collected (e.g.
fiscal incentives such as tax credits [footnote omitted];
(iii) a government provides goods or services other than general infrastructure, or
purchases goods;
(iv) a government makes payments to a funding mechanism, or entrusts or directs
a private body to carry out one or more of the type of functions illustrated in (i) to
(iii) above which would normally be vested in the government and the practice, in no
real sense, differs from practices normally followed by governments;
or
(a)(2) there is any form of income or price support in the sense of Article XVI of
GATT 1994;
and
(b) a benefit is thereby conferred.
Thus, Article 1.1 makes clear that the definition of a subsidy has two distinct elements (i) a financial
contribution (or income or price support), (ii) which confers a benefit.
7.65 Thus, in this case, Brazil would have to demonstrate that the legal instruments governing the
establishment and operation of the programmes at issue are mandatory in respect of the alleged
violation, i. e., the grant of prohibited export subsidies. In other words, Brazil would have to
demonstrate that the legal instruments mandate (i) a financial contribution; (ii) which confers a
benefit, and a subsidy therefore exists, and (iii) that subsidy is contingent upon export performance.
7.66 We note that Canada has not contested that the legal instruments governing the programmes
at issue mandate financial contributions. We also note that Article 1.1(a)(1)(i) indicates that a
financial contribution exists where "a government pr actice involves a direct transfer of funds (e. g.
grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e. g. loan
guarantees)". We consider that there is no disagreement between the parties that the legal instruments
governing the programmes at issue mandate such activity.
7.67 We note, however, that the parties do not agree that the legal instruments governing the
programmes at issue mandate conferral of a benefit and establish export contingency. We shall
address those questions in the context of each programme. With respect to the conferral of a benefit,
which we shall address first, we will be guided by the relevant findings of the panel in Canada –
Aircraft. In that case, the panel found that:

First, in our opinion the ordinary mean ing of "benefit" clearly encompasses some
form of advantage. We do not consider that the ordinary meaning of "benefit" per se
includes any notion of net cost to the government. As Canada itself has noted, the
dictionary definition of "benefit" refers to "advantage", and not to net cost. In order
to determine whether a financial contribution (in the sense of Article 1.1(a)(i))
confers a "benefit", i.e., an advantage, it is necessary to determine whether the
financial contribution places the recipient in a more advantageous position than
would have been the case but for the financial contribution. In our view, the only
logical basis for determining the position the recipient would have been in absent the
financial contribution is the market. Accordingly, a financial contribution will only
confer a "benefit", i.e., an advantage, if it is provided on terms that are more
advantageous than those that would have been available to the recipient on the
market.
39
Further, the Appellate Body upheld the findings of the panel, ruling as follows:
We also believe that the word "benefit", as used in Article 1.1(b), implies some kind
of comparison. This must be so, for there can be no "benefit" to the recipient unless
the "financial contribution" makes the recipient "better off" than it would otherwise
have been, absent that contribution. In our view, the marketplace provides an
appropriate basis for comparison in determining whether a "benefit" has been
"conferred", because the trade-distorting potential of a "financial contribution" can be
identified by determining whether the recipient has received a "financial contribution"
on terms more favourable than those available to the recipient in the market.
40
7.68 Thus, we shall now examine whether the legal instruments governing the programmes at issue
mandate subsidisation, in particular, the conferral of a benefit within the meaning of Article 1 of the
SCM Agreement. If that is the case – and a subsidy therefore exists – we will examine whether that
subsidy is contingent upon export performance.
2. Export Development Corporation "as such"
7.69 The EDC is incorporated under the laws of Canada and is wholly owned by the Government
of Canada. Canada explains that the EDC operates on commercial principles41 with the objectives of:
(a) supporting and developing, directly or indirectly, Canada's export trade; and
(b) supporting and developing, directly or indirectly, Canada's capacity to:
(i) engage in exports, and
(ii) respond to international business opportunities.42
7.70 We note that Brazil makes a broad argument in respect of the EDC as such – in terms of the
EDC Corporate and Canada Accounts being export credit agencies – which applies to both the EDC
Corporate and Canada Accounts. Brazil also makes certain additional arguments which are specific to
each of the two accounts. We shall first address the broad argument encompassing both accounts and

39 Canada – Aircraft, Report of the Panel, footnote 9, supra, para. 9.112 (footnote omitted).
40 Canada – Aircraft, Report of the Appellate Body, footnote 9, supra, para. 157.
41 First Written Submission of Canada, para. 19 (Annex B-4).
42 Export Development Act, RSC 1985, c. E-20, s. 10 (Exhibit BRA-17).

then the additional arguments specific to each account, applying the mandatory/discretionary
distinction to all three sets of arguments.
(a) Export Development Corporation as an export credit agency
(i) Brazil
7.71 Brazil's broad argument regarding the EDC as such is that the EDC Corporate and Canada
Accounts "are established and operate as export credit agencies ["ECAs"] that have as the raison
d'être of their existence the provision of export subsidies"43. Brazil claims that ECAs operate with an
unfair competitive advantage, as they are able to ra ise funds at a lower cost than their private sector
competitors, and because they are exempted from certain taxes. Thus, when the EDC provides
guarantees, loans, and financial services, it necessarily confers a benefit. The fact that the EDC
operates on "commercial principles" does not elimin ate this unfair competitive advantage, nor the
benefit. Brazil asserts that the safe haven of item (k) of the Illustrative List was created precisely
because the provision of prohibited export subsidies is "inherent in the very existence and functioning
of an ECA"
44.
7.72 Brazil further claims that specific examples demonstrate that the EDC as such provides
prohibited export subsidies in the form of loan guarantees, financial services, and debt financing.
(ii) Canada
7.73 Canada argues that Brazil, by its argument that all ECAs necessarily provide prohibited
export subsidies, seeks to escape its burden of proving the existence of a subsidy and, in particular, a
benefit. In the opinion of Canada, Brazil's ar gument is not supported by the text of the
SCM Agreement, and it is contrary to what previous panels and the Appellate Body have found to
constitute a subsidy. As ECAs vary with respect to legal status, policies, and products, they do not
necessarily subsidise exports, according to Canada. Canada considers that the test of whether an ECA
offers a subsidy is not "Is it an ECA?", but whether the recipient of the financing receives a financial
contribution on terms more favourable than those available to the recipient in the market, as per the
finding of the Appellate Body in Canada – Aircraft.
7.74 Canada disputes Brazil's attempt to refer to individual transactions to defend its "as such"
claim. According to Canada, a Member cannot look to individual transactions to illustrate that a
measure is inconsistent as such. To prove that a measure is inconsistent as such, a Member must
prove that the executive is legally required to act in a manner inconsistent with the WTO Agreement
in some circumstances.
(iii) Findings
7.75 We note that, as is well established in WTO dispute settlement, the initial burden of proof lies
on the complaining party, which must establish a prima facie case of inconsistency. The burden then
shifts to the defending party, which must counter or refute the claimed inconsistency. We recall, in
this regard, the statement of the Appellate Body in Hormones:
The initial burden lies on the complaining party, which must establish a prima facie
case of inconsistency with a particular provision of the SPS Agreement on the part of
the defending party, or more precisely, of its SPS measure or measures complained

43 Response of Brazil to Question 29 from the Panel, Responses of Brazil to Questions from the Panel
Following the First Meeting of the Panel (Annex A-9).
44 See footnote 35, supra.

about. When that prima facie case is made, the burden of proof moves to the defending
party, which must in turn counter or refute the claimed inconsistency.45
Thus, in this case, Brazil must demonstrate prima facie inconsistency in respect of the EDC.
7.76 We recall that Brazil's broad argument is that the EDC as such provides export subsidies as
the EDC Corporate and Canada Accounts "are established and operate as [ECAs] that have as the
raison d'être of their existence the provision of export subsidies"
46, which would be a violation of
Article 3.1(a) of the SCM Agreement. Whatever the reason for the existence of export credit
agencies, to prove that the EDC as such provides export subsidies, Brazil would have to establish that
to be the case on the basis of the various legal texts regarding the establishment and operation of the
EDC (i. e., both its Canada and its Corporate Accounts).
7.77 We consider that, despite the fact that Brazil has the burden of proof, it has not pointed to any
specific provision in those legal texts that suggests that these programmes mandate subsidisation, in
particular, the conferral of a benefit within the meaning of Article 1 of the SCM Agreement. We have
nonetheless examined the various legal texts submitted by Brazil and found nothing that points to
mandatory subsidisation on the part of the EDC. We note, in particular, that Article 10 of the Export
Development Act ("EDA")
47, which sets out the purposes and powers of the EDC, does not support
Brazil's claim of mandatory subsidisation. Articl e 10(1), which sets out the purposes of the EDC,
states:
The [EDC] is established for the purposes of supporting and developing, directly or
indirectly, Canada's export trade and Canadian capacity to engage in that trade and to
respond to international business opportunities.
7.78 Article 10(1.1)of the EDA, which sets out the powers of the EDC, enumerates a number of
activities that the EDC may engage in, including:
(a) acquire and dispose of any interest in any property by any means;
(b) enter into any arrangement that has th e effect of providing, to any person, any
insurance, reinsurance, indemnity or guarantee;
(c) enter into any arrangement that has the effect of extending credit to any person or
providing an undertaking to pay money to any person;
(d) take any security interest in any property;
(e) prepare, compile, publish and distribute information and provide consulting
services;
(f) procure the incorporation, dissolution or amalgamation of subsidiaries;
(g) acquire and dispose of any interest in any entity by any means;

45 European Communities – Measures Concerning Meat and Meat Pr oducts (Hormones), Report of the
Appellate Body, WT/DS26/AB/R-WT/DS48/AB/R, adopted 13 February 1998, para. 98. See also United States
– Measure Affecting Imports of Woven Wool Shirts and Blouses from India , Report of the Appellate Body,
WT/DS33/AB/R, adopted 23 May 1997, p. 14.
46 See footnote 43, supra.
47 Export Development Act, footnote 42, supra, Article 10(1).

(h) make any investment and enter into any transaction necessary or desirable for the
financial management of the [EDC];

7.79 None of these provisions, nor any other provisions of the EDA, establish mandatory
subsidisation in respect of the EDC. Further, Article 19 indicates that the Board of Directors of the
EDC may determine the terms and conditions on which the EDC may exercise any power under the
EDA, and we have seen no evidence presented by Brazil in respect of any terms and conditions set by
the Board that would suggest the mandatory grant of subsidies.
7.80 Brazil submits that ECAs benefit from a competitive advantage over their private sector
competitors (because ECAs do not pay taxes, for example), and this enables them to offer more
favourable terms than those available in the private sector. According to Brazil, "not paying taxes is
illustrative of, and an essential prerequisite to, an ECA's capability to perform its normal mission – to
provide export subsidies"
48. Brazil also implies that there would be no need for the EDC if it did not
provide support on terms more favourable than those available on the market. 49 Whether or not these
arguments are factually correct, however, we do not see how they establish mandatory subsidisation.
That an entity enjoys certain fiscal advantages does not in and of itself prove that that entity is
required to pass on those advantages to its client s in the form of subsidies within the meaning of
Article 1 of the SCM Agreement.
50
7.81 In our opinion, the fact that ECAs may have a competitive advantage that allows them to
undercut private sector competitors does not mean that they are necessarily required to do so.
Furthermore, although the EDC may have provided subsidies in the form of loan guarantees, financial
services or debt financing in specific transactions 51, it does not follow from this that the EDC is
required to provide such subsidies.
7.82 We note that Brazil submits that "[i]f an ECA is not covered by the safe haven of item (k), it
is providing a prohibited subsidy 'as such' because providing export subsidies, as the Tokyo Round
negotiators realised, is inherent in the very existence and functioning of an ECA" 52 . . . "[I]tem (k)
allows ECAs to perform their normal function a nd, at the same time, meet GATT, and now WTO,
requirements"53. By this, we understand Brazil to be arguing that there would have been no need for
item (k) if ECAs did not provide export subsidies. Again, Brazil's argument is predicated on the
nature of ECAs, which we do not consider dispositive of the question of mandatory subsidisation. We
consider that item (k) sets out the circumstances in which the grant of export credits, inter alia, is per
se deemed to be an export subsidy, and provides one specific exception thereto, otherwise known as
the "safe haven" of item (k). The existence of item (k) – including its negotiating history – has no
bearing on the question of whether an ECA is mandated to provide subsidies. To accept that because
item (k) was negotiated in order to reconcile OECD and WTO rules on export subsidies, it follows
that all ECAs are required to grant export subsidies would be to make an assumption for which we see
no basis and effectively fail to apply the mandatory/discretionary distinction. The existence of

48 Second Written Submission of Brazil, para. 47 (Annex A-10).
49 See Exhibit BRA-54.
50 Further, to the extent that Brazil might be implying that all ECAs grant prohibited export subsidies,
we consider that such an argument blurs the distinction between financial contribution and benefit. That an
ECA provides export credits demonstrates the existence of a financial contribution, not the conferral of a benefit
thereby.
51 We are making no findings, however, in this respect at this juncture.
52 Second Written Submission of Brazil, para. 45 (Annex A-10).
53 Response of Brazil to Question 28 from the Panel, Responses of Brazil to Questions from the Panel
Following the First Meeting of the Panel (Annex A-9).

item (k) does not eliminate the requirement for a co mplaining party to prove the mandatory nature of
the programme in order to prevail on an "as such" claim.
7.83 Finally, we recall Brazil's further argument that specific examples demonstrate that the EDC
as such provides prohibited export subsidies in the form of loan guarantees, financial services, and
debt financing. "As such" claims are, however, subject to the mandatory/discretionary distinction
and, under that distinction, alleged subsidisation would have to be demonstrated on the basis of the
various legal texts regarding the establishment an d operation of the EDC. In our view, specific
instances of subsidisation therefore do not in and of themselves establish "as such" illegality in respect
of an underlying programme.
7.84 Having found that the EDC does not – by virtue of being an ECA – mandate the conferral of a
benefit and, hence, subsidisation, we need not, and do not, address the question of export contingency.
7.85 For the foregoing reasons, we reject Brazil's argument that the EDC – by virtue of being an
ECA – mandates subsidisation, in particular, the conferral of a benefit within the meaning of Article 1
of the SCM Agreement. We therefore find that the EDC is not – by virtue of being an ECA –
inconsistent with Article 3.1(a) of the SCM Agreement.
(b) EDC Canada Account
7.86 Having examined Brazil's broad argument encompassing both accounts, we shall now turn to
Brazil's additional arguments specific to each account, first addressing Brazil's additional arguments
specific to the EDC Canada Account, and then its additional arguments specific to the EDC Corporate
Account. Accordingly, to assess Brazil's claim ag ainst the EDC Canada Account as such, we must
first determine whether the EDC Canada Account mandates the grant of prohibited export subsidies in
a manner inconsistent with Article 3.1(a) of the SCM Agreement.54
7.87 We recall that the EDC may undertake and administer financing transactions that it would not
otherwise undertake provided that the Government of Canada deems them to be in the national
interest. Obligations under such activities are f unded by the Government of Canada, and the risk is
assumed directly by the Government of Canada. This is the so-called "Canada Account".
(i) Brazil
7.88 Brazil claims that Canada has not disputed that EDC support is de jure contingent on export,
and therefore focuses on the question of subsidisation.
7.89 Brazil submits that the EDC only uses the EDC Canada Account when the terms of its
support would not be consistent with "what the relevant borrower has recently paid in the market for
similar terms and with similar security"55, and thus could not be provided through the EDC Corporate
Account. According to Brazil, the EDC Canada Account support is, therefore, apparently not
consistent with what Canada deems to be the market, and thus confers a benefit and constitutes a
subsidy. Brazil further asserts that the very existence of the EDC Canada Account Policy Guideline
56
demonstrates that EDC Canada Account support as such constitutes a prohibited export subsidy.
Brazil indicates that Canada submitted in the Canada – Aircraft – Article 21.5 case that, under this
guideline, "future Canada Account transactions will be consistent with Canada's obligations under the

54 We note that, pursuant to item (k) of the Illustrative List of Export Subsidies annexed to the
SCM Agreement, "an export credit practice which is in conformity with [the interest rate] provisions [of the
OECD Arrangement] shall not be considered an export subsidy prohibited by this Agreement".
55 First Written Submission of Canada, para. 67 (emphasis in original) (Annex B-4).
56 Exhibit CAN-17 and Appendix A to Exhibit CAN-16.

SCM Agreement in that they will qualify for the safe haven in the second paragraph of item (k)" 57.
Brazil points out that the Article 21.5 Panel determined that the Policy Guideline was not sufficient to
qualify EDC Canada Account support for the safe haven and, by Canada's own admission, without the
protection of the safe haven, EDC Canada Account support constitutes a prohibited export subsidy.
For Brazil, "it is the failure of the policy guideline . . . that speaks to the nature of EDC's Canada
Account 'as such'"58.
(ii) Canada
7.90 Canada maintains that the EDC Canada Account is discretionary, indicating that the
Canada – Aircraft Panel found that the programme is discretionary and that there is no reason for the
present panel to diverge from this finding. According to Canada, Brazil has not submitted arguments
or evidence showing that the Canada – Aircraft Panel erred in its findings. Nor, submits Canada, has
Brazil offered any basis on which the circumstances giving rise to the Canada – Aircraft findings can
be distinguished from the circumstances in this dispute.
(iii) Findings
7.91 Again, we note that, as is well established in WTO dispute settlement, the initial burden of
proof lies on the complaining party, which must establish a prima facie case of inconsistency. The
burden then shifts to the defending party, which must counter or refute the claimed inconsistency.
Thus, in this case, Brazil must demonstrate prima facie inconsistency in respect of the EDC Canada
Account.
7.92 We recall that the panel in Canada – Aircraft rejected Brazil's claim that Canada Account
debt financing for the export of Canadian regional aircraft as such constituted an export subsidy
inconsistent with Article 3.1(a) of the SCM Agreement.
59 Leaving aside for the moment the issue of

57 Canada – Measures Affecting the Ex port of Civilian Aircraft – Recourse by Brazil to Article 21.5 of
the DSU ("Canada – Aircraft – Article 21.5 "), Report of the Panel, WT/DS70/RW, adopted 4 August 2000,
para. 5.61.
58 Response of Brazil to Question 49 from the Panel, Responses of Brazil to Questions from the Panel
Prior to the Second Meeting of the Panel (Annex A-11).
59 See Canada – Aircraft , Report of the Panel, footnote 9, supra, para. 10.1. See also Section VII.B.1,
supra. In this regard, we recall, in particular, the statement of the Appellate Body in Japan – Alcoholic
Beverages II that:
[a]dopted panel reports are an important part of the GATT acquis . . . They create legitimate
expectations among WTO Members, and, therefore, should be taken into account where they
are relevant to any dispute. ( Japan – Taxes on Alcoholic Beverages (" Japan – Alcoholic
Beverages II"), Report of the Appellate Body, WT/DS8/AB/R-WT/DS10/AB/R-
WT/DS11/AB/R, adopted 1 November 1996, p. 14.)
Noting this passage, the panel in India – Patents (EC) stated:
[P]anels are not bound by previous decisions of panels or the Appellate Body even if the
subject-matter is the same. In examining dispute WT/DS79 we are not legally bound by the
conclusions of the Panel in dispute WT/DS50 as modified by the Appellate Body report.
However, in the course of "normal dispute settlement procedures" required under Article 10.4
of the DSU, we will take into account the conclusions and reasoning in the Panel and
Appellate Body reports in WT/DS50. Moreover, in our examination, we believe that we
should give significant weight to both Article 3.2 of the DSU, which stresses the role of the
WTO dispute settlement system in providing security and predictability to the multilateral
trading system, and to the need to avoid inconsistent rulings[]. ( India – Patent Protection for
Pharmaceutical and Agricultural Chemical Products ("India – Patents (EC) "), Report of the
Panel, WT/DS79/R, adopted 2 September 1998, para. 7.30 (emphasis in original).)

export contingency, we first address that of subsidisation, in particular, whether Canada Account
mandates the conferral of a benefit within the meaning of Article 1 of the SCM Agreement.60
7.93 We recall that, under the mandatory/discretionary distinction, Brazil must demonstrate
subsidisation on the basis of the legal texts governing the establishment and operation of the
EDC Canada Account. We note, however, that the EDA61, which establishes the EDC, does not give
any indication of mandatory subsidisation, nor does Brazil argue that it, or any of the other legal texts,
does. In particular, the guidelines that apply, including those, such as Appendix A to the Policy
Directive GEN 000-004 – Submission of Documents to the Government of Canada 62 and the EDC
Canada Account Policy Guideline63, adopted to implement the recommendations of the DSB pursuant
to Canada – Aircraft , refer only to the OECD Arrangement. The EDC Canada Account Policy
Guideline states: "For the purposes of an authorisation under subsection 23(1) of the Export
Development Act of a financing transaction or class of financing transactions, it is the policy of the
Minister for International Trade to consider that an y such transaction or class of transactions which
does not comply with the OECD Arrangement on Guid elines for Officially Supported Export Credits
would not be in the national interest." 64 None of these guidelines is sufficient to establish mandatory
subsidisation with regard to the EDC Canada Account. While it may be true that even when a
programme complies with the OECD Arrangement, it may – pursuant to the findings of the panel in
Canada – Aircraft – Article 21.5 – involve the grant of prohibited export subsidies contrary to
Article 3.1(a) of the SCM Agreement, that is not necessarily the case. In our view, Brazil has pointed
to no legal text which demonstrates mandatory subsidisation.
7.94 Brazil argues that the existence of subsidisation, in particular, the conferral of a benefit, in
respect of the EDC Canada Account is effectively established by the indication as to the
circumstances in which the EDC Canada Account is used, in that the EDC Canada Account is only
used when the grant of a subsidy is involved. Brazil's argument – made on the basis of a Canadian
statement – is that the EDC Canada Account is us ed only when the terms of its support would not be
consistent with "what the relevant borrower has recently paid in the market for similar terms and with
similar security"
65, and that this indicates that a benefit is conferred. We see no legal basis for this
assertion, however, nor does Brazil indicate any. Moreover, the material before us regarding
operation of the EDC Canada Account would suggest that the assertion is not factually correct.
Export Development Corporation: Annual Report 1999-2000 Reference Guide reads, in relevant part:
While EDC strives to find ways to structure transactions under its Corporate Account,
there are a number of factors which might lead EDC to refer a transaction to Canada
Account. The transaction could: exceed EDC's exposure guidelines for a particular
country (that is, the maximum amount of business EDC has decided it can prudently
undertake in a specific market); involve markets where, for reasons of exceptional
risk, EDC is unwilling to support Canadian export business; or it could involve an

60 We note that, in the present dispute, Brazil claims that Canada has not disputed that EDC support is
de jure contingent on export, and therefore focuses on the question of subsidisation.
61 See footnote 42, supra.
62 Exhibit CAN-16.
63 Exhibit CAN-17.
64 Subsection 23(1) of the Export Development Act states: "Where the [EDC] advises the Minister that
it will not, without an authorisation made pursuant to this section, enter into any transaction or class of
transactions that it has the power to enter into under paragraphs 10(1.1)(a) to (e) or (i) to (k) and the Minister is
of the opinion that it is in the national interest that the [EDC] enter into any such transaction or class of
transactions, the Minister, with the concurrence of the Minister of Finance, may authorise the [EDC] to do so"
(Exhibit BRA-17).
65 First Written Submission of Canada, para. 67 (emphasis in original) (Annex B-4).

amount or a term in excess of that which EDC would normally undertake for a single
borrower.66
7.95 It is clear to us from the cited language that there are various factors in a given transaction
which might lead to the use of the EDC Canada, rather than Corporate, Account, and these factors
serve as limitations on EDC Corporate Account involvement in any particular transaction. We do not
see, however, how the conditions for use of the EDC Canada Account demonstrate the existence of
mandatory subsidisation, in particular that the programme requires the conferral of a benefit when
used to provide financing assistance. We consider that Brazil has failed to demonstrate that EDC
Canada Account support necessarily involves subsidisation. Although we can see that such support
might conceivably take the form of subsidisation, there is nothing to suggest that this must, in law, be
the case.
7.96 Having found that the EDC Canada Account does not mandate the conferral of a benefit and,
hence, subsidisation, we need not, and do not, address the question of export contingency.
7.97 For the foregoing reasons, we reject Brazil's claim that the EDC Canada Account mandates
the provision of export subsidies contrary to Article 3.1(a) of the SCM Agreement. We therefore find
that the EDC Canada Account as such is not inconsistent with Article 3.1(a) of the SCM Agreement.
(c) EDC Corporate Account
7.98 We now turn to Brazil's additional arguments specific to the EDC Corporate Account. To
assess Brazil's claim against the EDC Corporate Account, we must determine whether the EDC
Corporate Account per se mandates the grant of prohibited export subsidies in a manner inconsistent
with Article 3.1(a) of the SCM Agreement.
7.99 We recall that EDC "Corporate Account" activities are the EDC's activities on its own
account.
(i) Brazil
7.100 Brazil claims that Canada has not disputed that EDC support is de jure contingent on export,
and therefore focuses on the question of subsidisation.
7.101 Brazil argues that the EDC Corporate Account was established to support exports by
providing financial services that the market does not provide. The EDC Corporate Account
"complements" the market. It provides interest rates below the CIRR 67 and for terms that exceed ten
years. Yet the CIRR and the ten-year repayment term are, in the words of the OECD Arrangement,
"the most generous repayment terms and conditions that may be supported". The Appellate Body has
concluded that terms more generous than those provided by the OECD Arrangement are positive
evidence of a material advantage; such terms are, a fortiori, positive evidence of a benefit. The EDC
Corporate Account, by its own description, provides financial services to Canadian exporters – and
only to Canadian exporters – on terms superior to the terms specified in the OECD Arrangement and
superior to those the exporters could obtain elsewhere. Provision of these services is contingent in
law upon export. They therefore constitute a prohibited export subsidy.
(ii) Canada

66 Export Development Corporation: Annual Report 1999-2000 Reference Guide, p. 7 (Exhibit BRA-
23).
67 Commercial Interest Reference Rate within the meaning of Article 15 of the OECD Arrangement.

7.102 Canada maintains that the EDC Corporate Account is discretionary, indicating that the
Canada – Aircraft Panel found that the programme is discretionary and that there is no reason for the
present panel to diverge from this finding. According to Canada, Brazil has not submitted arguments
or evidence showing that the Canada – Aircraft Panel erred in its findings. Nor, submits Canada, has
Brazil offered any basis on which the circumstances giving rise to the Canada – Aircraft findings can
be distinguished from those in this dispute.
7.103 Canada further responds that EDC Corporate Account financing is not offered on terms more
favourable than those available in the market. It does not confer a benefit within the meaning of
Article 1.1(b) of the SCM Agreement and therefore does not amount to a subsidy. As Brazil has
failed to show that EDC Corporate Account fina ncing amounts to a subsidy, the issue of export
contingency is moot.
7.104 Canada disputes Brazil's attempt to refer to individual transactions to defend its "as such"
claim. According to Canada, a Member cannot look to individual transactions to illustrate that a
measure is inconsistent as such. To prove that a measure is inconsistent as such, a Member must
prove that the executive is legally required to act in a manner inconsistent with the WTO Agreement
in some circumstances.
(iii) Findings
7.105 Again, we note that, as is well established in WTO dispute settlement, the initial burden of
proof lies on the complaining party, which must establish a prima facie case of inconsistency. The
burden then shifts to the defending party, which must counter or refute the claimed inconsistency.
Thus, in this case, Brazil must demonstrate prima facie inconsistency in respect of the EDC Corporate
Account.
7.106 Leaving aside for the moment the issue of ex port contingency, we first address that of
subsidisation, in particular, whether the EDC Corporate Account mandates the conferral of benefit
within the meaning of Article 1 of the SCM Agreement.68
7.107 We recall that, under the mandatory/discretionary distinction, Brazil must demonstrate
subsidisation on the basis of the legal texts governing the establishment and operation of the EDC
Corporate Account. To satisfy the "benefit" element of Article 1.1 of the SCM Agreement for
purposes of a challenge to the EDC Corporate Account as such, Brazil must show that the programme
requires conferral of a benefit, not that it could be
 used to do so, or even that it is used to do so. We
note, however, that Brazil points to no legal text in respect of the EDC Corporate Account as
establishing mandatory subsidisation. We note, further, that we have found none. The EDA 69, in
particular, which establishes the EDC, does not give any indication of mandatory subsidisation. We
also note various other texts70 submitted by Canada in this regard, in particular, the Credit Risk Policy
Manual71 and the Policy for Implementing Market-Based and Official Support Transactions 72.
Nothing in these texts provides any evidence to support the mandated conferral of a benefit in
financing supplied through the EDC Corporate Account.
7.108 Rather, there is arguably evidence to the contrary which, while not conclusive, suggests that
the EDC Corporate Account is not to be used to provide prohibited export subsidies. The EDC Credit

68 We note that Brazil claims that Canada has not disputed that EDC support is de jure contingent on
export, and therefore focuses on the question of subsidisation.
69 See footnote 42, supra.
70 See Exhibits CAN-18-23, 25, 46-47, and 49.
71 Exhibit CAN-48.
72 Exhibit CAN-50.

Risk Policy Manual states, for instance: "EDC will establish pricing levels that are appropriate for the
underlying credit risk and other relevant considerations applicable to EDC (e. g., Canada's obligations
pursuant to the WTO Agreement and the OECD Consensus)." 73 And the Policy for Implementing
Market-Based and Official Support Transactions states, for instance: "This policy is intended . . . to
provide greater certainty of conformity of EDC's medium-/long-term transactions with applicable
international trade agreements, primarily the WTO SCM Agreement and the OECD Arrangement, as
facts supporting conformity must be adequately documented for each transaction in accordance with
the transaction classification process specified herein."
74
7.109 We recall further that Canada states: "In terms of the pricing process, the EDC's
transportation group has a committee that reviews and approves the pricing on all transactions in the
civil aircraft sector. In setting this pricing, the EDC compares what the relevant borrower has recently
paid in the market for similar terms and with similar security. The EDC then prices according to that
benchmark. In the absence of this benchmark, the EDC compares the relevant borrower to borrowers
of comparable credit standing in the civil aviation sector for whom a similar credit history exists; the
EDC then prices according to this alternative benchmark." 75 T h e EDC Credit Risk Policy Manual
states: "EDC's credit commitments will be priced with respect to market practices" 76. Again, there is
nothing to suggest that EDC Corporate Account support must, in law, confer a benefit, and therefore
take the form of subsidisation.
7.110 We also recall that Brazil submits that operating on commercial principles does not exclude
subsidisation, since certain EDC services / products are not available on the market. According to
Brazil, the provision by the EDC Corporate Account of services not available on the market
necessarily means that services are provided on terms more favourable than those available on the
market. As an example, Brazil refers to the EDC Corporate Account's "ability" to complement the
services of banks and other financial institutions. We recall, however, that our terms of reference
limit the scope of our enquiries to the universe of export credits. To the extent that any services
provided by the EDC Corporate Account are independent of export credits provided by the
EDC Corporate Account, we consider that those services are not measures that fall within our terms of
reference. To the extent that any such services are part and parcel of export credits provided by the
EDC Corporate Account, those services fall within our terms of reference and are part of our
assessment of export credits provided by the EDC Corporate Account. In this regard, we consider
that any such services could not constitute a financial contribution independently of the export credits
in relation to which they are provided.
7.111 Even assuming that the provision of services not available on the market necessarily confers a
benefit, the fact that the EDC Corporate Account has the "ability" to provide such services does not
necessarily mean that it is required to do so. As noted above, to satisfy the "benefit" element of
Article 1.1 of the SCM Agreement for purposes of a challenge to the EDC Corporate Account as such,

73 See footnote 71, supra, p. 16. With regard to the legal status of the EDC Credit Risk Policy Manual,
we note Canada's statement as follows: "As a self-governing, autonomous Crown corporation, EDC's operating
practices and policies are the responsibility of its Boar d of Directors. The Credit Risk Policy Manual was
approved by the Board of Directors, but it is not legislation and consequently is not binding on EDC in the same
way as legislation would be. However, any transaction of EDC which is within the authority delegated to EDC
management and which departs from the policies in the Manual is not duly authorised unless the transaction is
in accordance with an exception to the relevant policy (as approved by the Board of Directors) or the Board
approves the transaction itself" (Response of Canada to Question 63 from the Panel, Responses of Canada to
Questions from the Panel Following the Second Meeting of the Panel (Annex B-11)).
74 See footnote 72, supra.
75 First Written Submission of Canada, para. 67 (Annex B-4).
76 See footnote 73, supra.

Brazil would have to show that the programme requires conferral of a benefit, not that it could be used
to do so, or even that it is used to do so.77
7.112 Having found that the EDC Corporate Account does not mandate the conferral of a benefit
and, hence, subsidisation, we need not, and do not, address the question of export contingency.
7.113 For the foregoing reasons, we reject Brazil's claim that the EDC Corporate Account mandates
the provision of export subsidies contrary to Article 3.1(a) of the SCM Agreement. We therefore find
that the EDC Corporate Account as such is not inconsistent with Article 3.1(a) of the
SCM Agreement.
3. Investissement Québec "as such"
7.114 Having examined Brazil's claim against the EDC as such, we shall now turn to Brazil's claim
against IQ as such. Accordingly, to assess Brazil's claim against IQ as such, we must first determine
whether IQ mandates the grant of prohibited export subsidies in a manner inconsistent with
Article 3.1(a) of the SCM Agreement.
(i) Brazil
7.115 Brazil asserts that IQ constitutes a prohibited export subsidy as such. In respect of mandatory
subsidisation, Brazil submits that IQ is mandated to provide assistance under Section 28 of the IQ Act.
Brazil argues that a benefit is necessarily conferred when such assistance takes the form of loan
guarantees, because firms buying Bombardier aircraft benefit from the superior credit rating of the
Government of Québec. IQ equity guarantees also confer a benefit, as a governmental guarantee is
provided to equity investors. In response to Ca nada's defence that fees have been charged for such
guarantees, Brazil asserts that Canada has failed to demonstrate that the fees charged by IQ are
commensurate with those charged by commercial guar antors with A+ or A2 credit ratings to firms
wishing to enjoy the benefits of those guarantors' A+ or A2 ratings.
7.116 Brazil notes that, furthermore, the latest decree
78, issued in 2000 to replenish the IQ guarantee
fund for the Air Wisconsin transaction, eliminates the requirement that fees be charged. Brazil further
notes that Canada still argues that fees are in fact charged. In this regard, Canada relies on paragraph
B of the IQ criteria79 which requires that " IQ will not make support available for transactions if the
remuneration it is to receive is less than that offere d in the market". Brazil submits, however, that a
closer look at paragraph B demonstrates otherwise; according to paragraph B, if the "competitive
nature" of the transactions requires that IQ receive less than it would in the market, it will do so.
7.117 In respect of mandatory export contingency, Brazil asserts that IQ support is – on the basis of
Decrees 572-2000 and 841-2000 – de jure contingent on the export of goods outside of Québec.
Brazil submits that contingency on export outside Québec should be sufficient to find export
contingency within the meaning of Article 3.1(a), or else Members would be able to subvert the

77 This is not a case where EDC Corporate Account support necessarily confers a benefit, and where
the only discretion available is that of not providing the support at all. We do not express a view as to whether
our approach in this case would be equally applicable in such factual circumstances. Rather, this is a case where
Canada has discretion to operate the EDC Corporate Account in such a manner that it does not confer a benefit.
Further, we note that the facts before us are unlike those before the Appellate Body in Argentina – Measures
Affecting Imports of Footwear, T extiles, Apparel and Other Items . In that case, the Appellate Body was
reviewing mandatory legislation. ( See Argentina – Measures A ffecting Imports of Foot wear, Textiles, Apparel
and Other Items, Report of the Appellate Body, WT/DS56/AB/R, adopted 22 April 1998, paras. 49 and 54.)
78 Decree 1488-2000 (Exhibit CAN-36).
79 Exhibit CAN-51.

SCM Agreement export subsidy disciplines by introducing subsidy programmes that exclude small
parts of their home territories.
(ii) Canada
7.118 Canada submits that Section 28 of the IQ Act provides "the executive authority" with
complete discretion regarding the terms and conditions of the assistance it provides. Canada asserts
that IQ assistance in regional aircraft transactions is authorised more specifically under certain
Decrees, which empower IQ to grant guarantees or counter-guarantees up to certain amounts of
money. IQ enjoys complete discretion under these decrees. Furthermore, by virtue of IQ's transaction
evaluation criteria
80, IQ must provide support on market terms. IQ therefore cannot mandate the
provision of subsidies.
7.119 In respect of export contingency, Canada denies that Decree 572-2000, which conditions
assistance on export outside of Québec, has anything to do with aircraft sales financing. Nor does it
preclude funding for projects within Québec. In any event, Canada submits that contingency on
export outside of Québec does not fall within the scope of the Article 3.1(a) prohibition.
"Exportation" within the meaning of the SCM Ag reement refers to the movement of goods and
services between Members, not within
 them.
(iii) Findings
7.120 We note that, as is well established in WTO dispute settlement, the initial burden of proof lies
on the complaining party, which must establish a prima facie case of inconsistency. The burden then
shifts to the defending party, which must counter or refute the claimed inconsistency. Thus, in this
case, Brazil must demonstrate prima facie inconsistency in respect of IQ.
7.121 Leaving aside for the moment the issue of expor t contingency, we first address the issue of
subsidisation, in particular, whether IQ mandates the conferral of a benefit within the meaning of
Article 1 of the SCM Agreement.
7.122 We recall that Brazil's claim is based on provisions of the IQ Act and Decrees 572-2000 and
841-2000. Canada asserts, however, that the Decrees "have nothing to do with aircraft sales financing
and are not used for aircraft sales financing" 81. In response, Brazil notes that the Decrees relate to
support for the sale of goods, and asserts that because regional aircraft are goods, support for the sale
of regional aircraft is covered by the Decrees. Canada responds that "Decree 841-2000 could not
apply to financing of Bombardier regional aircraft because it applies only to small enterprises.
Decree 572-2000 applies, for the most part, to investments in Québec. However, one of the measures
in the Decree provides for loan guarantees intended for buyers outside of Québec for the purchase of
goods and services . . . Theoretically, this measure could be used to finance the sale of Bombardier
regional aircraft. However, due to [a] Québec content limitation and other restrictions, Decree 572-
2000 is not well suited to financing regional aircraft sales and has never been used to do so"
82. Brazil
rebuts these arguments by submitting that nothing in Decree 841-2000 suggests that its application is
restricted to small enterprises, adding that there ar e provisions of the Decree suggesting that it is not
restricted to small enterprises.
7.123 To the extent that the Decrees could cover support for the sale of regional aircraft, however,
the question we must address is whether such support involves mandatory subsidisation, in particular,

80 Exhibit CAN-51.
81 First Written Submission of Canada, para. 93 (Annex B-4).
82 Response of Canada to Question 69 from the Panel, Responses of Canada to Questions from the
Panel Following the Second Meeting of the Panel (Annex B-11).

the conferral of a benefit within the meaning of Article 1 of the SCM Agreement. Brazil does not
indicate anything in the IQ Act83 or in Decrees 572-2000 84 and 841-2000 85 that demonstrates
necessary subsidisation. Nor have we found any such evidence in these or any other legal texts
governing the establishment and operation of IQ. We note, in this regard, that Section 28 of the IQ
Act, which establishes IQ, states: "The Government may, where a project is of major economic
significance for Québec, mandate the agency to grant and administer the assistance determined by the
Government to facilitate the realisation of the project. The mandate may authorise the agency to fix
the terms and conditions of the assistance." While Brazil is correct in stating that IQ is mandated to
provide assistance under Section 28 of the IQ Act, nothing in the IQ Act suggests that such assistance
must take the form of subsidisation, and, in particular, confer a benefit under the SCM Agreement.
Rather, IQ would seem to have the discretion to determine the terms and conditions of such
assistance. Even assuming that IQ loan and equity guarantees confer a benefit, the fact that IQ may
do so does not necessarily mean that it is required to do so. To satisfy the "benefit" element of
Article 1 of the SCM Agreement for purposes of a challenge to IQ as such, Brazil would have to
show, as for purposes of a challenge to the EDC, that the programme requires conferral of a benefit,
not that it could be used to do so, or even that it is used to do so.
7.124 Similarly, while Decree 572-2000 enables IQ to provide financial support for investment or
export projects, and Decree 841-2000 enables IQ to provide support for market development projects,
nothing in these Decrees demonstrates that that support must take the form of subsidisation. To the
contrary, it seems to us that both Decrees allow for the provision of support in other forms and reflect
a certain discretion on the part of the agency in respect of the manner in which it undertakes
investment or export projects or market development projects, respectively.
7.125 Further, when requested by the Panel to "provide any general or sector-specific regulations,
guidelines, policies or similar documents . . . concerning the fixing of the terms and conditions of IQ
support to the regional aircraft industry" 86, Canada submitted the " critères d'évaluation des
transactions" (criteria for the evaluation of transactions)87 which are used by the IQ Credit Committee
in making its recommendations in respect of particular transactions88. Nor do these "critères" provide
any evidence of mandatory subsidisation. In this regard, we note Canada's further statement that,
"subject to the 'critères d'évaluation', IQ has very broad discretion in deciding whether to provide such
support, and the terms and conditions on which it does so" 89. In our view, Brazil has failed to
establish the contrary to be the case in that it has not identified a legal instrument from which it can be
demonstrated that IQ involves the mandatory grant of subsidies.
7.126 Having found that IQ does not mandate the conferral of a benefit and, hence, subsidisation,
we need not, and do not, address the question of export contingency.

83 Exhibit BRA-18.
84 Exhibit BRA-19.
85 Exhibit BRA-20.
86 Question 17 from the Panel, Responses of Canada to Questions from the Panel Following the First
Meeting of the Panel (Annex B-7).
87 Exhibit CAN-51.
88 While we note Canada's statement that "the 'critères' do not fix terms and conditions", we also note
its statement that "[n]o other guidelines etc. exist fixing the terms and conditions of IQ support to the regional
aircraft industry . . . [T]here is no updated version of the 'critères d'évaluation'. They have remained the same
since IQ superseded SDI in 1998" (Response of Canada to Question 42 from the Panel, Responses of Canada to
Questions from the Panel Prior to the Second Meeting of the Panel (Annex B-9)).
89 Response of Canada to Question 42 from the Panel, Responses of Canada to Questions from the
Panel Prior to the Second Meeting of the Panel (Annex B-9).

7.127 For the foregoing reasons, we reject Brazil's claim that IQ mandates the provision of export
subsidies contrary to Article 3.1(a) of the SCM Agreement. We therefore find that IQ as such is not
inconsistent with Article 3.1(a) of the SCM Agreement.
D. EDC / IQ "AS APPLIED"
7.128 Brazil requests "that the Panel find the Canada Account, EDC and IQ programmes
inconsistent with Canada's obligations under the SCM Agreement as applied on the basis of evidence
regarding specific transactions".90
7.129 Canada asserts that a challenge "as applied" is the same thing as a challenge to "specific
transactions".91
7.130 In our view, there are a number of reasons why it would not be appropriate for us to make
separate findings regarding the EDC and IQ programmes "as applied". First, we do not consider that
Brazil's "as applied" claims are independent of its claims regarding "specific transactions". Indeed,
Brazil itself acknowledges that "[i]n order for Brazil to prevail on its 'as applied' claims, the Panel
must find that the challenged programmes have been applied in specific transactions in a manner that
is inconsistent with the SCM Agreement".
92 Since Brazil's "as applied" claims are not independent of
its claims against "specific transactions", and since we make findings regarding "specific
transactions", we see no practical purpose in making "as applied" findings.
7.131 Second, we are unclear as to what the implications of a finding that a programme "as applied"
is inconsistent with Article 3.1(a) of the SCM Agreement would be, particularly in the context of
implementation. One possibility is that a panel might find that a programme "as applied" is
inconsistent with Article 3.1(a) on the basis of findings that all "specific transactions" undertaken thus
far under that programme are inconsistent with Article 3.1(a). In such a case, we fail to see what the
value added in making a finding regarding the programme "as applied" would be, since the
implications for implementation would not extend beyond those "specific transactions". At most, the
implication would be that, in the future, the relevant Member should cease to exercise its discretion in
a manner inconsistent with Article 3.1(a). This would add nothing to the basic requirement of
Article 3.1(a) itself. Another possibility is that a panel might find that a programme "as applied" is
inconsistent on the basis of findings that certain – but not all – "specific transactions" under that
programme are inconsistent.
93 In this case, the implications for implementation would extend beyond
the "specific transactions" in respect of which the panel has made findings. We consider, however,
that it would be inappropriate for a panel to extend its findings in this manner.94

90 Response of Brazil to Question 25 from the Panel, Responses of Brazil to Questions from the Panel
Following the First Meeting of the Panel (Annex A-9). See footnote 14, supra.
91 See Second Written Submission of Canada, paras. 48-52 (Annex B-8).
92 See Response of Brazil to Question 60 from the Panel (emphasis in original), Responses of Brazil to
Questions from the Panel Following the Second Meeting of the Panel (Annex A-14).
93 We wish to clarify that we are not addressing the situation where a Member's discretionary
legislation has functionally become mandatory as a result of that Member exercising its discretion under that
legislation in such a manner that it has become legally bound to continue to exercise its discretion in that manner
in the future.
94 To the extent that implementation of an "as applied" finding would imply that a Member must ensure
against future exercises of discretion in violation of the SCM Agreement, we recall that the Appellate Body
expressed some doubts about such a standard when it noted in Canada – Aircraft – Article 21.5 that "[t]he use
in this standard of 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 … programme. A standard
which, if so read, would, however, 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

7.132 Third, we recall our earlier remarks regarding the application of the mandatory / discretionary
distinction.95 Further, we recall the statement of the panel in United States – Export Restraints that
"the distinction between mandatory and discretionary legislation has a rational objective in ensuring
predictability of conditions for trade. It allows parties to challenge measures that will necessarily
result in action inconsistent with GATT/WTO obligations, before such action is actually taken" 96.
The conclusion by a panel that a programme is discretionary and therefore is not inconsistent with the
WTO Agreement and a subsequent conclusion, by the same panel, that the programme "as applied"
(i.e., the manner in which the discretion inherent in that programme has been applied) is inconsistent
with the WTO Agreement would be of little value. In our view, findings regarding a programme "as
applied" would undermine the utility of the mandatory / discretionary distinction.
7.133 For these reasons, we reject Brazil's claims regarding the EDC and IQ programmes "as
applied".
E. INFORMATION GATHERING BY THE PANEL
7.134 In a letter dated 21 May 2001, Brazil asked the panel to exercise its discretion under
Article 13.1 of the DSU "to request from Canada documents and other information concerning the
terms of any support from 1 January 1995 onward committed or granted by the Export Development
Corporation ("EDC"), Canada Account, Inve stissement Québec ("IQ"), or any subsidiary
organizations thereof, in connection with the sale of regional aircraft by Bombardier" 97. This letter
was received prior to the deadlines for the parties' first written submissions. On 12 June 2001, we
informed the parties that we do "not consider it appropriate to seek any documents or information
from either party until it has at least had an oppor tunity to review both parties' first written
submissions".
7.135 Having reviewed the parties' first written submissions, on 20 June 2001 the Panel asked
Brazil "to provide full details of the terms and conditions of Embraer's offer of financing to Air
Wisconsin", and Canada "to provide full details of the terms and conditions of its Air Wisconsin
transaction". Both parties responded to this request on 25 June 2001. Canada failed to provide a copy
of the information to Brazil on that date. Instead, Canada "ask[ed] the Panel to require that when this
information is provided to Brazil, its disclosure be restricted to officials of the Government of Brazil
and private legal counsel retained and paid for by the Government of Brazil who are directly involved
in this dispute settlement proceeding". In a letter to Canada dated 26 June 2001, the Panel noted that
Canada's letter of 25 June 2001 "was not copied to Brazil, contrary to paragraph 10 of the Panel's
Working Procedures". The Panel further "note[d] that, with the limited exception of paragraph 16, its
Working Procedures do not provide for any special procedures regarding the treatment of business
confidential information. The Panel does not consider it appropriate to introduce such procedures
under the present circumstances, i.e., on the basis of an ex parte request, and without an opportunity to
consult with Brazil". For those reasons, the Panel returned Canada's submission of 25 June 2001. At
the first substantive meeting, Canada informed the Panel that it had not intended to make an ex parte
communication, and that it was not seeking to introduce any special procedures for the treatment of
business confidential information. On that basis, its letter of 25 June 2001 was entered in the record.
7.136 During the course of these proceedings, we also addressed a number of additional requests for
information and / or documentation to Canada. Since we are not a commission of enquiry, we did not

compliance measure" (Canada – Aircraft – Article 21.5, Report of the Appellate Body, footnote 57, supra, para.
38) (emphasis in original).
95 See paras. 7.56-7.57, supra.
96 United States – Export Restraints , Report of the Panel, footnote 34, supra, para. 8.9 (emphasis in
original).
97 Communication of 21 May 2001 from Brazil to the Panel (Annex A-2).

consider it appropriate to seek additional information and / or documentation on the basis of Brazil's
general request of 21 May 2001. We only considered it appropriate to seek additional information /
documentation from Canada on the basis of specific information and / or arguments submitted by
Brazil.
F. CANADA ACCOUNT SUPPORT FOR THE AIR WISCONSIN TRANSACTION
7.137 On 10 May 2001, the EDC offered Canada Account financing for the acquisition by Air
Wisconsin Airlines Corporation ("Air Wisconsin") of [] Bombardier regional jets. The financing will
involve [].98 [].
7.138 Brazil claims that the Canada Account financing to Air Wisconsin constitutes a prohibited
export subsidy, contrary to Article 3.1(a) of the SCM Agreement. Canada asserts that the Canada
Account financing to Air Wisconsin falls within th e scope of the safe haven provided for in the
second paragraph of item (k) of Annex 1 of the SCM Agreement.
7.139 In order to establish that the Canada Account financing to Air Wisconsin constitutes a
prohibited export subsidy, Brazil must demonstrate 99 that the Canada Account financing constitutes a
"financial contribution" that confers a "benefit", within the meaning of Article 1.1 of the
SCM Agreement. Brazil must also demonstrate that the Canada Account financing is "contingent …
upon export performance", within the meaning of Article 3.1(a) of the SCM Agreement. However,
even if Brazil succeeds in establishing that the Canada Account financing to Air Wisconsin is an
export subsidy, we will be precluded from finding that it constitutes a prohibited export subsidy if
Canada demonstrates100 that it falls within the second paragraph of item (k) of the Illustrative List of
Export Subsidies set forth in Annex 1 of the SCM Agreement.
1. Is the Canada Account financing to Air Wisconsin an export subsidy?
7.140 We shall first consider whether Brazil has established that the Canada Account offer to Air
Wisconsin is a "subsidy", i.e., whether it is a "financial contribution" that confers a "benefit". If so,
we shall then consider whether Brazil has established that the subsidy is "contingent … upon export
performance".
(a) Financial contribution
7.141 Brazil asserts that the Canada Account financing to Air Wisconsin is a "financial
contribution" because "Minister Tobin stated that it would take the form of a 'loan', which constitutes
a direct or potential direct transfer of funds, within the meaning of Article 1.1(a)1(i)".101 Canada does
not deny that the Canada Account financing to Air Wisconsin constitutes a "financial contribution".

98 See attachment to communication of 25 June 2001 from Canada.
99 It is now well established that the initial burden lies on the complaining party, which must establish a
prima facie case of inconsistency. The burden then shifts to the defending party, which must counter or refute
the claimed inconsistency ( See European Communities – Measures Concerning Meat and Meat Products
(Hormones), Report of the Appellate Body, WT/DS26/AB/R-WT/DS48/AB/R, adopted 13 February 1998,
para. 98).
100 In our view, the second paragraph of item (k) is available as an exception to the prohibition against
export subsidies contained in Article 3.1(a) of the SC M Agreement. Accordingly, the second paragraph of
item (k) may be invoked by Canada as an affirmative defence to a claim of violation of Article 3.1(a). In this
context, we refer to the second paragraph of item (k) as a "safe haven". As is clear from relevant WTO
jurisprudence, the burden of establishing an affirmative defence rests with the party raising it ( See, for
example, Brazil – Aircraft, Report of the Appellate Body, footnote 35, supra, para. 55).
101 First Written Submission of Brazil, para. 78 (Annex A-3).

7.142 We note that the Canada Account financing to Air Wisconsin will involve []. 102 [ ] a n d i s
therefore a "financial contribution" within the meaning of Article 1.1(a)(1)(i) of the
SCM Agreement.103
(b) Benefit
7.143 Brazil's claim of "benefit" is based on two statements made by Minister Tobin, Canada's
Industry Minister, while announcing the Canada Account financing to Air Wisconsin. 104 M i n i s t e r
Tobin stated that Canada is providing Air Wisconsin with "a better rate than one would normally get
on a commercial lending basis".105 Minister Tobin also stated that Canada was in this instance "using
the borrowing strength and the capacity of the government to give a better rate of interest on a loan
than could otherwise be secured by Bombardier".106
7.144 We recall that a "benefit" is conferred when a recipient receives a "financial contribution" on
terms more favourable than those avai lable to the recipient in the market. 107 In our view, Minister
Tobin's statements indicate that the Canada Account financing to Air Wisconsin, which will take the
form of a loan, will confer a "benefit" because it will be on terms more favourable than those
available to the recipient in the market. This is confirmed by the fact that, in these proceedings,
Canada itself initially considered the terms of the Canada Account financing to Air Wisconsin to be
more favourable than those available in the market108 (and therefore sought to rely on the item (k) safe
haven).
7.145 During the course of these proceedings, however, Canada asserted that the Canada Account
financing to Air Wisconsin did not confer a "benefit " because it is no more favourable than financing
available to Air Wisconsin on the market, in the form of an offer from Embraer. Canada asserts that
the Embraer offer is an appropriate market benchmark against which to measure the Canada Account
financing, because []. In other words, Canada assumes that because [], it should necessarily be treated
as a market offer.
7.146 In these proceedings, Brazil
"[]."
109
7.147 Given the principle of good faith, we accept Brazil's assertion that []. However, that does not
mean that Embraer's offer should be treated as a market offer. In this regard, we note first that [].
Brazil does not deny that these statements were made.
7.148 Second, []. In this regard, we note that Embraer has had frequent recourse to PROEX /
BNDES support in the past. According to Brazil, approximately [] per cent of Embraer's export sales

102 See attachment to communication of 25 June 2001 from Canada. [].
103 Brazil also argues that such a loan would also constitute the provision of a "service[] other than
general infrastructure", within the meaning of Article 1.1(a)(1)(iii). In light of our finding under
Article 1.1(a)(1)(i), we do not consider it necessary to examine Brazil's argument regarding Article 1.1(a)(1)(iii).
104 See First Written Submission of Brazil, para. 79 (Annex A-3).
105 See Transcript of Press Conference of Industry Minister Tobin, 10 January 2001, para. 66
(Exhibit BRA-21).
106 Id., para. 20.
107 See Canada – Aircraft, Report of the Appellate Body, footnote 9, supra, para. 157.
108 See Response of Canada to Question 10 from the Panel, Responses of Canada to Questions from the
Panel Following the First Meeting of the Panel (Annex B-7).
109 See Response of Brazil to Question 32 from the Panel, Responses of Brazil to Questions from the
Panel Following the First Meeting of the Panel (Annex A-9).

of regional jets have involved either BNDES or PROEX support.110 (Canada claims the percentage is
much higher). 111 Similarly, Embraer has reported that "[t]he Brazilian government has been an
important source of export financing for our customers through the BNDES- exim program,
administered by BNDES. In addition, Banco do Brasil S.A., which is owned by the Brazilian
government, administers the ProEx program, which enables some of our customers to receive the
benefit of interest discounts."
112 For the reasons in these two paragraphs, we consider that the Embraer
offer was made with the expectation of support from the Brazilian Government.
7.149 Furthermore, we recall that Canada itself initially considered the Embraer offer to be below
market,113 and that it restated this view towards the end of these proceedings on 8 August 2001, when
it asserted that "it is simply not credible that third-party institutions would provide financing for a
relatively low quality credit such as Air Wisconsin []." 114 We also note Brazil's assertion that the
terms of Embraer's offer do not constitute the "market". 115 At various stages during these
proceedings, therefore, both parties have asserted that the Embraer offer was not a "market" offer.
For these reasons, we are unable to find that Embraer made a "market" offer to Air Wisconsin (despite
the absence of Brazilian Government official support for that offer). 116 We are therefore obliged to
reject Canada's argument that the Canada Acc ount financing to Air Wisconsin did not confer a
"benefit" because it was no more favourable than Embraer's "market" offer.
7.150 In view of the statements made by Minister Tobin upon the announcement of the Canada
Account financing to Air Wisconsin, and our view that Embraer's offer was not a "market" offer, we
find that the Canada Account financing to Air Wi sconsin confers a "benefit" within the meaning of
Article 1.1(b) of the SCM Agreement.
(c) Export contingency
7.151 Brazil asserts that the Canada Account financing to Air Wisconsin is "contingent … upon
export performance" (Article 3.1(a) of the SCM Agreement) because "[t]he Canada Account is used
to support export transactions"117, and because Canada Account is one way for the EDC to satisfy its

110 See Response of Brazil to Panel Question 58 from the Panel, Responses of Brazil to Questions from
the Panel Following the Second Meeting of the Panel (Annex A-14).
111 Canada has expressed "considerable reservations regarding the accuracy of Brazil's response" ( See
Comments of Canada on Responses of Brazil to Questions from the Panel Following the Second Meeting of the
Panel, paras. 15-19 (Annex B-14)). According to Ca nada, Brazil has understated the proportion of Embraer's
export sales of regional jets that have involved either BNDES or PROEX support. We do not consider it
necessary to address this difference of views between the parties, as Brazil's statement that approximately [] per
cent of Embraer's export sales of regional jets have involved either BNDES or PROEX support is sufficient for
us to conclude that Embraer has had frequent recourse to PROEX / BNDES support in the past.
112 Embraer, Securities and Exchange Commission Form 20F-2000, p. 75 (emphasis added)
(Exhibit CAN-67).
113 At para. 46 of its first written submission, Canada referred to "Brazil's below-market financing offer
to Air Wisconsin" (Annex B-4). In its notification under the OECD Arrangement , Canada stated that "[t]he
interest rate [offered by Embraer] is substantially lower than the market rate at which a regional airline like Air
Wisconsin could borrow" (See Exhibit CAN-52, Section 9).
114 See Response of Canada to Question 67 from the Panel, Responses of Canada to Questions from the
Panel Following the Second Meeting of the Panel (Annex B-11).
115 See Second Written Submission of Brazil, paras. 105-106 (Annex A-10).
116 Accordingly, it is not necessary for us to consider whether or not the Canada Account offer to Air
Wisconsin was less favourable than Embraer's offer, as alleged by Canada.
117 Brazil cites language from the EDC's website, "How We Work" (Exhibit BRA-16).

"mandate to support and develop Canada's export trade and Canadian capacity to engage in that trade
and to respond to international business opportunities"118.
7.152 In addressing Brazil's claim of export contingency, we note first that Canada does not deny
that the Canada Account financing to Air Wisconsin is "contingent … upon export performance".
Second, we note that Canada itself has stated that the mandate of the Canada Account is "to support
and develop Canada's export trade and Canadian capacity to engage in that trade and to respond to
international business opportunities" 119. Third, we recall that the EDC, which operates the Canada
Account programme, was "established for the purposes of supporting and developing, directly or
indirectly, Canada's export trade and Canadian capacity to engage in that trade and to respond to
international business opportunities". 120 We therefore consider that any financing provided by the
EDC under the Canada Account is necessarily "contingent … upon export performance", since
anything the EDC does is statutorily for the purpose of "supporting and developing … Canada's
export trade"
121. Fourth, we note that the Canada – Aircraft panel found that the Canada Account
debt financing at issue in that case was "contingent … upon export performance". 122 F o r t h e s e
reasons, we find that support provided under the Canada Account programme, including the financing
to Air Wisconsin, is "contingent in law … upon export performance" within the meaning of
Article 3.1(a) of the SCM Agreement.
(d) Conclusion
7.153 In light of the above considerations, we conclude that the Canada Account financing to Air
Wisconsin is an export subsidy. As such, the Ca nada Account financing will constitute a prohibited
export subsidy unless it falls within the scope of the item (k) safe haven.
2. Does the Canada Account financing to Air Wisconsin fall within the item (k) safe haven?
(a) Arguments of the parties
7.154 Canada submits that the Canada Account support to Air Wisconsin falls within the safe haven
provided for in the second paragraph of item (k), beca use it is "in conformity with" the "interest rates
provisions" of the OECD Arrangement.
7.155 According to Canada, it learned in late October 2000 that Brazil was prepared to finance the
sale of Embraer regional jets to Air Wisconsin "on below-market terms". 123 The information
indicated that Brazil was offering []. Canada considered that it had no choice but to offer Air
Wisconsin debt financing on a matching basis. Therefore, Canada offered []. As a pre-condition to
the financing, Canada required Air Wisconsin to confirm in writing that Canada’s offer was valued by
Air Wisconsin as no more favourable, viewed in its entirety, than that offered by Brazil. Air
Wisconsin provided such written confirmation on 20 March 2001.
7.156 Canada asserts that the Air Wisconsin transaction is consistent with Canada’s
SCM Agreement obligations because Canada is merely matching Brazil’s offer in a manner consistent
with the "interest rates provisions" of the OECD Arrangement. Canada’s financing on a matching
basis thus falls within the exception of the second paragraph of Item (k) in Annex I to the
SCM Agreement. In Canada’s view, matching in the context of the OECD Arrangement qualifies for

118 Brazil refers to an Industry Canada News Release, dated 10 January 2001, concerning, inter alia, the
sale of Bombardier aircraft to Air Wisconsin (Exhibit BRA-3).
119 Industry Canada News Release, 10 January 2001 (Exhibit BRA-3).
120 Export Development Act, footnote 42, supra, Section 10(1).
121 Id.
122 See Canada – Aircraft, Report of the Panel, footnote 9, supra, para. 9.230.
123 First Written Submission of Canada, para. 43 (Annex B-4).

the "safe haven" because the matching provisions of the OECD Arrangement, i.e., Article 29 of the
main text and Articles 25 and 31 of Annex III, are in "conformity" with the "interest rates provisions"
and indeed are themselves "interest rates provisions." A body of disciplines on matching has been
developed in the OECD Arrangement in order to "govern" this practice. In particular, Articles 50
through 53 of the main text set out matching procedures. The mere existence of this body of
disciplines demonstrates that matching is a legitimate exercise that is permitted by, and conforms to,
the OECD Arrangement.
7.157 According to Brazil, recourse to the matching provisions of the OECD Arrangement does not
constitute "conformity with" the "interest rate provisions" of the OECD Arrangement. The ordinary
meaning of item (k), in its context, along with the object and purpose of the SCM Agreement,
supports this interpretation. Furthermore, in Brazil’s view Canada failed to respect the provisions of
Article 53 of the OECD Arrangement, which imposes certain procedural requirements on Participants
seeking to match.
124 Thus, even if matching a derogation could benefit from the item (k) safe haven
in principle, Brazil considers that Canada's failure to respect the Article 53 procedural requirements
would exclude the item (k) safe haven in this case.
(b) Evaluation by the Panel
7.158 As noted above 125, the onus is on Canada to establish that the Canada Account financing to
Air Wisconsin falls within the scope of the safe haven provided for in the second paragraph of
item (k).
7.159 The second paragraph of item (k) provides
… that if a Member is a party to an international undertaking on official export
credits to which at least twelve original Members to this Agreement are parties as of
1 January 1979 (or a successor undertaking which has been adopted by those original
Members), or if in practice a Member applies the interest rates provisions of the
relevant undertaking, an export credit practice which is in conformity with those
provisions shall not be considered an export subsidy prohibited by this Agreement.
7.160 Neither party disputes that the Embraer offer to Air Wisconsin is not consistent with the
OECD Arrangement [].
126 To the extent that the Canada Account financing to Air Wisconsin matches
the Embraer offer, the Canada Account financing therefore matches a derogation.
7.161 In order to avail itself of the item (k) safe haven, Canada must first establish that the matching
of a derogation could, as a matter of law, be "in conformity with" the "interest rates provisions" of the
OECD Arrangement. Only if Canada establishes that this is possible as a matter of law, will we need
to consider whether Canada has met its burden of establishing that the Canada Account financing to
Air Wisconsin is matching according to the provisions of the OECD Arrangement. Similarly, only if
Canada establishes that matching a derogation could, as a matter of law, fall within the item (k) safe

124 First, Brazil states that Canada failed to comply with Article 53(a) of the OECD Arrangement ,
whereby Participants "shall make every effort to verify" that terms not conforming with the OECD Arrangement
are "officially supported". Second, Brazil asserts that Canada has not demonstrated that it informed its fellow
Participants of the nature and outcome of the verification efforts called for by Article 53(a). Nor has it provided
evidence demonstrating that it notified other OECD Arrangement Participants of the terms and conditions of its
support for the Air Wisconsin transaction, as it is required to do under Articles 53(b) and 47(a) of the
OECD Arrangement. Third, Brazil submits that Article 53, which regulates matching of non-conforming terms
and conditions offered by a non-participant, does not permit non-identical matching.
125 See para. 7.139, supra.
126 See Articles [] of the Sector Understanding on Export Credits for Civil Aircraft.

haven, will we need to address Brazil's arguments regarding Canada's alleged failure to comply with
the procedural requirements of Articles 47(a) and 53 of the OECD Arrangement.
7.162 In determining whether the matching of a derogation could, as a matter of law, be "in
conformity with" the "interest rates provisions" of the OECD Arrangement, we recall that Article 31.1
of the Vienna Convention on the Law of Treaties provides that a treaty shall be interpreted "in good
faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context
and in the light of its object and purpose."
7.163 The concept of "conformity" with the "interest rates provisions" of the OECD Arrangement
was addressed by the panel in Canada – Aircraft – 21.5 .127 That panel considered, on the basis of a
textual analysis, that conformity with the interest rates provisions of the OECD Arrangement had to
be judged on the basis of (i) conformity with the minimum interest rates provision, i.e. the CIRR, and
(ii) adherence to those provisions of the OECD Arrangement which "operate to support or reinforce
the minimum interest rate rule". 128 The panel considered that its textual analysis was confirmed by
the context of the second paragraph of item (k), and the object and purpose of the SCM Agreement.
7.164 With regard to matching, the Canada – Aircraft – 21.5 panel took the view that offers that
matched a permitted exception (an action itself foreseen and permitted within limits by the
Arrangement) "conformed" with the provisions of the OECD Arrangement and, hence, also
"conformed" with the interest rates provisio ns in the sense of the safe haven clause. 129 In contrast,
offers that matched a derogation (an action itself not permitted under any circumstances by the
Arrangement) were not "in conformity" with the provisions of the OECD Arrangement and, as a
result, were also not "in conformity" with the interest rates provisions in the sense of the safe haven
clause.130 The Canada – Aircraft – Article 21.5 panel stated, in this regard, that, if it were accepted
that matched derogations were "in conformity" with the interest rates provisions of the OECD
Arrangement, then the concept of "conformity" could not possibly discipline official financing
support.131 T h e Canada – Aircraft – Article 21.5 panel also recalled that non-Participants to the
OECD Arrangement would not, as a matter of right, have access to information regarding the terms
and conditions offered or matched by Participants. Such information was available only to
Participants. Thus, if matched derogations were eligible for the safe haven in the second paragraph of
item (k), non-Participants would be at a systematic disadvantage vis-à-vis Participants.
132 The
Canada – Aircraft – Article 21.5 panel also stressed the importance of avoiding an interpretation of
item (k), second paragraph, that would lead to structural inequity in respect of developing country
Members.133
7.165 The findings of the Canada – Aircraft – Article 21.5 panel on item (k) were not appealed by
Canada (or Brazil) and were subsequently adopted by the DSB on 4 August 2000. The findings of
that panel regarding the exclusion of the matching of a derogation from the item (k) safe haven were
found "persuasive" by the Brazil – Aircraft – Second Article 21.5 panel.
134 The report of that panel
was not appealed by Canada (or Brazil) a nd was subsequently adopted by the DSB on

127 Canada – Aircraft – Article 21.5, Report of the Panel, footnote 57, supra.
128 Canada – Aircraft – Article 21.5, Report of the Panel, footnote 57, supra, para. 5.114.
129 Id., paras. 5.124 and 5.126. The Canada – Aircraft – Article 21.5 panel referred to Articles 29 and
51 of the OECD Arrangement as well as Articles 25, 29(d), and 31 of the Sector Understanding on Civil
130 Id., paras. 5.125-5.126. The Canada – Aircraft – Article 21.5 panel referred to Articles 29 and 47(b)
of the OECD Arrangement as well as Articles 25, 29(d), and 31 of the Sector Understanding on Civil Aircraft
(Id., para. 5.125 and footnote 113).
131 Id., paras. 5.120 and 5.125.
132 Id., para. 5.134.
133 Id., para. 5.136.
134 Brazil – Aircraft – Second Article 21.5, Report of the Panel, footnote 35, supra, para. 5.113.

23 August 2001. We consider that the findings of both the abovementioned panels are persuasive, and
endorse those panels' interpretations of the second paragraph of item (k). The approach of these
panels appears to us to be entirely consistent with the wording of the second paragraph of item (k).
Indeed, if one were to accept that the matching of a derogation could fall within the item (k) safe
haven, one would effectively be accepting that a Member could be "in conformity with" the "interest
rates provisions" of the OECD Arrangement even though that Member failed to respect the CIRR (or
a permitted exception). In our view, such an interpretation would be unjustified.
7.166 Canada has sought to distinguish the findings of the Canada – Aircraft – 21.5 panel.
135
Canada notes that the panel opined as to which provisions of the OECD Arrangement would
constitute "interest rates provisions" on the theory that its mandate was to determine what was
necessary to "ensure" compliance, and that the panel offered its opinion in the absence of an actual
disputed transaction. While Canada's observations may be factually accurate, in our view they do not
render the panel's reasoning any less persuasive.
7.167 Canada considers that the matching provisions of the OECD Arrangement, i.e., Article 29 of
the main text and Articles 25 and 31 of Annex III, are in "conformity" with the "interest rates
provisions", and indeed are themselves "interest rates provisions", because a body of disciplines on
matching has been developed in the OECD Arrangement in order to "govern" this practice. In this
regard, Canada refers to the procedures set forth in Articles 50 through 53. We note, however, that
Canada argues that the availability of the item (k) safe haven is not conditional on fulfilment of the
procedural requirements set forth in Articles 50 – 53 of the OECD Arrangement.
136 In our view, it
would be anomalous to find that all forms of matching could in principle fall within the scope of the
item (k) safe haven on the basis of the procedures set forth in Articles 50 – 53 of the
OECD Arrangement, if compliance with those procedures was not required in order to benefit from
the item (k) safe haven in a given case.
7.168 Canada also states that the Appellate Body in Brazil – Aircraft "mentioned the possibility of
using the 'matching' provisions of the OECD Arrangement".
137 We note, however, that the Appellate
Body expressly stated that "'matching' in the sense of the OECD Arrangement [was] not applicable in
[that] case".138 The Appellate Body cannot, therefore, be understood to have made any findings on
this issue. In addition, we note that there is noth ing to suggest that the Appellate Body was referring
to the matching of a derogation, as opposed to the matching of a permitted exception . As explained
by the Canada – Aircraft – 21.5 panel, this distinction has significant implications for the application
of the item (k) safe haven.139
7.169 Canada submits that the text of the OECD Arrangement does not support the interpretation of
the Canada – Aircraft – 21.5 panel. In particular, Canada argues that Article 29 specifically permits
matching as a response to an "initiating offer" that may or may not comply with the
OECD Arrangement. According to Canada, it is the initiating offer that may be the derogation, but
never the (matching) response, because the initiating offer – when it amounts to a derogation – is

135 Although the report of the Brazil – Aircraft – Second 21.5 panel was not adopted at the time that the
parties made their submissions in these proceedings, th at panel issued its interim report to the parties on
20 June 2001, before our first substantive meeting with the parties. Thus, although we did not have access to
that interim report, the parties could have taken the interim findings of that panel into account for the purpose of
making their submissions in the present proceedings.
136 Canada submits that the term "interest rates provisions" excludes "procedural requirements with
which a non-Participant inherently could not comply", although Canada asserts that matching must nevertheless
be "undertaken in good faith and on the basis of reasonable due diligence" ( See First Written Submission of
Canada, para. 56 and footnote 46 (Annex B-4)).
137 First Written Submission of Canada, footnote 40 (Annex B-4).
138 Brazil – Aircraft, Report of the Appellate Body, footnote 35, supra, para. 185.
139 See 7.164, supra.

specifically prohibited under Article 27, whereas th e (matching) response is specifically permitted by
Article 29. We note that Canada made this argument in the Canada – Aircraft – 21.5 proceedings,
and that the panel dealt with Canada's argument by observing that, "although matching of derogations
is in certain cases not prohibited, this does not alter the fact that both the original derogation and the
matching remain, by the Arrangement's own terms out of conformity with the provisions of the
Arrangement."140 The panel also noted that "Canada's approach would directly undercut real
disciplines on official support for export credits".141 We see no reason not to adopt the same approach
to Canada's argument in these proceedings. In our view, in such cases the matching interest rate is
simply not "in conformity with [the interest rates] provisions", as that expression is used in the
SCM Agreement.
7.170 Canada also submits that although the SCM Agreement disciplines trade distorting subsidies,
the prospective nature of the dispute settlement remedies means that – in the absence of matching –
illegal subsidisers will have a perpetual advantage. According to Canada, incorporating the matching
disciplines of the OECD Arrangement in the item (k) safe haven prevents this. In our view, however,
it is not entirely clear that the WTO dispute settlement system only provides for prospective remedies
in cases involving prohibited export subsidies. In this regard, we recall that the Australia – Leather –
Article 21.5 panel found that remedies in cases involving prohibited export subsidies may encompass
(retrospective) repayment in certain instances.
142 In any event, even if the WTO dispute settlement
mechanism does only provide for prospective remedies, we note that it does so in respect of all cases,
and not only those involving prohibited export subsidies. Article 23.1 of the DSU provides that
Members shall resolve all disputes through the multilateral dispute system,
143 to the exclusion of
unilateral self-help. Thus, to the extent that the WTO dispute settlement system only provides for
prospective remedies, that is clearly the result of a policy choice by the WTO Membership. Given
this policy choice, and given the fact that Article 23.1 of the DSU applies to all disputes, including
those involving (alleged) prohibited export subsidies, we see no reason why the (allegedly)
prospective nature of WTO dispute settlement remedies should impact on our interpretation of the
second paragraph of item (k).
7.171 In addition, Canada considers it significant that the Illustrative List of Export Subsidies
contained in Annex 1 of the SCM Agreement was carried over from the Tokyo Round Subsidies
Code. Canada notes that the OECD Arrangement was adopted in 1978, after more than ten years of
negotiations. In 1979, the Tokyo Round Subsidies Code was agreed together with other Tokyo Round
Agreements. Given that the signatories of the GATT Subsidies Code were at the same time
participants in the OECD Arrangement , Canada believes it is illogical that the signatories of the
GATT Subsidies Code would have allowed matching in the OECD Arrangement but then would have
forbidden it in the Subsidies Agreement one year later. In our view, it is not our role to pass judgment
on the logic of the signatories of the GATT Subsidies Code. Like the Canada – Aircraft – 21.5 and
Brazil – Aircraft – Second 21.5 panels, we have confined our interpretation to the wording of the
second paragraph of item (k), read in context, and in light of the object and purpose of the
SCM Agreement. Furthermore, we note that Canada refers to the GATT Subsidies Code in a section
of its first written submission concerning the obj ect and purpose of the SCM Agreement. In this
regard, we do not consider that the object and purpose of the SCM Agreement is necessarily the same

140 Canada – Aircraft – Article 21.5 , Report of the Panel, footnote 57, supra, para. 5.125 (emphasis in
original).
141 Id.
142 Australia – Subsidies Provided to Producers and Exporters of Automotive Leather – Recourse by
the United States to Article 21.5 of the DSU , Report of the Panel, WT/DS126/RW, adopted 11 February 2000,
para. 6.39.
143 Article 23.1 of the DSU states: "When Members seek the redress of a violation of obligations or
other nullification or impairment of benefits under the covered agreements or an impediment to the attainment
of any objective of the covered agreements, they shall ha ve recourse to, and abide by, the rules and procedures
of this Understanding."

as the object and purpose of the GATT Subsidies Code. For example, the SCM Agreement provides
for more extensive special and differential treatment for developing countries than the GATT
Subsidies Code did. In addition, the preamble to the Marrakesh Agreement Establishing the World
Trade Organization, of which Agreement the SCM Agreement is an integral part, recognises "that
there is need for positive efforts designed to ensure that developing countries, and especially the least
developed among them, secure a share in the growth in international trade commensurate with the
needs of their economic development". No such "n eed" was identified in the GATT Subsidies Code.
In addition, all WTO Members are bound by the SCM Agreement, whereas only a number of GATT
Contracting Parties were signatories of the GATT Subsidies Code. Furthermore, the provisions of the
SCM Agreement – unlike those of the GATT Subsidies Code – are subject to binding dispute
settlement under the DSU.
7.172 Canada also notes the statement by the Canada – Aircraft – 21.5 panel that, with the scope of
the item (k) exemption left in the hands of a certain subgroup of WTO Members – the Participants –
to define, the second paragraph of item (k) should not be interpreted in a manner that allows that
subgroup of Members to create for itself de facto more favourable treatment than under the
SCM Agreement than is available to all other WTO Members.
144 Canada asserts that the application
of all the "interest rates provisions" of the OECD Arrangement – including matching – is not de facto
more favourable treatment for Participants, because the right to offer terms on a matching basis is
available to all WTO Members. While we accept that all WTO Members would have the right to
match derogations, were such matching to fall within the scope of the item (k) safe haven, we note
that non-Participants would still be at a "systematic disadvantage as they would not have access to the
information about the terms and conditions being offered or matched by Participants". 145 Thus, while
both Participants and non-Participants may have the right to match derogations, it cannot be assumed
that non-Participants would always have the information needed to exercise that right in practice.146
7.173 Canada denies that there is any "systematic disadvantage" to non-Participants, as they are
under no obligation to provide information on matching offers to anyone. By contrast, Canada notes
that Participants must notify their matching, which therefore is subject to prior scrutiny by other
Participants. Canada further notes that, although non-Participants would not receive the terms and
conditions of Participants' matching offers, Participants would likewise not receive non-Participants'
matching offers. Moreover, Canada suggests that non-Participants are advantaged because the OECD
Arrangement is a public document, and non-Participants therefore know the basic terms and
conditions that Participants may offer. However, the terms and conditions of non-Participants' offers
are not public knowledge.
7.174 We fail to see how the fact that matching by Participants is subject to prior scrutiny removes
the "systematic disadvantage" resulting from the fact that non-Participants will have no formal means
of knowing what terms and conditions (offered by Participants) they are entitled to match. Nor is this
"systematic disadvantage" for non-Participants removed by the fact that Participants will not receive
the terms and conditions of non-Participants' offers. The fact that Participants may not know
precisely what terms and conditions are being offered by non-Participants does not change the fact
that non-Participants have no formal means of knowing what terms and conditions are being offered
by Participants. In addition, we consider that Ca nada's argument that non-Participants know what

144 Canada – Aircraft – Article 21.5, Report of the Panel, footnote 57, supra, para. 5.132.
145 Canada – Aircraft – Article 21.5 , Report of the Panel, footnote 57, supra, para. 5.134, and Brazil –
Aircraft – Second Article 21.5, Report of the Panel, footnote 35, supra, para. 5.117.
146 The European Communities argues that if a non-Participant has doubts about the reliability of the
alleged offer of non- OECD Arrangement terms that it is invited to match, it may request confirmation of them
from the offeror. While non-Participants may be able to obtain information in this manner, they would still be at
a "systematic disadvantage" compared to Participants in all those situations where Participants notify other
Participants, on their own motion, of non-conforming terms, as required by the OECD Arrangement.

basic terms and conditions Participants may offer (because the OECD Arrangement is a public
document) is irrelevant to the issue at hand. We are concerned with the matching of a derogation,
which by definition is not in conformity with the terms and conditions of the OECD Arrangement.
The point is that, while non-Participants may know what terms and conditions Participants are
supposed to offer, they have no formal means of knowing when Participants derogate from those
terms and conditions.
7.175 The European Communities asserts that the Canada – Aircraft – 21.5 panel adopted a
"strained reasoning" that ignores the informal and "gentleman’s agreement" character of the OECD
Arrangement, a non-binding instrument which is designed to provide a framework for transparency
and fair competition in the field of export credit transactions between the participants and to be
applied flexibly. According to the European Commun ities, a more teleological reason for the panel’s
conclusion was its view that matching would "directly undercut real disciplines on official support for
export credits."
147 The European Communities asserts, however, that that view is not shared by the
Participants to the OECD Arrangement themselves, who obviously regard matching as being
compatible with effective disciplines on export credits.148
7.176 In our view, the fact that the OECD Arrangement allows matching of derogations, or the fact
that Participants view matching of derogations as a means of disciplining export credits, does not
necessarily mean that the SCM Agreement should allow matching of derogations. Unlike the
OECD Arrangement, the SCM Agreement is not an "informal" "gentleman's agreement". The
SCM Agreement therefore does not need to allow rec ourse to the matching of derogations in order to
instil discipline. The SCM Agreement is a binding instrument, and is therefore enforceable through
the WTO dispute settlement mechanism.
149

147 Canada – Aircraft – 21.5, Report of the Panel, footnote 57, supra, para. 5.125.
148 A similar argument was expressed by the United States, which referred to the matching provisions
of the OECD Arrangement as its "key enforcement provision" (Third-Party Submission of the United States,
para. 12 (Annex C-2)).
149 In this regard, we endorse the following findings of the Brazil – Aircraft – Second 21.5 panel: "It
seems to us that both third parties tend to argue – incorrectly – from the standpoint of the OECD Arrangement
rather than from the standpoint of the safe haven clause and the SCM Agreement. The United States considers
that it would be unfortunate if Participants to the OECD Arrangement were dissuaded from using its matching
provisions for fear that doing so might be contrary to the provisions of the SCM Agreement. The United States
appears to suggest that, deprived of the possibility of matching, Participants would somehow be left defenceless
in the face of non-conforming practices under the OECD Arrangement . This is not the case, however. It
notably overlooks the fact that, to the extent those non-conforming practices are covered by the
SCM Agreement, they would be enforceable through the WTO dispute settlement mechanism.
The European Communities asserts that the reasoning on matching by the Article 21.5 Panel ignores
the fact that the OECD Arrangement is a non-binding gentlemen's agreement. The Article 21.5 Panel was well
aware of the nature of the OECD Arrangement. As we understand it, however, the Article 21.5 Panel based its
view on the provisions of the SCM Agreement and the need to prevent the scope of the safe haven clause from
being improperly enlarged. It convincingly st ated that, to accept, for purposes of the SCM Agreement, that even
non-conforming departures from the provisions of the OECD Arrangement were covered by the safe haven,
would, in effect, remove any disciplines on official financing support for export credits. The European
Communities contests that statement, arguing that the Participants to the OECD Arrangement consider matching
to be compatible with effective disciplines on officially supported export credits. However, the fact that the
OECD Arrangement allows matching of derogations does not logically imply that it should also be allowed
under the SCM Agreement. Indeed, the OECD Arrangement and the SCM Agreement are very different. The
European Communities itself acknowledges that the OECD Arrangement is a non-binding gentlemen's
agreement. In those circumstances, matching may serve an important deterrent and enforcement function. That
rationale for matching does not apply to the SCM Agreement. The SCM Agreement is a binding instrument, and
it is enforceable through the WTO dispute settlement mechanism. The European Communities' argument is

7.177 The United States contends that the Canada – Aircraft – 21.5 panel’s concern (in para. 5.138)
that Canada’s interpretation would permit Members to "opt out" of their WTO obligations on the basis
of the behaviour of non-Members is misplaced, because if matching is shielded by the item (k) safe
harbour, then a Member who matches a non-conforming offer is acting in accordance with its WTO
obligations. In our opinion, the concern expressed by the Canada – Aircraft – 21.5 panel was that a
"Member's conformity with GATT/WTO rules [should not be] defined by the behaviour of non-
Members". We agree. This concern would arise even if the inclusion of the matching of a derogation
in the item (k) safe haven would mean that matching Members were acting in accordance with their
WTO obligations. This is because the inclusion of the matching of a derogation in the item (k) safe
haven would not establish any objective benchmark against which to determine whether or not a
Member is in accordance with its WTO obligations. In any given case, the benchmark would be set
by reference to the terms and conditions of the non-conforming offer. To the extent that the non-
conforming offer were made by a non-WTO Member, the benchmark for determining whether or not
a matching Member acts in accordance with its WTO obligations would therefore be the non-
conforming terms and conditions offered by the non-Member. Thus, the fact that the matching of a
derogation is included in the second paragraph of item (k) would not remove the potential for a
"Member's conformity with GATT/WTO rules [to be] defined by the behaviour of non-Members".
7.178 The United States also asserts that, contrary to the Canada – Aircraft – 21.5 panel’s concern,
Canada’s approach to this issue does not raise the issue of "structural inequity" in respect of
developing countries.
150 The United States notes that Article 27 of the SCM Agreement exempts
developing countries from the prohibitions of paragraph 1(a) of Article 3, subject to compliance with
the provisions in Article 27.4. This exemption applies to all export subsidies, not just to export
credits. The United States notes that the exemption in the second paragraph of item (k), by contrast, is
much more limited. Despite its more limited scope, however, the United States argues that the
item (k) safe harbour was an important part of the overall package that WTO Members agreed to
when they accepted the SCM Agreement.
7.179 We understand the United States to argue that the inclusion of the matching of derogations in
the item (k) safe harbour would only undermine part of the special and differential treatment provided
for developing country members, and that this more limited structural inequity in respect of
developing countries should be tolerated because of the importance attached by Members to the
item (k) safe harbour. In our view, however, Article 27 accords developing country Members special
and differential treatment in respect of all export subsidies, whatever form they take. Thus, to the
extent that an export credit constitutes an export subsidy, it falls within the scope of Article 27, and
developing country Members are in principle entitled to special and differential treatment in respect of
that export credit. We are therefore unable to interpret the second paragraph of item (k) in a manner
that would render Article 27, in part at least, ineffective.
151

therefore unavailing" ( Brazil – Aircraft – Second 21.5 , Report of the Panel, footnote 35, supra, paras 5.114-
5.115, footnotes omitted).
150 We recall that the Canada – Aircraft – 21.5 panel had referred to the possibility of Canada's
interpretation of the second paragraph of item (k) "result[ing] in either more favourable treatment, de facto, for
developed compared to developing countries, or the de facto elimination of special and differential treatment for
developing countries" ( Canada – Aircraft – 21.5 , Report of the Panel, footnote 57, supra, para. 5.136). That
panel referred to the possibility of a developed country Member matching the subsidised terms of a developing
country Member, even though those terms are in accord ance with a provision according special and differential
treatment to that Member, such as Article 27 of the SCM Agreement.
151 See United States – Standards for Reformulated and Conventional Gasoline , Report of the
Appellate Body, WT/DS2/AB/R-WT/DS4/AB/R, adopted 20 May 1996, p. 23, and Japan – Alcoholic
Beverages II, Report of the Appellate Body, footnote 59, supra, p. 12.

(c) Conclusion
7.180 For the above reasons, we conclude that Canada has failed to establish that the matching of a
derogation could, as a matter of law, be "in conformity with" the "interest rates provisions" of the
OECD Arrangement. As a matter of law, therefore, the matching of a derogation could not fall within
the scope of the item (k) safe haven.
7.181 In light of our conclusion in the preceding paragraph, it is not necessary for us to consider
whether, as a matter of fact, the Canada Account financing to Air Wisconsin constitutes matching
according to the provisions of the OECD Arrangement. Similarly, it is not necessary for us to examine
Brazil's claims that Canada failed to comply with the procedural requirements set forth in
Articles 47(a) and 53 of the OECD Arrangement.
3. Conclusion
7.182 We have found that the Canada Account financing to Air Wisconsin is a subsidy that is
"contingent … upon export performance". We have further found that the Canada Account financing,
which Canada characterises as the matching of a derogation under the OECD Arrangement, cannot as
a matter of law benefit from the item (k) safe haven. In light of these findings, we conclude that the
Canada Account financing to Air Wisconsin is a prohibited export subsidy, contrary to Article 3.1(a)
of the SCM Agreement.
G. OTHER EDC TRANSACTIONS
7.183 Brazil has made detailed claims regarding financing provided by the EDC to the following
purchasers of Bombardier regional jets: Atlantic Southeast Airlines ("ASA"), Atlantic Coast Airlines
("ACA"), Comair, Kendell, and Air Nostrum. The EDC provided financing to all of these airlines
under the EDC Corporate Account. Some of the EDC financing to Air Nostrum was also provided
under the EDC's Canada Account.
7.184 Brazil claims that the abovementioned financing took the form of prohibited export subsidies.
Brazil claims that EDC financing is a direct transfer of funds in the form of a loan, which constitutes a
"financial contribution" within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement. Brazil also
asserts that the provision of loans by the EDC is a "service[] other than general infrastructure", within
the meaning of Article 1.1(a)(1)(iii). Brazil claims that EDC financing confers a "benefit" within the
meaning of Article 1.1(b), and is therefore a subsidy, because it is provided to the recipient airlines on
terms more favourable than the recipients could obtain in the market. Brazil claims that EDC
financing is "contingent … upon export performance" because the EDC was "established … for the
purposes of supporting and developing, directly or indirectly, Canada's export trade and Canadian
capacity to engage in that trade and to respond to international business opportunities."
152
7.185 Canada agrees that EDC financing is a "financial contribution" within the meaning of
Article 1.1(a)(1)(i). However, Canada denies that the provision of EDC loans is a "service[] other
than general infrastructure", within the meaning of Article 1.1(a)(1)(iii). Canada agrees that the
existence of a "benefit" can be determined by examining whether or not a financial contribution is on
terms more favourable than those available to the recipient in the market. According to Canada, all
Corporate Account financing for regional aircraft since 1998 has been provided on a commercial
basis, and therefore does not confer a "benefit". Canada does not deny that EDC support is
"contingent … upon export performance".

152 Export Development Act , footnote 42, supra, Section 10(1); Export Development Corporation
Annual Report 2000, p. 47 (Exhibit BRA-22).

7.186 In order for Brazil's claims to succeed, it must be demonstrated that the EDC loans at issue
are subsidies, by virtue of being "financial contributions" that confer a "benefit". It must also be
demonstrated that the EDC financing at issue, if found to constitute subsidisation, is "contingent …
upon export performance".
7.187 We note that the parties agree that the EDC loans at issue take the form of "direct transfer[s]
of funds" within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement. We agree, and therefore
find that the EDC loans at issue constitute "f inancial contributions" within the meaning of
Article 1.1(a)(1) of the SCM Agreement.153
7.188 Brazil makes a number of general arguments in support of its claim that the EDC financing at
issue confers a "benefit". These general arguments apply in respect of most of the EDC transactions
at issue. Brazil also makes a number of arguments that are transaction-specific, in the sense that they
only relate to certain EDC transactions. We begin by examining whether any of the general
arguments relied on by Brazil demonstrate that a "benefit" is conferred by the EDC financing at issue.
We shall then examine Brazil’s transaction-specific arguments. If, on the basis of the above, we find
that any of the EDC financing at issue confers a "benefit", we shall then determine whether or not
that EDC financing is "contingent … upon export pe rformance" within the meaning of Article 3.1(a)
of the SCM Agreement.
7.189 In addressing Brazil's arguments, we will be guided by the findings of the panel and Appellate
Body in Canada – Aircraft. In that case, the panel found that
a financial contribution will only confer a "benefit", i.e., an advantage, if it is
provided on terms that are more advantageous than those that would have been
available to the recipient on the market.
154
7.190 The Appellate Body upheld the findings of the panel, ruling that
the marketplace provides an appropriate basis for comparison in determining whether
a "benefit" has been "conferred", because the trade-distorting potential of a "financial
contribution" can be identified by determining whether the recipient has received a
"financial contribution" on terms more favourable than those available to the recipient
in the market.
155
1. Brazil’s general "benefit" arguments
7.191 Brazil advances four general arguments in support of its claim that the EDC financing at issue
confers a "benefit". First, Brazil asserts that the EDC financing is inconsistent with certain indications
of market financing allegedly relied on by Canada in the Brazil – Aircraft – Second 21.5 proceedings.
Second, Brazil asserts that the EDC’s financing was offered on the basis of an unreliable credit rating
tool. Third, Brazil submits that the EDC financing at issue is more favourable than a "market"
benchmark constructed by Brazil on the basis of Enhanced Equipment Trust Certificate ("EETC")
data. Fourth, Brazil asserts that the EDC failed to base its terms on financing procured by Bombardier
customers from commercial institutions.

153 On the basis of this finding, we do not consider it necessary to consider whether or not the provision
of EDC financing constitutes the provision of "services other than general infrastructure" within the meaning of
Article 1.1(a)(1)(iii) of the SCM Agreement.
154 Canada – Aircraft, Report of the Panel, footnote 9, supra, para. 9.112.
155 Canada – Aircraft, Report of the Appellate Body, footnote 9, supra, para. 157.

(a) Indications of market financing allegedly relied on by Canada in the Brazil – Aircraft – 21.5
proceedings
7.192 Brazil refers to the following statements made by Canada in the Brazil – Aircraft – 21.5
proceedings:
British Airways, which is the best rated non-Sovereign airline, obtains rates of
LIBOR [London Inter-Bank Offer Rate] + 30 to 40 bps for large aircraft deals (an
additional 20-30 bps [basis points] should be added for regional aircraft, even for
clients with British Airways' credit rating). This translates … to T [US Treasury
fixed rate 10-year notes] + 105-120 (+125-150 for regional aircraft). … Indeed,
AAA-rated industrials (and there are no airlines with this rating) cannot obtain credit
at T + 20; AAA's tend to pay a spread of approximately 70 bps.156
[A] representative sample of airline companies operating in the US market obtained
financing at T+110 to 250 basis points (based on a weighted average of the different
tranches of the financing transaction). It has also noted that the net interest rate
payable by a borrower with a particularly poor credit rating may be in excess of
T+350 basis points.157
7.193 According to Brazil, these statements mean th at, "in Canada’s view, the appropriate spread
for the best-rated airline for a regional jet transaction would be either LIBOR + 50-70 bps (floating
rate) or T-bill plus 125-150 bps (fixed rate transactions). For a ' representative' airline with a credit
rating ranging from AAA to BBB-, the appropriate spread woul d be up to T-bill + 250 bps. Airlines
that are less credit worthy have a credit rating 'in excess of T + 350 bps'." 158 Brazil relies on this
interpretation of Canada's statements to challenge EDC financing to ASA, ACA, Comair, Kendell,
and Air Nostrum.
159
7.194 Canada asserts that Brazil "misrepresents and distorts" Canada's argument in the Brazil –
Aircraft – 21.5 proceedings. According to Canada,
[t]he essence of Canada's argument was that the rate offered under PROEX II [the
Brazilian interest rate support programme at issue in Brazil – Aircraft – 21.5 ], US
Treasury plus 20 bps, was not available in the market. Moreover, Canada cautioned
that although that rate was under no circumstances available, the other rates to which
it referred – and to which Brazil now refers in its 31 July statement – do not establish
a hard limit for the international aircraft financing market. As Canada explained:
"Prevailing market conditions, different payment profiles, or terms,
or other conditions negotiated between a lender and a borrower could
affect the final interest rate, resulting in higher or lower rates [than
those to which Canada referred in that proceeding]."
Nevertheless, in paragraphs 48 and 49 of its 31 July statement and Exhibit BRA 64,
Brazil attempts to attribute to Canada the position that: "For a ‘representative’ airline
with a credit rating ranging from AAA to BBB-, the appropriate spread would be up

156 Brazil – Export Financing Programme for Aircraft – Recourse by Canada to Article 21.5 of the
DSU (" Brazil – Aircraft – 21.5 "), Report of the Panel, WT/DS46/RW, adopted 4 August 2000, Annex 1-2,
footnote 26.
157 Id., Annex 1-5, para. 11. We note that a "basis point" is equivalent to 0.01 per cent.
158 Oral Statement of Brazil at the Second Meeting of the Panel, para. 49 (Annex A-12).
159 In particular, Brazil claims that the EDC provid ed financing below the spreads allegedly identified
by Canada for "best-rated", "representative" and "less credit worthy" airlines.

to T-bill +250 bps." This is patently false. Exhibit BRA-64 describes the weighted
average of particular tranches of airline debt. It does not describe a generically
appropriate interest-rate spread based on an airline’s credit rating.
Nowhere in the submissions Brazil cites, did Canada argue on the basis of that data
that airlines from AAA to BBB- would have to pay spreads of up to 250 bps over US
Treasury. Moreover, while Canada pointed out the rates that British Airways was
paying at the time as the best-rated non-sovereign airline, Canada did not argue that
highly rated airlines would have to pay US Treasury plus 125 bps or more. Canada
could not have made such an argument: the data Canada provided (now Brazil’s
Exhibit BRA-64) shows that American Airlines, which at the time was rated BBB- by
Standard & Poor’s, was paying, on a weighted average basis, 111 bps over US
Treasury.
160
7.195 There is, therefore, significant disagreement between the parties as to how the
abovementioned statements by Canada in Brazil – Aircraft – 21.5 should be interpreted. In our view,
Brazil seeks to make more of Canada's statements than is appropriate. 161 For example, we do not
understand Canada to have advanced generally applicable interest rate spreads based on an airline's
credit ratings. In any event, we do not consider it necessary to attempt to resolve the disagreement
between the parties concerning Canada's statements in prior proceedings, since we have before us a
far more developed factual record than was needed by or available to the panel in Brazil – Aircraft –
21.5. Given the volume of data before us, which includes specific spreads levied on airlines with
specific credit ratings, we do not consider it necessa ry to concern ourselves with alleged spreads for
general categories of "representative", or "best rated" airlines. To the extent that we have the means
to determine what the market would charge for specific airlines with specific credit ratings, we do not
consider it necessary to refer to spreads for airlines broadly categorised as "representative", or "best
rated".
(b) EDC credit ratings
7.196 Brazil asserts that there are serious questions regarding the reliability of offers based on the
output from LA Encore, the EDC's credit rating prog ramme. Brazil raises two issues in this regard.
First, Brazil asserts that LA Encore is unreliable as an objective tool. Second, Brazil asserts that LA
Encore overstates credit ratings by four to ten notches. 162 Brazil asserts that, since each notch may
account for a difference of approximately 15 basis points in the spread offered to a company, 163 this
discrepancy could make a difference of between 50 and 150 basis points in an offering spread.
LA Encore unreliable as an objective tool
7.197 Brazil considers that LA Encore is unreliable as an objective tool because it has been
customised to use subjective factors. Brazil asse rts that Canada has not provided any information
regarding the precise manner in which the EDC has customised LA Encore, or any description of the
subjective factors used in the programme. Brazil asserts that Canada acknowledges that LA Encore
underwent a "re-calibration of specific weighting", but does not explain how this was done. Brazil
also states that the flexibility and customisation of LA Encore seems to be one of the main

160 Response of Canada to Oral Statement of Brazil at the Second Meeting of the Panel, paras. 22-24
(footnotes omitted, emphasis in original) (Annex B-12).
161 Nevertheless, we note that Canada has not denied in these proceedings that an additional 20-30 basis
points should be added to large aircraft spreads in order to arrive at an appropriate spread for regional aircraft
transactions.
162 A firm's credit rating will increase by one "notch" when the new rating is one level higher than the
former rating.
163 See Oral Statement of Brazil at the Second Meeting of the Panel, para. 54 (Annex A-12).

characteristics of the software. Brazil cites a finding in a report relied on by Canada to the effect that
"this flexibility generally precludes the outputs of the system from being used outside the
organization. The very attributes that allow extensive customization of the knowledge base for
specific credit environments prevent two organizations from being able to objectively use the measure
as a basis for transactions since they cannot use the (differently) customised systems as a common
basis for comparison."
164
7.198 Canada asserts that LA Encore is a computer-based company analysis software developed by
a Certified Public Accounting firm and systems analyst company as a tool for analysing financial risk
and comparing, on a broad basis, the financial risks associated with different companies. It is now
owned by Moody's Risk Management Services, one of the two largest rating agencies in the world.
(As a result, the LA Encore software has been renamed Moody’s Risk Advisor, or MRA). LA Encore
is used by major commercial banks such as Lloyds, Barclays, and ABN-Amro.
7.199 According to Canada, Moody's maintains each user's system to ensure consistency with the
public ratings that it publishes. Moody's permits LA Encore to be tailored using customisation tools
to establish or reflect an organisation’s own credit practices, policy guidelines or internal ratings
approach based on its own lending preferences and portfolio. The EDC has utilised the customisation
features of LA Encore to reflect the EDC’s own corporate risk methodologies. Canada asserts that
this re-calibration of specific weightings has been undertaken to ensure that all EDC-generated ratings
take into account a data-base of the current senior unsecured bond ratings of more than 900 S&P rated
industrials. This allows the EDC to calibrate its own internally generated ra tings with these external
market benchmarks. Canada submits that the EDC' s risk rating methodologies, which include the re-
calibration, have been reviewed in the context of the EDC's credit risk management framework by the
external risk management consultants Erisk. According to Canada, Erisk has deemed these
methodologies to be in line with standard industry practice.
7.200 We do not understand Brazil to challenge the EDC's use of the LA Encore programme per se.
Indeed, this would be difficult to accept, given the use of LA Encore by major commercial banks such
as Barclays, Lloyd's, and ABN-Amro. Rather, we understand Brazil to challenge the EDC's
customisation of its LA Encore programme.
7.201 As noted by Brazil, Moody's has publicised the ability to customise LA Encore (or "Moody's
Risk Advisor", as it is now called). According to Moody's, LA Encore incorporates "customisation
tools to establish an organisation's own credit practices, policy guidelines or internal ratings
approach".
165 Such customisation may take various forms: "authoring" (to adapt the main components
of the system to create a unique chart of accounts and reports); "tuner" (to reconfigure subjective
questions and adjust their impacts throughout the assessment network); "screen designer" (to adjust
the position of questions on the screen); "alerts" (to propagate bank policy with custom messages,
help texts and alerts); "reports author" (to build custom report templates); and "administrative tools"
(to configure user rights). None of these forms of customisation suggest manipulation for the purpose
of providing subsidies. Indeed, we recall that the same programme, with the same scope for
customisation, is also used by major commercial banks.
7.202 Canada has explained that the EDC's customis ation of LA Encore has comprised the re-
calibration of specific weightings, to ensure that all EDC-generated ratings take into account a
database of the current senior unsecured bond ratings of more than 900 S&P rated industrials.
Although Brazil has complained that Canada has not explained how this re-calibration was performed,
Brazil has not argued that there is anything wrong, in principle, with customising in order to take into

164 R. Kumra et al ., "Assessing a Knowledge-based Approach to Commercial Loan Underwriting",
Moody's Research Report No. 2-00-1, Revised October 2000, pp. 16-17 (Exhibit CAN-73).
165 Moody's Risk Advisor (Exhibit CAN-72).

account a data-base of the current senior unsecured bond ratings of more than 900 S&P rated
industrials.
7.203 Furthermore, we note that the EDC's customised version of LA Encore is maintained by
Moody's, to ensure consistency with the public ratings that it publishes. Accordingly, Moody's would
ensure that the EDC's airline ratings would be consistent with Moody's own public airline ratings. We
also note Canada's assertion that the EDC's credit rating methodologies, including its customisation of
LA Encore, have been verified by Erisk, external risk management consultants, which has deemed
these methodologies to be in line with standard industry practice. Brazil has not given us any reason
to question Canada's assertion. For these reas ons, we are not persuaded by Brazil's arguments
regarding the EDC's customisation of LA Encore. In particular, we are not persuaded that Canada's
customisation of LA Encore suggests manipulation for the purpose of providing subsidies.
7.204 On the balance of the evidence before us, we reject Brazil's arguments that LA Encore is
unreliable as an objective credit rating tool.
Ratings overstated
7.205 Brazil asserts that Canada's methodology to assign credit ratings overstates ratings. Brazil
states that "the ratings assigned by Canada to various borrowers were consistently higher than the
ratings published for better, more credit worthy airlines". 166 According to Brazil, the "EDC's
customised LA Encore system … produces ratings that are completely at odds with those published
by Standard & Poor's".167
7.206 Brazil has made this argument most particularly in respect of EDC financing provided to
Comair. In particular, Brazil notes that "Canada rated Comair at one point as [], even though
Standard & Poor's does not give any airline this rating and, indeed, Canada itself has stated []. 168
Brazil also notes that the EDC rated Comair [] in March 1998, which – according to the Standard &
Poor's data relied on by Brazil – "is a rating no other major US airline has enjoyed".169
7.207 Canada argues that "[r]atings are not correlated to size. For example, an airline such as
Southwest, with total revenues of USD 5.6 bill ion is rated A by Standard & Poors and A3 by
Moody's. United, a much larger airline with total revenues of USD 19.3 billion has a sub-investment
grade rating of BB+/Ba1".
170 According to Canada
[t]hough most regional airlines are not rated, it is false to assume that their ratings
would necessarily be lower than the US ma jors. Indeed, as the following Merrill
Lynch commentary notes, in many respects the regional airlines present a lower risk
than their major airline counterparts:
Historically, regional airlines have been consistently more profitable
than their major counterparts. As such, the stock market has
"awarded" them premium valuations vis-à-vis their major partners
reflecting their materially better earnings performance and prospects.

166 Comments of Brazil on Response of Canada to Or al Statement of Brazil at the Second Meeting of
167 Comments of Brazil on Responses of Canada to Questions and Additional Questions from the Panel
Following the Second Meeting of the Panel, p. 7 (Annex A-16).
168 Oral Statement of Brazil at the Second Meeting of the Panel, para. 52 (emphasis in original)
(Annex A-12).
169 Id., para. 90.
170 Comments of Canada on Responses of Brazil to Questions from the Panel Following the Second
Meeting of the Panel, para. 8 (footnote omitted) (Annex B-14).

For example, SkyWest with only 23 RJs, 90 turboprops and
$530 million of annual revenue has an equity market value of
$1.7 billion – more than Alaska and America West’s combined
$1.1 billion! And those two major airlines generate annual sales, in
aggregate of $3.8 billion, with a combined fleet of 233 large, jet
aircraft!
We can only speculate what Comair (and ASA) would be worth at
current multiples. However, we do know that the implied equity
value for 100% of ASA and Comair was roughly $3 billion based
on Delta’s purchase price a few years ago – which compares to
Delta’s current equity value of only $5.8 billion . [emphasis in
original]
Although these comments are meant to refl ect equity performance, the underlying
facts are relevant to Brazil’s assertions. The regional airlines have outperformed the
majors in a number of key areas including revenue growth and, in terms of market
capitalization, a number of the regional airlines – including Comair and ASA – are
the same size if not larger than some of the US majors.
For all of these reasons, Brazil is wrong to suggest that regional airlines should pay
more for financing than the major US airlines simply because of their sales
revenues.
171
7.208 In light of the evidence adduced by Canada, which is based on a report compiled by Merrill
Lynch,172 we are not convinced that Canada's credit ratings for regional airlines are unreliable simply
because they are higher than Standard & Poor's public ratings for major US airlines. Canada has
explained that regional airlines may be accorded higher credit ratings than major airlines because they
have "outperformed the majors in a number of key areas". We note that Comair in particular has been
valued very highly by Merrill Lynch. We see no reason why, had Standard & Poor's provided a
public rating for Comair,173 that public rating would not have reflected the high equity value identified
by Merrill Lynch.
7.209 We note Brazil's argument that "Canada rated Comair at one point as [] and, indeed, Canada
itself has stated []. Although Brazil does not specify at what point Canada rated Comair as [], we
assume that it is referring to Canada's statement that the EDC offered financing to Comair in April
1996 "based on an imputed rating of [], … Today, given the availability of LA Encore, after inputting
Comair's 1994, 1995 and 1996 results into LA Encore we find that the 1996 rating is calculated as
[]."174 [] In our view, however, these two statements by Canada are not necessarily inconsistent.
Canada did not actually rate Comair as [] in April 1996. Canada simply stated on 26 July 2001, in
these proceedings, that it would have rated Coma ir as [] in April 1996, had it used the LA Encore
programme at that time. Further, the fact that Standard & Poor's has not rated major US carriers []
does not necessarily mean that a regional carrier should not be assigned that rating. We therefore
draw no conclusions from the fact that [].

171 Id., paras. 10-12 (footnote omitted).
172 Merrill Lynch, "Regional Airline Update: In Times of Economic Uncertainty, Look to Regional
Airlines", 30 May 2001 (Exhibit CAN-103).
173 We note that airlines will only request ratings (from companies such as Moody's and Standard &
Poor's) when they intend to seek public financing. The fact that regional airlines such as Comair do not have
ratings does not reflect on their creditworthiness. It simply means that they have not needed a rating for the
purpose of seeking public financing.
174 Response of Canada to Question 37 from the Panel, Responses of Canada to Questions from the
Panel Prior to the Second Meeting of the Panel (Annex B-9).

7.210 Brazil also asserts that there are large changes in ratings assigned to specific regional airlines.
Brazil argues that the EDC rated Comair [] in April 1996, but subsequently used its LA Encore
programme to generate a rating of [], []. Similarly, the EDC rated ASA as [] in March 1997, but
subsequently used its LA Encore programme to generate a rating of [], []. Canada claims that, prior to
the introduction of LA Encore, the EDC did not attempt to assign precise credit ratings for potential
customers.
175 It simply determined []. []. Brazil did not respond to this Canadian argument when
commenting on Canada's 13 August 2001 submission. In addition, there is evidence that the EDC
rated ASA [].176 In light of Canada's assertion regarding the absence of precise credit ratings prior to
the introduction of LA Encore, the corroboration of Canada's assertion in respect of ASA, and Brazil's
failure to respond to Canada's assertion in its 20 August 2001 submission 177, we attach no importance
to the alleged differences between the EDC's pre- and post-LA Encore ratings for Comair and ASA.
7.211 In light of the above, Brazil has not persuaded us that the EDC's credit ratings are overstated.
Conclusion
7.212 To conclude, we find that Brazil has failed to establish that there are serious questions
regarding the reliability of offers based on LA Encore output.
(c) Brazil’s constructed "market" benchmark
7.213 Brazil asserts that the EDC financing at issue confers a "benefit" because it is more
favourable than a "market" benchmark constructed by Brazil using a base EETC178 spread. Brazil has
constructed a "market" benchmark for the majority of the EDC transactions at issue. In establishing
its base EETC spread, Brazil first calculated the weighted average of bid spreads at which all airline
EETCs were trading in the month of the EDC transaction at issue. Second, as a "cross-check" Brazil
calculated the weighted average of offer spreads for all new airline EETCs offered in the year of the
EDC transaction at issue.
179
7.214 Canada has criticised the methodology employed by Brazil in respect of EETCs. Without
addressing all of the issues raised by Canada,180 we note that Canada has criticised Brazil's use of data
for all EETCs, and Brazil's use of weighted average spreads for all tranches of an EETC.
(i) Use of data for all EETCs
7.215 Canada asserts that, although Brazil purported to only include airline EETCs in its base EETC
spread,181 it actually included EETC data in respect of non-airlines (i.e., Fed Ex and Atlas Air).
According to Canada, only airline EETCs should have been considered. Brazil failed to respond to
Canada's objection in its 20 August 2001 submission.

175 See Response of Canada to Oral Statement of Brazil at the Second Meeting of the Panel (Annex B-
12).
176 See 1997 Shadow Bond Rating for ASA (Exhibit CAN-44).
177 See Comments of Brazil on Responses of Canada to Questions and Additional Questions from the
Panel Following the Second Meeting of the Panel (Annex A-16).
178 Enhanced Equipment Trust Certificates, or EETCs, are a secured form of financing that comprise a
number of tranches. Each tranche will be assigned a credit rating, depending on the seniority of the claim of the
tranche over the aircraft.
179 See Comments of Brazil on Response of Canada to Oral Statement of Brazil at the Second Meeting
of the Panel, paras. 21 and 22 (Annex A-17).
180 Canada's arguments are set out in full in Annex B-12.
181 See Oral Statement of Brazil at the Second Meeting of the Panel, para. 65 (Annex A-12).

7.216 Given that Brazil itself purported to use only airline EETCs, and in light of Brazil's failure to
respond to Canada's objection, we agree with Canada that any EETC data used for the purpose of
examining the EDC's financing should not include non-airline EETCs.
(ii) Use of weighted averages
7.217 Canada criticises Brazil for using the weighted average spreads for all tranches of an EETC
issuance. According to Canada, nowhere has Brazil indicated that it has considered the varying
underlying credit ratings of the individual airlines or EETC loan tranches. Neglecting to consider the
creditworthiness of different borrowers is a fundamental flaw. Nor does it appear to Canada that
Brazil has considered the varying age or type of the underlying assets (for example, whether they are
jets at all), or the market's appetite for these assets. According to Canada, Brazil's analysis also fails
to address terms to maturity, loan-to-value ratios, li quidity features and cross-collateralisation of the
various issues.
7.218 Brazil asserts that Canada stated in Brazil – Aircraft – Second 21.5 that, for a given EETC,
the highest-rated tranche within that EETC was a "conservative relative benchmark" for the purpose
of determining "material advantage" within the meaning of the first paragraph of item (k). According
to Brazil, "[g]iven that Canada has previously stated that the highest-rated tranche (with the lowest
spread) was 'conservative', there is no reason to believe that Brazil's use of weighted-average spreads
led in any way to an unfair comparison."
182
7.219 We recall that EETCs are a secured form of financing that comprise a number of tranches.
Each tranche will be assigned a credit rating, depe nding on the seniority of the claim of the tranche
over the aircraft. In our view, the fact that Canada stated that the highest-rated tranche was a
"conservative relative benchmark" does not mean that Canada would also consider the inclusion of
weighted average spreads for all tranches as an equally "conservative relative benchmark". Indeed,
this would only make sense if the use of weighted average spreads for all tranches would necessarily
result in a spread that is more "conservative", and therefore lower, than the use of only the highest-
rated tranches. However, this will clearly not be the case, since the inclusion of weighted average
spreads for all tranches will necessarily include spreads for tranches rated lower than the highest-rated
tranche. Thus, the use of weighted average spreads for all tranches of an EETC issuance would result
in a benchmark spread that is higher than would be the case if only the spreads for the highest-rated
tranches were included. Brazil is therefore wrong to argue that "[g]iven that Canada has previously
stated that the highest-rated tranche (with the lowe st spread) was 'conservative', there is no reason to
believe that Brazil's use of weighted-average spreads led in any way to an unfair comparison."183
7.220 Furthermore, it is apparent to us that the use of weighted average spreads for all tranches of
an EETC issuance could result in a benchmark spread that is higher than would be the case if only the
spreads for the appropriately-rated tranches were in cluded. This could lead to a finding of below-
market financing (by reference to Brazil's EETC benchmark), when in fact the transaction at issue
may have been at, or above, market. For these reasons, we have considerable reservations regarding
Brazil's use of weighted average EETC data, especially given the availability of airline-specific data
in the record.
(iii) Conclusion

182 See Comments of Brazil on Response of Canada to Oral Statement of Brazil at the Second Meeting
of the Panel, para. 15 (Annex A-17).
183 In addition, we note that Canada's remarks in Brazil – Aircraft – 21.5 were made in respect of
establishing a market benchmark for the purpose of determining the existence of "material advantage" (item (k),
second paragraph). There is no reason for us to assume that Canada would necessarily take the same approach
when establishing a market benchmark for the purpose of determining the existence of "benefit".

7.221 In light of the above, we are not persuaded that it is appropriate to rely on Brazil's constructed
"market" benchmark for the purpose of determining whether or not the EDC financing at issue confers
a "benefit".
(d) Bombardier customers' commercial financing
7.222 Brazil notes that, in its response to Panel Question 43, Canada stated that over [] per cent of
Bombardier’s sales did not involve any government support, even through so-called "market window"
operations.184 According to Brazil, these transactions would provide a plentiful and accurate resource
for determining the appropriate market rates for Canada’s officially-supported transactions. Brazil
asserts that it is difficult to see how Canada could reasonably arrive at market rates for its transactions
without ever referring to the vast majority of Bombardier transactions that it claims were financed
without any government participation, even market window participation.
7.223 Canada asserts that where such information is available, the EDC does consider it to the
extent that it is relevant. Canada also argues that, to the extent that such information is available, it
confirms that the EDC’s pricing was at or even above commercial market financing. However,
Canada submits that it is often difficult to obtain complete information on the financing provided by
banks and other financial institutions due to their confidentiality policies.
7.224 We consider that it would be unrealistic to expect the EDC to have access to data regarding
all commercial financing transactions involving Bombardier regional jets. The EDC is not a party to
such transactions, and has no right to obtain details of those transactions. Indeed, it is likely that the
terms of those transactions are viewed as confidential by the parties.
7.225 In any event, evidence in the record suggest s that the EDC has referred to commercial
financing for Bombardier regional jets where possible. For example, a December 1996 EDC memo
refers to financing from European banks for regional jets purchased by [].
185 In addition, EDC
documentation refers to offers of financing by European banks to [].186
7.226 Thus, we do not consider that EDC financing should be deemed to confer a "benefit" simply
because the EDC failed to base its financing in all cases on the terms of commercial financing
provided to Bombardier customers.
(e) Conclusion
7.227 In light of the above, we are not persuaded by the general arguments raised by Brazil in
support of its claim that the EDC financing at issu e confers a "benefit". We shall now examine the
transaction-specific "benefit" arguments put forward by Brazil.
2. Brazil’s transaction-specific "benefit" arguments
7.228 As noted above, Brazil has made claims concerning specific EDC Corporate Account
financing to ASA, ACA, Comair, Kendell, and Air Nostrum. Brazil has also made claims against
EDC Canada Account financing to Air Nostrum. We shall now examine each of these transactions in
turn, noting that the EDC offered more than one loan to some of these airlines.

184 The term "market window" is used by the parties to describe the provision of financing by EDC on
terms that are, according to Canada, consistent with those that are available in the market.
185 See Exhibit CAN-59, p. 6.
186 See Exhibit CAN-39.

Note for public version of report: The Panel accepted Canada's position that the interest rates and
fees offered or charged by the EDC and IQ should be treated as confidential business information.
The Panel noted that detailed knowledge about the considerations and benchmarks it used to
determine whether the EDC interest rates at issue conferred a benefit under the SCM Agreement
would enable those interest rates to be derived, to varying degrees of precision, for the transactions
analysed by the Panel. Accordingly, the Panel conc luded that it was necessary to redact significant
parts of its report. Nonetheless, the Panel agreed with Brazil that it was important that the
considerations and benchmarks used by the Panel be identified. Those considerations and
benchmarks included:
(i) Commercial Interest Reference Rates (CIRRs) (as set
by the OECD)
(ii) the EDC's minimum lending yield (an internal rate
set by the EDC)
(iii) an EETC issued by a major U.S. airline
(iv) two bond issues of a major U.S. airline
(v) information on rates reportedly offered by other
major banks
The considerations and benchmarks referred to in items (iii) and (iv) were proposed by Canada and
were used after consideration of the relevance of their terms and conditions compared to those of the
EDC transactions examined. Not all five considerations and benchmarks were used in examining
each EDC transaction.
1.229 In examining Brazil's claims in this case, we shall consider whether or not a "benefit" is
conferred on Bombardier by virtue of a "benefit" being conferred on the airline customer purchasing
Bombardier aircraft.187 In this regard, Brazil argues that there can be a "benefit" to Bombardier even
if there is no "benefit" to the purchasing airline, e.g., even if the EDC provides financing to the
purchasing airline on terms that are not more favourable than those that the airline could obtain in the
market. In short, Brazil argues that if "Embraer … offers to arrange financing at γ per cent, while
Bombardier is able to provide government financing at γper cent[,] [t]he government support has
benefited Bombardier by relieving it of the necessity of providing or arranging its own financing,
even though the customer may view the offers as equal, and therefore not be benefited." 188 I n o u r
view, the fact that Bombardier may arrange financing in the form of government support does not
necessarily confer a "benefit" simply because Bombardier is "reliev[ed] … of the necessity of
providing or arranging its own financing". If th at were the case, a "benefit" would be conferred
whenever Bombardier arranged external financin g – even through commercial banks – since any
external financing would "reliev[e] it of the neces sity of providing or arranging its own financing".
We find it difficult to accept that the existence of "b enefit" (in the context of financing) is determined

187 We endorse the following statement by the Brazil – Aircraft – Second 21.5 panel: "We note that
PROEX III payments are made in support of export credits extended to the purchaser, and not to the producer,
of Brazilian regional aircraft. In our view, however, to the extent Canada can establish that PROEX III
payments allow the purchasers of a product to obtain export credits on terms more favourable than those
available to them in the market, this will, at a minimum, represent a prima facie case that the payments confer a
benefit on the producers of that product as well, as it lowers the cost of the product to their purchasers and thus
makes their product more attractive relative to competing products" ( Brazil – Aircraft – Second 21.5 , Report of
the Panel, footnote 35, supra, para. 5.28, footnote 42) (emphasis in original).
188 See Response of Brazil to Question 59 from the Panel, Responses of Brazil to Questions from the
Panel Following the Second Meeting of the Panel (Annex A-14).

on the basis of whether or not Bombardier provides internal or external financing. The existence of
"benefit" (in the context of financing) is determined by reference to the terms at which similar
financing is available to the airline customer in the market. The abovementioned market comparison
indicates that a number of the specific transactions at issue in these proceedings do not confer a
"benefit" on the airline customer, and therefore neither on Bombardier. In respect of these specific
transactions, Brazil has failed to provide any evidence of "benefit" accruing to Bombardier absent any
"benefit" to the airline customer.
(a) ASA – March 1997
7.230 The EDC offered financing to ASA in March 1997. In March 1997, the EDC rated ASA as
[]. The EDC offered financing at US Ten-Year Trea sury Notes (hereinafter "T") plus [] basis points,
for [].
7.231 Brazil claims that the terms of the EDC's March 1997 offer to ASA conferred a "benefit"
because the repayment term exceeded the maximum authorised under the OECD Arrangement, and
the spread offered by the EDC was [].
189
(i) Repayment term
7.232 Brazil notes that Article 21 of the Sector Understanding on Export Credits for Civil Aircraft
provides for a maximum repayment term for regional aircraft of 10 years. According to Brazil, a
repayment term in excess of 10 years is positive evidence of "material advantage" (within the
meaning of item (k), first paragraph) and, a fortiori, a "benefit" within the meaning of Article 1.1(b) of
the SCM Agreement.
7.233 Canada claims that the OECD Arrangement is not necessarily reflective of market terms.
Canada also asserts that repayment terms for regional aircraft financing routinely exceed 10 years.
7.234 In addressing Brazil's argument, we ar e aware that the Appellate Body found in Brazil –
Aircraft 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'". 190 However, the fact that the OECD Arrangement can be used as a
market benchmark for the purpose of determining the existence of "material advantage" does not
necessarily mean that it should also serve as a benchmark for the purpose of determining the existence
of "benefit". If one were to draw this conclusion, one would be equating "benefit" with "material
advantage", and the Appellate Body has made it clear that this is not possible as a matter of law. In
Brazil – Aircraft , the Appellate Body stated that "if the 'material advantage' clause in item (k) is to
have any meaning, it must mean something different from 'benefit' in Article 1.1(b)".191
7.235 We note that a "benefit" is only conferred when financing is made available to the recipient
on terms more favourable than the recipient could obtain in the market. Thus, Brazil might have been
able to demonstrate that a repayment term in exce ss of ten years confers a "benefit" by establishing
that such repayment terms are not available in th e market. However, Brazil failed to do this. By
contrast, Canada has adduced evidence of instances in which the repayment term of market financing

189 CIRRs are Commercial Interest Reference Rate s within the meaning of Article 15 of the
OECD Arrangement.
190 Brazil – Aircraft, Report of the Appellate Body, footnote 35, supra, para. 181.
191 Id., para. 179 (emphasis in original). The Brazil – Aircraft – Second 21.5 panel understands the
Appellate Body to mean that it is "impermissible" to interpret the term "benefit" to have the same meaning as
the term "material advantage" ( See Brazil – Aircraft – Second 21.5 , Report of the Panel, footnote 35, supra,
footnote 50).

for regional aircraft transactions exceeds 10 years. In particular, Canada has referred the Panel to the
1997 issuance by Northwest Airlines of pass-through certificates financing 12 British Aerospace Avro
RJ85 aircraft. The term for the 1997-1A (Class A) certificates is 18.25 years. 192 Canada has also
referred the Panel to the 1997 issuance by Continen tal Airlines of pass-through certificates financing
nine Embraer EMB-145ER Regional Jets. The term for the 1997 3A (Class A) certificates is 15.25
years.
193 In addition, Canada has submitted the Morgan Stanley Dean Witter Report, which offers
additional evidence that the standard length of financing available in the market for regional aircraft
financing ranges from 10 to 18 years. 194 This report contains information on structured transaction
pricing in the commercial marketplace. It indicates that US airlines have financed regional aircraft in
the market using enhanced equipment trust certificate (EETC) tranches that feature a greater than 10
year term of maturity. For example, the EETC Class A and B tranches issued on 19 September 1997
by Atlantic Coast Airlines for 6 CRJ-200 and 8 British Aerospace J-41 aircraft have terms of maturity
of respectively 16 years (Class A) and 13 years (Class B). In our view, this evidence – which has not
been disputed by Brazil – demonstrates that repayment terms of up to 18.25 years are available in the
market. Thus, the fact that a given repayment term may exceed the 10-year term provided for in
Article 21 of the Sector Understanding on Export Credits for Civil Aircraft does not mean ipso facto
that financing is provided on terms more favourable than those available to the recipient on the
market.
7.236 For these reasons, we reject Brazil's argument that a repayment term of more than 10 years is
in itself positive evidence of a "benefit" within the meaning of Article 1.1(b) of the SCM Agreement.
(ii) []
7.237 Brazil asserts that the interest rate offered to ASA in March 1997 is []. Brazil argues that an
interest rate [] is positive evidence of "material advantage" (item (k), first paragraph) and, a fortiori, a
"benefit".
7.238 Canada denies that interest rates [] necessarily confer a "benefit", as the CIRR lags behind the
market.
7.239 We have already noted the Appellate Body's finding in Brazil – Aircraft 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'".
195 We also noted the Appellate Body's statement that "material advantage"
should not be equated with "benefit". Furthermore, in Brazil – Aircraft – 21.5 the Appellate Body
stated that "[t]he CIRR is a constructed interest rate for a particular currency, at a particular time, that
does not always necessarily reflect the actual state of the credit markets".196
7.240 Canada has explained that the CIRR lags behind the market, so that at a given point in time
financing [] is not necessarily more favourable than that available to the recipient on the market. In
this regard, Canada refers the Panel to the following argument it made before the Brazil – Aircraft –
21.5 panel:

192 Northwest Airlines 1997-1 Pass Through Trusts , Credit Suisse First Boston, Lehman Brothers,
Morgan Stanley Dean Witter, Prospectus, 16 September 1997 (Exhibit CAN-54).
193 Continental Airlines 1997-3 Pass Through Trusts , Morgan Stanley Dean Witter, Prospectus,
23 July 1997 (Exhibit CAN-55).
194 "EETC Market Update: Monthly Update: Airlines" (Morgan Stanley Dean Witter, Fixed Income
Research, North America, Investment Grade Credit – Industrials), 10 February 2001 (Exhibit CAN-14).
195 Brazil – Aircraft, Report of the Appellate Body, footnote 35, supra, para. 181.
196 Brazil – Aircraft – 21.5 , Report of the Appellate Body, WT/DS46/AB/RW, adopted 4 August 2000,
para. 64.

A meaningful comparison of market transactions to CIRR is difficult due to the fact
that the CIRR is a constructed rate, while commercial aircraft transactions are priced
at commercial rates available at the time of the specific transaction. To recall, the
CIRR is determined by taking the average of the 7-year Treasury rate (in the case of
deals with repayment terms up to 10 years) for the previous month and adding 100
bps. For example, the CIRR for the period 15 September – 15 October would be
constructed using the average of the 7-year Treasury for the month of August, plus
100 bps. Carrying on with the example, the result of this calculation is that the CIRR
applicable to transactions closing during the period from 15 September through
15 October would [be] a rate that was calculated using the average of the applicable
Treasury rate during August, i.e. up to two months earlier. To an entity that operates
on the basis of commercial principles, the calculation of the CIRR is such that it
would not be considered a reliable reflection of current market conditions.
197
7.241 Brazil has not disputed that the CIRR lags behind the market. 198 Nor has Brazil disputed that
the CIRR may not be a reliable reflection of current market conditions. However, we also note that
"CIRRs should represent final commercial lending interest rates in the domestic market of the
currency concerned", and "should closely correspond to the rate for first-class domestic borrowers".199
For this reason, we consider that the CIRR could, in the absence of additional evidence regarding
market rates, serve as "a rough proxy for commercial interest rates".200 In our view, therefore, the fact
that an interest rate is [] constitutes evidence that the interest rate would be more favourable than rates
available in the market, and in the absence of an y counter-evidence on market rates, would justify a
finding that such an interest rate confers a "benefit".
(iii) Market benchmarks proposed by Canada
7.242 Canada has provided evidence that the EDC March 1997 offer to ASA (T plus []) was higher,
and therefore less favourable, than the market spreads for a specific tranche of a [], for certain [], and
for the general industrial index for similar credit ratings. Canada therefore denies that the EDC March
1997 offer to ASA confers a "benefit".201

7.243 Canada compares the EDC's March 1997 offer to ASA with a [].
7.244 Brazil has not expressly challenged Canada’s reference to the spreads for specific EETC
tranches in these proceedings. On several occasions, Brazil refers to Canada’s own references to

197 Brazil – Aircraft – 21.5 , Report of the Panel, footnote 156, supra, Annex 1-4, Responses of Canada
to Questions from the Panel Posed on 3 February 2000, Response to Question 4(a) from the Panel, p. 82.
198 The "lag" will be more pronounced if market interest rates move quickly, as appears to have
happened in the period April 1996 to August 1997 (See Exhibit CAN-59).
199 OECD Arrangement, Article 15.
200 Brazil – Aircraft – Second 21.5 , Report of the Panel, footnote 35, supra, para. 5.35 (emphasis in
original).
201 Brazil notes that Canada has not provided pricing memos for the ASA and ACA transactions.
According to Brazil, therefore, the Panel has no way of knowing whether the benchmarks referred to by Canada
in Annex II to its 13 August 2001 submission were the actual benchmarks used by EDC to price the transaction,
or whether, instead, Canada searched for the specific purpose of this dispute for any benchmark that falls below
the rates it offered ASA and ACA. In our view, it is not necessary for a Member to demonstrate that it applied
specific benchmarks at the time of providing a "financial contribution" in order to rely on those benchmarks for
the purpose of rebutting claims of "benefit". There is no reason why the absence of "benefit" cannot be
demonstrated on the basis of an ex post rationalisation, provided the benchmarks relied on relate to the time that
the transaction was made.

EETC spreads in order to justify Brazil’s recourse to EETC data. As noted above, we do not agree
with Brazil’s use of weighted average EETC data. This does not mean, however, that we should also
reject Canada's use of EETC data. This is because Canada does not rely on weighted average EETC
data. Rather, Canada has adduced evidence regarding issues of specific EETC tranches. The criteria
applied by Canada in selecting these specific EETC tranches (in particular, that the credit rating of the
EETC tranche be [], and that the EETC be issued within at least 90 days prior to the Loan’s Date of
Offer – See Annex II to Canada’s submission of 13 August 2001) have not been challenged by Brazil.
Since Canada is not relying on average EETC data, and in the absence of any objections raised by
Brazil regarding Canada's use of specific EETC tranches, we see no reason not to take into account
the specific EETC tranche data submitted by Canada.
202
7.245 We note that the EDC's March 1997 offer to ASA is [] basis points [] than the spread for the
[] tranche. Since ASA and the [] tranche were rated [] secured at that time, there is no need to make
any credit rating adjustment. However, we note that, according to evidence adduced by Canada, the
"vast majority"
203 of EETCs are for large aircraft, and that only one EETC has been placed to finance
regional jets.204 From this evidence, we understand that the [] relates to large aircraft. In the Brazil –
Aircraft – Second 21.5 proceedings, Canada asserted that spreads for regional aircraft transactions are
20-30 basis points higher than spreads for large aircraft transactions. 205 Accordingly, the EDC's
March 1997 offer to ASA should be reduced by 20- 30 basis points, to enable a proper comparison
with the (large aircraft) [] tranche.206 The adjusted EDC offer would be T + [], which is significantly
lower than the spread for the comparable [] tranche identified by Canada.

7.246 Canada has also asserted that the EDC March 1997 offer to ASA was less favourable than []
corporate bonds issued by [], rated [] unsecured, issued in []. In March 1997, the [] were trading at T
plus [] and [], i. e., at a lower spread than that offered by the EDC to ASA. These bonds met a
number of qualitative criteria set by Canada (in particular, the bonds are [], so they provide a measure

202 In relying on company-specific EETC data, however, we note that both parties have expressed
reservations regarding the reliability of EETCs as a ma rket benchmark. For example, Canada asserts that it
"never suggested that EETCs could identify the 'market' spread for a particular regional aircraft financing
transaction, nor did it rely on EETCs for that purpose" (Response of Canada to Oral Statement of Brazil at the
Second Meeting of the Panel, para. 31 (Annex B-12)). Br azil asserts that "the credit risk or spread on a EETC
issue would generally be lower than the spread that the same airline could obtain in a commercial bank-financed
transaction" (Oral Statement of Brazil at the Second Meeting of the Panel, para. 64 (Annex A-12)). We take
note of these comments when comparing EDC financing with company-specific EETC data.
203 Communication of 7 August 2001 from CIT Structured Finance (Exhibit CAN-79).
204 Communication of 8 August 2001 from Babcock & Brown (Exhibit CAN-79).
205 See para. 7.192, supra.
206 In its request for interim review ( See para. 6.11, supra), Canada objected to the Panel's addition of
20-30 basis points to large aircraft EETC spreads to arrive at an appropriate regional aircraft spread. The Panel
made this adjustment in response to Brazil's reliance on statements made by Canada in the Brazil – Aircraft –
Second 21.5 proceedings (See paras. 47 and 50 of Oral Statement of Brazil at the Second Meeting of the Panel
(Annex A-12)). In responding to Brazil's oral statement ( See Response of Canada to Oral Statement of Brazil at
the Second Meeting of the Panel (Annex B-12)), Canada made no attempt to deny the need for a 20-30 basis
point adjustment when converting from large aircraft to regional aircraft spreads. Nor did Canada object to
Brazil's inclusion of a 20 basis point adjustment ("for the difference between the regional aircraft used in the
financing at issue and the larger jets used in the typical EETC issue") in its Exhibit BRA-66. Furthermore,
although Canada asserted at interim review that "[v]ariations in pricing between similar but non-identical asset
classes are dynamic and subject to change …", Canada did not deny the need for an adjustment per se .
However, although Canada appeared to accept the need for an adjustment of some sort, Canada failed to indicate
what would be, in its view, an appropriate adjustment for the transactions at issue. In addition, we note that a
lesser adjustment would not necessarily change the outcome of our findings.

of the spread attributed to an airline credit rating, rather than the security provided by an aircraft type,
and they have an [] on the date the relevant EDC loan was offered).
7.247 In its 20 August 2001 submission, Brazil accuses Canada of using corporate bonds "in the
large aircraft sector without any consideration of whether these spreads should be adjusted for the
regional aircraft sector even though … Canada has said that spreads for the regional aircraft sector
should be 20-30 points higher than in the large aircraft sector".
207 In this regard, we note that Canada
stated in the Brazil – Aircraft – 21.5 proceedings that "an additional 20-30 bps should be added [to
large aircraft spreads] for regional aircraft". 208 However, we do not understand Canada to have
argued that a regional carrier will necessarily have to pay more for credit than a major carrier. In fact,
Canada has expressly argued that this will not necessarily be the case. 209 Rather, we understand
Canada to have argued that a higher spread will have to be paid for financing purchases of regional
aircraft as opposed to large aircraft, since large aircraft offer better security than regional aircraft.
Indeed, Brazil itself has argued that this will be the case.
210 In other words, the spread adjustment
depends on the type of aircraft at issue (because regional aircraft offer less security than large
aircraft), and not on the nature – or size – of the carrier at issue. As noted above, the two [] relied on
by Canada are unsecured, such that they reflect the credit rating of the carrier, and not the security of
the aircraft type. Accordingly, Brazil’s objection is not a sufficient basis for rejecting Canada's use of
the two [] to justify the EDC's March 1997 offer to ASA.
7.248 Brazil has also criticised Canada for using data from one period to justify pricing in another,
despite the fact that Canada already criticised Br azil for allegedly doing the same thing (in its oral
statement at the second meeting). Thus, Brazil asserts that "Canada relies on the [] issued in March
1997 to support every comparison with the exception of the Atlantic Coast Airlines February 1996
and Kendell Airlines August 1999 offers. Canada uses these bonds as representative comparisons in
charts covering financing offered in July 1996 (a year before []), March 1998, August 1998, February
1999, and March 1999".
211 We recall, however, that the relevant []. When these bonds are referred to
by Canada, it cites the price at which the bonds were trading at the time of the transaction at issue.
Thus, for the ASA March 1997 and August 1998 offers, Canada refers to the March 1997 and August
1998 prices for the relevant []. Similarly, for the EDC's March 1999 offer to ACA, Canada refers to
the price at which the [] were trading in March 1999. We therefore reject Brazil's argument that
Canada used data from one period to justify pricing in another.
General industrial index
7.249 Canada has also sought to justify the pricing of the EDC's March 1997 offer to ASA on the
basis of the spreads for general industrial bonds with similar credit ratings. In particular, Canada has
relied on general industrial indices derived from Bloomberg US Fair Market Yields – Industrial.
7.250 Although Brazil has made some limited use of these same general industrial indices, 212 Brazil
believes that the utility of indices of general industrial bonds as a proxy for identifying market rates
for financing of regional jet transactions is limited by several factors. First, the 10-year general
industrial corporate bonds represent simple averages at which bonds issued by a wide variety of

207 Comments of Brazil on Responses of Canada to Questions and Additional Questions from the Panel
Following the Second Meeting of the Panel, para. 27 (footnote omitted) (Annex A-16).
208 Brazil – Aircraft – 21.5, Annex 1-2, footnote 26.
209 See paras. 7.207-7.208, supra.
210 Comments of Canada on Responses of Brazil to Questions from the Panel Following the Second
Meeting of the Panel, para. 13 (Annex B-14).
211 Comments of Brazil on Responses of Canada to Questions and Additional Questions from the Panel
Following the Second Meeting of the Panel, para. 26 (Annex A-16).
212 See Oral Statement of Brazil at the Second Meetin g of the Panel, para. 97 (in respect of ACA)
(Annex A-12).

companies in a wide variety of industries are tradin g at a given point in time. While bonds issued by
airlines may be included in the calculation of this average, the average itself does not reveal whether
bonds issued by a particular sector should be valued above or below the average at a particular point
in time. Second, there are substantial differences in liquidity between the average industrial spreads
and a bank loan financing a regional jet purchase. The industrial spreads are based on thousands of
bonds being traded in huge volumes (with daily trad ing volume estimated at $10 billion) by traders
around the world each day. A bank loan to finance a particular purchase of a regional jet, on the other
hand, is an isolated transaction, much less liqui d, requiring much greater and more immediate
assumption of risk by a lender than the lender would experience buying and selling general industrial
bonds. Third, general industrial bonds do not accurately reflect the spreads for industry sectors that
may not normally be publicly rated or issue corporate bonds, such as many airlines that purchase
regional jets. Moreover, the different risks between airline companies and industrial companies are
not necessarily reflected in the different ratings of the companies. A major airline rated A-, such as
Southwest Airlines, may trade at a different spread than, for example, a major computer company
with the same rating. This difference in spreads reflects differences in the market estimation of the
prospects for each industry, the nature of the collateral securing each bond, competitiveness within
each industry, and the manner in which the bonds are structured within each industry. These factors
are reflected to some extent within the ratings, but are largely left to the discretion of the market.
According to Brazil, spreads change a lot more freque ntly than do credit ratings. In the event of a
change in the performance of a particular bond issuer or its industry, the market will react much more
immediately than will the credit ratings agencies. Brazil submits that the result will be a discrepancy
between the spreads at which similarly rated companies in different industries may trade.
7.251 According to Brazil, the market agrees that th e general industrials curves do not reflect the
peculiarities of the regional airlines industry. For example, in a report on EETCs, Salomon Smith
Barney ("SSB") states that "EETCs trade at a considerable premium compared with comparably rated
generic corporate bonds."
213 SSB's analysis supports Brazil’s and the market’s views that companies
with the same credit rating will not necessarily en joy the same spreads when issuing papers in the
bonds market. Moreover, the similarity in ratings does not in itself mean that companies will obtain
financing at the same spreads for particular transactions. For example, Southwest Airlines is a major
airline with revenues of $5.6 billion in 2000 and a fleet of over 350 Boeing large jets and no regional
jets.214 This is a substantially different company from Atlantic Southeast Airlines (ASA), which had
revenues of $410 million in 1998. 215 Southwest is currently rated A- by Standard & Poor’s. 216
Assuming that ASA, with less than one -tenth of Southwest’s sales revenues,217 was also rated A- by
the EDC, this does not mean that the market would finance a sale of 20 regional jets to ASA at the
same rates as it would finance a sale of the same size to Southwest.
7.252 Canada notes Brazil's argument that the different risks between airline companies and
industrial companies are not necessarily reflected in the different ratings of the companies. However,
Canada suggests that such individualised risks are taken into account by the EDC in its transaction-
specific assessment of risk. Canada also asserts that much of Brazil's criticism of the use of general
industrial indices turns on its assertion that smaller companies will not have access to financing at the
same rates as larger companies, even when they have the same credit rating. Canada asserts that

213 The ABCs of EETCs – A Guide to Enhanced Equipment Trust Certificates , Salomon Smith Barney,
8 June 2001, p. 37 (Exhibit BRA-71).
214 http://www.southwest.com/about_swa/press/factsheet.html.
215 http://www.rati.com/airlines/AirlineFinance. 1998 is the most recent year for which information
regarding ASA is publicly available.
216 Exhibit BRA-67.
217 According to Brazil, many other factors in addition to sales revenues would enter into this calculus.
Brazil uses sales revenue merely to illustrate that while companies' credit ratings may be equivalent, the terms at
which the companies might obtain financing may not necessarily be so.

regional airlines have outperformed the majors in a number of key areas including revenue growth
and, in terms of market capitalisation, a number of the regional airlines – including Comair and ASA
– are the same size if not larger than some of the US majors. Canada therefore submits that Brazil is
wrong to suggest that regional airlines should pay more for financing than the major US airlines
simply because of their sales revenues.218
7.253 Although Canada has addressed some of the concerns raised by Brazil, it has not responded to
all of them. In particular, Canada has not responded to Brazil's observation that the 10-year general
industrial corporate bonds represent simple averages at which bonds issued by a wide variety of
companies in a wide variety of companies in a wide variety of industries are trading at a given point in
time. In the absence of compelling assurances by Canada that the difficulties identified by Brazil
regarding the use of average data are misplaced, we do not consider it appropriate (especially given
the availability of company-specific bond data submitted by Canada) to base our findings (for any of
the EDC transactions at issue) on a comparison of the EDC's financing terms with average spreads
offered in the general industrial corporate bond market.
Conclusion
7.254 We recall that the EDC's March 1997 offer to ASA was priced [], and that a [] interest rate
constitutes evidence that the interest rate would be more favourable than rates available in the market,
and in the absence of any counter-evidence, would justify a finding that such an interest rate confers a
benefit.
219 Here, there is additional relevant evidence on market rates. While the EDC's March 1997
offer to ASA is priced [] the [] tranche of the [], it is priced [] the March 1997 spread for []. 220 On
balance we find that there is credible but conflicting evidence on whether the EDC's March 1997 offer
was below market. Thus, on the basis of the evidence presented, we conclude that Brazil has failed to
establish that the EDC's March 1997 offer to ASA was priced below market and conferred a "benefit"
within the meaning of Article 1.1(b) of the SCM Agreement.
(b) ASA – August 1998
7.255 The EDC offered financing to ASA in August 1998 at T plus [], for []. At that time, ASA was
rated [] secured / [] unsecured by the EDC.
7.256 Brazil claims that the EDC's August 1998 offer to ASA confers a "benefit" because the
repayment term exceeded the maximum authorised under the OECD Arrangement, and the spread
offered by the EDC was [].
7.257 We recall our finding that a repayment term in excess of the 10-year period authorised by the
OECD Arrangement is not positive evidence of "benefit" with in the meaning of Article 1.1(b) of the
SCM Agreement. We also recall, however, that the fact that an interest rate is [] constitutes evidence
that the interest rate would be more favourable th an rates available in the market, and in the absence
of any counter-evidence on market rates, would justif y a finding that such an interest rate confers a
"benefit".
221
7.258 Canada has relied on a number of factors to demonstrate that the EDC's August 1998 offer to
ASA was consistent with the market. Without referring to each and every factor identified by
Canada, we first note that Canada has relied on the [] tranche of a [] issued in [] at T plus []. Although

218 For a full description of Canada's arguments on this issue, see para. 7.207, supra.
219 See para. 7.241 supra.
220 As to the weight to be given to individual company EETC data, we recall that both parties have
expressed some reservations. See footnote 202, supra.
221 See para. 7.241 supra.

there is no need for any credit rating adjustment, we recall that EETC's have generally been issued in
respect of large aircraft, and that the EDC's offer should therefore be adjusted, i.e., reduced, by 20-30
basis points to a "large aircraft level". The adjusted EDC offer would be T + [], which is [] than the
price of the [] tranche of the [] identified by Canada.
7.259 Second, we note that Canada relies on the price at which [] were trading in August 1998.
Although these bonds were priced at T plus [] and [] respectively, i.e., in excess of the EDC offer,
these [] were rated [] at that time, [] than ASA’s unsecured rating of []. As noted above, Brazil has
asserted that each notch may account for a difference of up to 15 basis points. 222 On this basis, the
price of the [], adjusted [] to [] (i.e., reduced by [] basis points to T plus [] and []), would be [] than the
EDC's August 1998 offer to ASA (i. e., T plus []).223 Canada has submitted evidence to the effect that
adjusting a credit rating from [] to [] would result in a [] basis point reduction in interest rates. 224
Such adjustment would reduce the price of the [] to T plus [] and [], again [] the EDC's August 1998
offer to ASA.
7.260 We recall that the EDC's August 1998 offer to ASA was priced [], and that a [] interest rate
constitutes evidence that the interest rate would be more favourable than rates available in the market,
and in the absence of any counter-evidence, would justify a finding that such an interest rate confers a
benefit.225 Here, there is additional relevant evidence on market rates. While the EDC's August 1998
offer to ASA is priced [] the [] tranche of the [], it is priced [] the August 1998 spread for []. 226 On
balance we find that there is credible but conflicting evidence on whether the EDC's August 1998
offer was below market. Thus, on the basis of the evidence presented, we conclude that Brazil has
failed to establish that the EDC’s August 1998 offer to ASA was priced below market and conferred a
"benefit" within the meaning of Article 1.1(b) of the SCM Agreement.
(c) ACA – February 1996
7.261 The EDC issued an indicative term sheet (providing for financing at T plus []) to ACA in
February 1996, when the EDC rated ACA [] secured / [] unsecured. No formal offer was made by the
EDC at that time.
7.262 According to Brazil, "Canada defends its pricing of offers to [ACA] in part on the ground that
one of its offers was ultimately not accepted by ACA. Brazil notes that whether or not EDC's early
offers were accepted, EDC appears to have relied on its February 1996 offer to ACA in pricing EDC
support for the Comair transaction. … Thus, these offers provide further evidence that EDC does not
follow market principles".227
7.263 In our view, there is no basis for us to make any findings regarding the February 1996
indicative term sheet. This term sheet was not binding on the EDC, and the terms therein would not
necessarily have been reflected in any financing ultimately offered 228 by the EDC to ACA. For these

222 See para. 7.196, supra.
223 As noted above ( See para. 7.247, supra), there is no need to adjust the EDC offer to take into
account the type of aircraft at issue when comparing EDC's offer with [], since these are [] corporate bonds.
224 See Appendix 1 to Annex II of Response of Canada to Oral Statement of Brazil at the Second
Meeting of the Panel (Annex B-12).
225 See para. 7.241 supra.
226 As to the weight to be given to individual company EETC data, we recall that both parties have
expressed some reservations. See footnote 202, supra.
227 Comments of Brazil on Response of Canada to Or al Statement of Brazil at the Second Meeting of
228 Although Brazil refers to a February 1996 "offer", only an indicative term sheet was issued by the
EDC at that time.

reasons, we find that the indicative term sheet is not a "financial contribution" within the meaning of
Article 1.1(a) of the SCM Agreement.
7.264 The fact that the EDC may have referred to its February 1996 indicative term sheet for ACA
in respect of pricing offered to Comair is without consequence. The fact that the indicative term sheet
may have been referred to in respect of Comair may be relevant when reviewing the EDC's financing
to Comair. However, that does not mean that it is of such a nature as to constitute a "financial
contribution" to ACA.
(d) ACA – March 1999
7.265 In March 1999, the EDC offered ACA fixed rate financing at T plus [], or floating rate
financing at LIBOR plus [], over []. At the time, the EDC rated ACA [] secured / [] unsecured.
7.266 Brazil submits that the EDC's offer was below market, because it was priced []. In its 13
August 2001 submission, Canada argues that the price at which [] was trading in March 1999 "does
not provide a good ‘on the run’ benchmark" because it was "not frequently traded". Canada notes that
this was the reason cited by SSB for excluding [] from its EETC database.
229 In our view, the fact that
an EETC is not frequently traded could be a valid reason for disregarding it for the purpose of
establishing valid market benchmarks against which to compare the EDC's financing. In addition, we
note that Brazil did not object to Canada's statement that the [] "does not provide a good 'on the run'
benchmark". Accordingly, we draw no conclusions regarding the consistency with the market of the
EDC's March 1999 offer to ACA on the basis of the price at which [] was trading at that time.
7.267 Brazil also asserts that the EDC's March 1999 offer to ACA was compared to the sale of a []
to [].
230 In this regard, we note that Exhibit CAN-39, which contains the pricing strategy for an offer
to Kendell, refers to the price of prior EDC loans to [] and ACA. The EDC therefore clearly took the
price of an earlier loan to [] into account when pric ing its loan to Kendell. However, this does not
mean that the EDC also took its loan to [] into account for the purpose of its financing to ACA. We
therefore do not see the relevance of Brazil's argument to our examination of the EDC's financing to
ACA.
231
7.268 In order to demonstrate that the EDC's March 1999 offer to ACA is consistent with the
market, Canada asserts, inter alia, that earlier financing offered by the EDC had only been used for
the acquisition of [] by November 1999. Canada asserts that financing for other CRJs acquired by
ACA came from a combination of []. Canada submits that the EDC was advised that the financing
from [] in 1998 was priced at T plus [] over []. 232 The EDC was also advised that financing from []
was offered in early 1999 at Libor plus [] basis points, corresponding to approximately T plus [],
based on November 1999 swap rates. 233 We note that the EDC's March 1999 offer was less
favourable than these offers from [] and [], which are commercial operators.

229 Exhibit CAN-81.
230 See Oral Statement of Brazil at the Second M eeting of the Panel, para. 104, referring to
Exhibit CAN-39 (Annex A-12).
231 We note that Canada has responded to Brazil's argument in the context of the EDC's financing to
Kendell, and not in the context of the EDC's financing to ACA ( See Response of Canada to Oral Statement of
Brazil at the Second Meeting of the Panel, para. 18 (Annex B-12)).
232 In its oral statement at the second meeting of the Panel, Brazil indicated [].
Brazil first made a claim regarding the EDC’s March 1999 offer to ACA at the second meeting of the
Panel. Documentary evidence regarding the EDC’s March 1999 offer to ACA was therefore not covered by
earlier requests by the Panel for documents / supporting evidence regarding EDC financing. However, there is
no basis for us to doubt the veracity of Canada's assertions regarding financing offered by [].
233 Reference to the [] financing is contained in EDC documents submitted as Exhibit CAN-39.

7.269 Canada has also submitted evidence indicating that [] (then rated []) were trading at T plus []
and [] in March 1999. Since these [] are rated the same as the EDC's unsecured rating for ACA, there
is no need for any credit rating adjustment when comparing the price of the EDC's offer with the price
of the []. The EDC's March 1999 offer (i. e., T plus []) is [] than the price at which [] were trading in
March 1999.
7.270 Although the EDC's offer was [] than the relevant [] pricing, other factors enumerated above
indicate that the EDC’s March 1999 offer to ACA was not made on terms more favourable than those
available to ACA on the market. For this reason, we find that the EDC’s March 1999 offer to ACA
did not confer a "benefit".
(e) Comair – July 1996
7.271 The EDC offered Comair financing for [] aircraft in July 1996 at T plus [] basis points, for a
period of []. The EDC rated Comair [] (secured) / [] (unsecured) at that time.
7.272 Brazil claims that the EDC's offer confers a "benefit", because it is []. Brazil also asserts that
the offer was not consistent with commercial principles because the EDC took into account [].234
Minimum Lending Yield ("MLY")
7.273 Canada has submitted evidence indicating that the EDC's July 1996 offer was [] bps [] the
EDC's MLY. According to the EDC Resolution Respecting MLYs, "[]". 235 This would imply that
EDC financing [].236 Canada has consistently argued in these proceedings that the EDC operates on
commercial principles.237 Thus, we are entitled to presume that the EDC's definition of [] would be
the same as that of a commercial lender. Accordingly, the fact that the EDC finances [], and therefore
does not include [], would suggest that the EDC is financing below market, and therefore confers a
"benefit". However, this conclusion should not be drawn if there is other specific evidence indicating
that the financing at issue was not made available on terms more favourable than those available to
the recipient on the market.

7.274 Evidence submitted by Canada also demonstrates that, for the purpose of formulating its
July 1996 offer to Comair, the EDC took into account [].238 In certain circumstances, the fact that the
EDC provides financing on the basis of [] may suggest that the financing is not consistent with
commercial principles, and therefore below market, since commercial lenders would be unlikely to
take into account []. However, this conclusion would not be reached if there is other specific evidence
that the financing is not more favourable than financing available to the recipient on the market.

234 See Exhibit CAN-59, p. 3.
235 See Exhibit CAN-47.
236 Canada has asserted that "the fixed margin for credit risk may be [] on the authority of the President
or Senior Vice President Finance and Chief Financial Of ficer of EDC". According to Canada, "an authorized
margin [] the identified fixed margin is the [] for that transaction". We have evidence that EDC offered
financing [] to Comair in two transactions: in July 1996 and August 1997. None of the documentary evidence
submitted by Canada regarding these transactions contains any details regarding the basis on which the
President or Senior Vice President Finance and Chief Fi nancial Officer of EDC may have authorised the [] of
the fixed margin for credit risk. Nor does it contain an y data indicating that any margin authorised by the
President or Senior Vice President Finance and Chief Financial Officer of the EDC was [] for the two
transactions at issue (See paras 6.13 and 6.14, supra).
237 First Written Submission of Canada, para. 19 (Annex B-4).
238 See Exhibit CAN-59, p. 3.

Market indicators submitted by Canada
7.275 Canada has submitted evidence that the EDC's July 1996 offer to Comair was less favourable
than the general industrial index for bonds of the same credit rating (i.e., [] secured / [] unsecured).
As noted above, however, we do not consider it appropriate to base our findings on data of such a
general nature.
7.276 Canada has also provided evidence that [], rated [], were trading at T plus [] and [] in July
1996. There is no need for any credit rating adjustment to this price, since the [] were rated the same
as Comair's unsecured rating. The EDC's offer (of T + []) to Comair is [] than the price of the [].239
7.277 Canada has also asserted that, at the time of the EDC's pricing of its July 1996 offer to
Comair, there were "recent market pricing indications for Comair" of T plus [] and []. In particular,
an Annex attached to an internal EDC memo dated 10 April 1996 includes the following passage:
Benchmarks:
1.[]
240
Again, the EDC's July 1996 offer to Comair is priced [] these market indicators.
7.278 Thus, the above evidence submitted by Canada to demonstrate that the EDC's offer was
consistent with the market, actually indicates that the EDC's July 1996 offer to Comair was made on
terms more favourable than those available to Comair in the market. Although the abovementioned
Annex also states that "[t]he [] banks have i ndicated an agreement with [the EDC's] pricing
strategy"
241, we do not consider that this general assertion without reference to specific interest rates
is sufficient to rebut the specific evidence submitted by Canada. In addition, we recall that the EDC's
July 1996 offer is [], and that in making its offer the EDC considered []. On balance, therefore, we
find that the EDC's July 1996 offer to Comair did co nfer a "benefit" within the meaning of Article
1.1(b) of the SCM Agreement.
(f) Comair – December 1996 and March 1997
7.279 In December 1996 and March 1997, the EDC offered financing to Comair at T plus [] basis
points, for []. Since Brazil has not made any specific arguments regarding these transactions, there is
no basis for us to find that they confer a "benefit" within the meaning of Article 1.1(b) of the SCM
Agreement. In any event, we note that there is ample evidence to suggest that the EDC's December
1996 offer to Comair was priced above offers from commercial banks.
242
(g) Comair – August 1997
7.280 In August 1997, the EDC offered Comair financing at T plus [] basis points, for [].
7.281 Brazil asserts that the EDC's offer conferred a "benefit" because it was [], and []. We recall
that the fact that an interest rate is [] const itutes evidence that the interest rate would be more
favourable than rates available in the market, and in the absence of any counter-evidence on market
rates, would justify a finding that such an interest rate confers a "benefit".
243 We also recall that EDC

239 At para. 7.209, we note that Canada calculated an ex post 1996 rating of [] for Comair. Adjusting
the [] prices to reflect a [] rating would clearly result in EDC's offer being priced even lower than the [].
240 See Exhibit CAN-59, p. 4.
241 See Exhibit CAN-59, p. 5.
242 See Exhibit CAN-59, p. 6.
243 See para. 7.241 supra.

financing [] suggests the existence of a "benefit", although this conclusion should not be drawn if
there is other specific evidence demonstrating that the EDC's offer is not more favourable than
financing available to the recipient on the market.244
7.282 Thus, in order to rebut Brazil's claim of "benefit" on the basis of the two abovementioned
factors, Canada should have adduced specific evidence indicating that the EDC's offer was not made
on terms more favourable than those available to Comair in the market. Canada has failed to do so.
Instead, Canada has submitted evidence containing a broad statement to the effect that in August 1997
"[m]arket interest in financing of the new Comair aircraft remain[ed] very strong, from []. As such,
pricing [was] anticipated to be in the range of Treasuries plus [] basis points."
245 This statement is not
sufficient to rebut Brazil's claim of "benefit".
7.283 In light of the fact that the EDC's August 1997 offer to Comair was [] and [], and in the
absence of specific evidence demonstrating that the EDC's offer was not made on terms more
favourable than those available to Comair in the market, we find that the EDC's August 1997 offer to
Comair conferred a "benefit".
(h) Comair – March 1998
7.284 In March 1998, the EDC offered Comair financing at [] plus [] basis points, for []. The EDC
rated Comair [] secured / [] unsecured at that time.
7.285 Brazil asserts that the EDC's offer confers a "benefit", because the EDC's offer was [].
246
7.286 The "comparables" referred to by Brazil are those set forth in Annex II of Canada's
submission dated 13 August 2001. They include the general industrial index, the [] tranche of a [].
As noted above, we do not consider it appropriate to base our findings on data submitted by Canada
regarding the general industrial index. Regarding the [] tranche of the [], we note that it was issued in
February 1998 at T plus []. The average rating of the split
247 [] tranche is []248, which is []. We recall
that, according to Brazil, [] may require a 15 basis point adjustment. This would lead to an adjusted []
price of T plus [] basis points, which is [] the EDC's offer to Comair. 249 We further recall the need to
increase EETC prices by 20-30 basis points, to arrive at an EETC price for regional aircraft
transactions. The further adjusted [] price would be T plus [], which is [] than the EDC's offer to
Comair.
7.287 The [] cited by Canada were rated [], some [] than the EDC's unsecured rating for Comair ([]).
An adjustment must therefore be made before comparing the price of the [] with the EDC's March
1998 offer to Comair. If one assumes 15 basis points per notch, as Brazil has suggested
250, the
adjusted [] prices would be reduced by [] basis points, from T plus [] and [] to T plus [] and T plus [].
Canada has submitted evidence to the effect that a change in rating from [] to [] would lead to a []
basis point spread reduction. Thus, using Canada's spread adjustment, the adjusted [] prices would be

244 See para. 7.273 supra.
245 See Exhibit CAN-59, p. 8.
246 Comments of Brazil on Responses of Canada to Questions and Additional Questions from the Panel
Following the Second Meeting of the Panel, para. 42 (Annex A-16).
247 A company has a split rating when it is rated differently by Moody's and Standard & Poor's.
248 Canada submits that Moody's [] correlates to Standard & Poor's [] ( See p. 12 of Annex II to
Response of Canada to Oral Statement of Brazil at the Second Meeting of the Panel (Annex B-12)). This has
not been disputed by Brazil.
249 Appendix 1 to Annex II of Canada's 13 August 2001 submission does not indicate what adjustment
Canada considers would be appropriate to reflect a rating change of [] to [] ( See Response of Canada to Oral
Statement of Brazil at the Second Meeting of the Panel (Annex B-12)).
250 See para. 7.196, supra.

T plus [] and []. Using either Brazil's or Canada's adjustment, therefore, the adjusted [] prices would
be lower, and more favourable, than the EDC's March 1998 offer to Comair.
7.288 Canada has also presented data regarding an [], rated [], and priced at T plus []. Canada notes
that [] is not a commercial airline, and "therefore has less relevance in this analysis". Since [] is not a
commercial airline, we do not consider that the price of its EETCs has any relevance for the purpose
of reviewing the EDC's offers to commercial airlines.
251
7.289 Canada has also asserted that the EDC's March 1998 offer to Comair was deemed appropriate
by the EDC "in comparison with ASA". 252 In this regard, we note that an internal EDC memo dated
10 March 1998 refers to a financing agreement "recently entered into" by the EDC with ASA.
However, the record indicates that the only EDC financing to ASA in existence in March 1998 dates
back to March 1997. We do not consider that the EDC's March 1997 financing to ASA is sufficiently
contemporaneous for the purpose of reviewing the EDC's March 1998 offer to Comair.
7.290 We recall that the EDC's offer was priced [] fav ourably than the adjusted [] price, but []
favourably than the adjusted [] prices. We further recall the reservations expressed by both parties
regarding the use of company-specific EETC data. 253 On balance we find that there is credible but
conflicting evidence on whether the EDC's March 1998 offer was below market. Thus, on the basis
of the evidence presented, we conclude that Brazil has failed to establish that the EDC’s March 1998
offer to Comair was priced below market and co nferred a "benefit" within the meaning of Article
1.1(b) of the SCM Agreement.
(i) Comair – February 1999
7.291 The EDC offered Comair [] financing at T plus []
254 in February 1999, when the EDC rated
Comair [] secured / [] unsecured.
7.292 Regarding the EDC's February 1999 offer to Comair, Brazil argued that the offer was below
market because it was made at [] basis points above the EDC's cost of funds. It appears to us that this
argument is based on the incorrect assumption that the offer was at T plus [] basis points, while we
find the evidence demonstrates that the offer was made at T plus [] basis points and we will examine
the transaction on that basis.255
7.293 Canada asserts that the EDC's pricing strategy considered a basket of US industrials including
banks, industrials and consumer goods companies with a like credit rating and actively trading bonds
with a similar term to maturity as the average life of the financing offered to Comair. According to
Canada, the average spread on such bonds was T plus [] basis points, [] basis points lower than the

251 See para. 7.216, supra.
252 Response of Canada to Oral Statement of Brazil at the Second Meeting of the Panel, para. 76
(Annex B-12).
253 See footnote 202, supra.
254 Brazil has queried whether EDC's offer was T plus [] or T plus [], as the EDC recommendation
contained in Exhibit CAN-59 refers to T plus []. Since the formal 26 February 1999 offer contained in Exhibit
CAN-58 refers to T plus [], we see no reason to doubt Canada's assertion that the EDC's February offer was T
plus []. Having assumed that the EDC's offer was actually T plus [], Brazil argued that the EDC's offer was
below market because it was [] basis points above its cost of funds. Brazil did not state that this argument
would apply equally in the event that the EDC actually offered T plus [] – or cost of funds plus 14 basis points
(which Brazil merely compared with the general EETC market ( See Oral Statement of Brazil at the Second
Meeting of the Panel, para. 94 (Annex A-12)). Since we do not accept Brazil's suggestion that the EDC actually
offered T plus [], we do not consider it necessary to address Brazil's argument that the EDC's offer was below
market because it was [] basis points above its cost of funds.
255 See Oral Statement of Brazil at the Second Meeting of the Panel, para. 94 (Annex A-12).

EDC's February 1999 offer to Comair. Canada submits that the EDC [], the average spread of which
(T plus [] basis points) was also lower than the EDC's February 1999 offer to Comair.
7.294 As noted above, we do not consider it appropriate to base our findings on average industrial
bond spreads, especially when airline-specific benchmarks are available. Since Canada has adduced
evidence regarding the [] tranche of a [], we shall base our findings on those indicators. The [] tranche
of the [] was issued in [] at T plus []. This price would increase to T plus [] when one adds the 20 - 30
basis point regional aircraft premium. The EDC's offer is [] than the adjusted [] price.
7.295 [] were trading at T plus [] and [] in February 1999, when they were rated []. Since Comair
was rated by the EDC as [] unsecured at that time, the price of the [] should be adjusted to reflect the
[] difference in credit ratings. According to Brazil, a [] adjustment would cause the [] prices to
decrease by [] basis points, to T plus [] and [], which is [] than the EDC's February 1999 T plus []
offer to Comair. According to evidence submitted by Canada, interest rates would decrease by []
basis points if a credit rating improved from [] to [].
256 This would lead to an adjusted price of T plus
[] and [] for [], which is also [] than the EDC's offer to Comair. Using both Brazil and Canada's
adjustment methodologies, therefore, the adjusted [] prices are [] than the EDC's February 1999 offer
to Comair.
7.296 Thus, the EDC's February 1999 offer to Comair is priced [] the [] tranche of the []. The
EDC's offer is also priced [] the February 1999 spread for []. 257 On the basis of the specific market
evidence presented by Canada, therefore, we conclude that the EDC's February 1999 offer to Comair
was more favourable than Comair could have obtained in the market. Accordingly, we find that the
EDC's February 1999 offer to Comair did confer a "benefit".
(j) Kendell – August 1999
7.297 The EDC offered financing to Kendell in August 1999 at T plus [], for []. According to
Canada, the EDC participated on an equal risk-sharing basis with seven other commercial lenders: [].
Canada asserts that this was a commercial transaction, as the terms and conditions were dictated by
the arranging banks [], and the financing was not conditional upon the EDC’s participation. Canada
asserts that the EDC was a price-taker, and not a price-maker, in this transaction. Canada also asserts
that the EDC participated in this deal on a pari passu basis.
7.298 Brazil asserts that the EDC's offer to Kendell confers a "benefit" because the [] repayment
term exceeds the maximum provided for in Article 21 of the Sector Understanding on Export Credits
for Civil Aircraft. As noted above, Brazil has not established that a repayment term in excess of 10
years is necessarily more favourable than that available on the market. Accordingly, we decline to
find the existence of a "benefit" on this ground.
7.299 Brazil also asserts that the transaction is not commercial, as alleged by Canada, since the fact
that the EDC provided a large part of the financing means that this was an officially supported
transaction. In this regard, Brazil queries whether the EDC participated in the transaction on a pari
passu basis. Brazil also submits that Canada's assertion that the EDC financed [] per cent of the
transaction is inconsistent with a statement in Exhibit CAN-39 that "[i]t is anticipated that EDC will
fund up to []% of the notes while [] together with [] other identified underwriters, will hold the other
[]%". Brazil also states that Canada has provided no support for its assertion that the EDC was

256 See Appendix 1 to Annex II of Response of Canada to Oral Statement of Brazil at the Second
Meeting of the Panel (Annex B-12).
257 As to the weight to be given to individual company EETC data, we recall that both parties have
expressed some reservations. See footnote 202, supra.

merely a price-taker in this instance. In any event, Brazil submits that the EDC's presence in the deal
necessarily affected the financing terms.
7.300 Dealing first with the extent of the ED C's participation in the Kendell August 1999
transaction, Canada has stated that the "EDC was responsible for [] percent, not [] percent of the
lending provided".258 Canada has also asserted that, ultimately, [] banks also participated in the deal,
alongside the EDC. It is clear, therefore, that the EDC's share of the financing was greater than that of
at least some of the [] participating banks. A ccording to Brazil, this means that the Kendell
transaction was officially supported, rather than commercial. We do not agree. Provided the basic
terms and conditions of the deal were fixed by commercial banks, and provided the EDC was exposed
to the same risk of non-repayment of its loan as those commercial banks, we see no reason why this
transaction should not be deemed to be commercial.
7.301 Brazil also asserts that the deal was not commercial because the EDC's presence necessarily
affected the terms of the financing. We would only be able to accept this argument if it were clear
that the banks' participation was dependent on participation by the EDC, or that the EDC was exposed
to a greater risk (of default) than the participatin g banks. However, Canada has submitted that the
deal was not dependent on the EDC's participation. According to Canada, the EDC was simply
invited to participate as a price-taker. This is confirmed by evidence in the record. 259 Furthermore,
the EDC was exposed to the same risk of default as the participating banks. 260 For these reasons, we
reject Brazil's argument that the EDC's participation in the Kendell transaction necessarily affected
the terms of the transaction.
7.302 Thus, in view of the fact that the terms and co nditions of the financing provided by the EDC
were arranged by commercial banks, and that the terms and conditions of the financing were not
dependent on the EDC's participation, and since the EDC's exposure to the risk of repayment was the
same as commercial banks, on balance we consider that this financing is on market terms, and not
officially supported. We therefore find that the EDC's August 1999 financing to Kendell did not
confer a "benefit".
(k) Air Nostrum
7.303 The EDC offered financing to Air Nostrum in October 1998, under both the Corporate
Account and the Canada Account. The EDC's Corpor ate Account financing was priced at [] per cent
(for []), whereas its Canada Account financing []. Financing was also provided under the IQ
programme (at [] per cent).
7.304 Brazil asserts that the EDC's financing to Air Nostrum conferred a "benefit" because the
weighted average interest rate for the deal ([] per cent) is [] for Deutschmark-denominated
transactions ([]).

258 Oral Statement of Canada at the Second Meeting of the Panel, para. 50 (Annex B-10). The EDC's []
per cent participation is not inconsistent with the statement in Exhibit CAN-39 that "[i]t is anticipated that EDC
will fund up to [] per cent" of the deal. Provided the EDC ultimately financed [] per cent or less of the deal, its
participation is consistent with that statement.
259 See the Executive Summary contained in Exhibit CAN-37, whereby "[t]he Joint
Arrangers/Underwriters are now seeking to offer to selected financial institutions the opportunity to buy Loan
Notes to be issued under the Facility". Furthermore, the EDC Pricing Strategy contained in Exhibit CAN-39
states "[g]iven this pricing has already been committ ed, EDC, as participant, would be expected to accept
pricing or stand aside".
260 This is evidenced by the fact that the EDC would share pari passu in the security (See Exhibit CAN-
39).

7.305 According to Canada, Air Nostrum confirmed to the EDC that the Government of Brazil had
offered long term financing for the Embraer contract, which was not consistent with
OECD Arrangement terms. On the basis of this information, the EDC, with Canada Account support,
provided a financing proposal which attempted to match the lease payment structure required by Air
Nostrum but with a higher all-in rate than that being offered by Brazil. The EDC notified the OECD
of its intention to match Brazil’s offer. Canada submits that, though the overall pricing was driven by
Canada’s desire to match the Brazilian offer and to meet Air Nostrum’s lease payment structure
requirements, it was also based on a review of the airline’s financial and operating performance.
7.306 In our view, it is not appropriate to analyse the EDC's financing to Air Nostrum on the basis
of the weighted average of the interest rates payable to EDC Corporate Account, EDC Canada
Account, and IQ, since Brazil has challenged each of these programmes (and specific transactions
under these programmes) separately. Accordingly, the financing provided to Air Nostrum under each
of these programmes should be examined separately. We examine the Canada Account and Corporate
Account financing to Air Nostrum below.261
7.307 As noted above, the EDC Canada Account financing to Air Nostrum was []. There is no
question that an [] loan confers a "benefit", since such a loan would not be available on the market.262
7.308 With regard to the EDC's Corporate Account financing to Air Nostrum, Brazil's claim
depends on finding that the weighted average interest rate was [] per cent, and therefore [] for
Deutschmark-denominated transactions. As noted above, however, the rate charged by the Corporate
Account was [] per cent, and we decline to analyse the EDC financing to Air Nostrum on the basis of
a weighted average interest rate.263 Since Brazil has adduced no other transaction-specific arguments
demonstrating that EDC's Corporate Account financing to Air Nostrum confers a "benefit", there is no
basis for us to make such a finding.
Conclusion
7.309 For the above reasons, we find that financing provided under the EDC Corporate Account to
ASA, ACA, Kendell, Air Nostrum and Comair in December 1996, March 1997, and March 1998 does
not confer a "benefit", and therefore does not constitute a subsidy. It is therefore not necessary for us
to consider whether or not the abovementioned EDC Corporate Account financing is "contingent …
upon export performance". However, we find that EDC Corporate Account financing to Comair in
July 1996, August 1997 and February 1999 does confer a "benefit", and is therefore a subsidy. In
addition, we find that the EDC's Canada Account financing to Air Nostrum is a subsidy. In order to
determine whether or not these subsidies are prohibited export subsidies, we must consider whether or
not the financing at issue is "contingent … upon export performance".
3. Is the EDC's Corporate Account financing to Comair "contingent … upon export
performance"?
7.310 Brazil asserts that the EDC, which operates the Corporate Account programme, was
"established for the purposes of supporting and developing, directly or indirectly, Canada's export

261 Regarding the alleged IQ financing to Air Nostrum, see footnote 289.
262 Although Canada has referred to the matching provisions of the OECD Arrangement , Canada has
made no attempt to demonstrate that the Canada Account financing to Air Nostrum falls within the safe haven
provided for in the second paragraph of item (k).
263 In any event, we recall our earlier finding that below-CIRR financing does not necessarily confer a
"benefit" (See para. 7.241 supra.).

trade and Canadian capacity to engage in that trade and to respond to international business
opportunities".264
7.311 First, we note that Canada does not deny that the Corporate Account financing to Comair is
"contingent … upon export performance". Second, we consider that the above-mentioned statutory
mandate of the EDC indicates that any financing it provides under the Corporate Account programme
is necessarily "contingent … upon export performance", since anything the EDC does is statutorily for
the purpose of "supporting and developing … Canada's export trade". For these reasons, we find that
the Corporate Account financing to Comair is "contingent … upon export performance".
4. Is the EDC's Canada Account financing to Air Nostrum "contingent … upon export
performance"?
7.312 Brazil asserts that the Canada Account offer to Air Nostrum is "contingent … upon export
performance" because "[t]he Canada Account is used to support export transactions", and because
Canada Account is one way for the EDC to satisfy its "mandate to support and develop Canada's
export trade and Canadian capacity to engage in that trade and to respond to international business
opportunities"
265.
7.313 In addressing Brazil's claim of export contingency, we note first that Canada does not deny
that the Canada Account financing to Air Nostrum is "contingent … upon export performance".
Second, we note that Canada itself has stated that the mandate of the Canada Account is "to support
and develop Canada's export trade and Canadian capacity to engage in that trade and to respond to
international business opportunities".
266 Third, we recall that the EDC, which operates the Canada
Account programme, was "established for the purposes of supporting and developing, directly or
indirectly, Canada's export trade and Canadian capacity to engage in that trade and to respond to
international business opportunities".
267 We therefore consider that any financing provided by the
EDC under the Canada Account is necessarily "contingent … upon export performance", since
anything the EDC does is statutorily for the purpose of "supporting and developing … Canada's
export trade". Fourth, we note that the Canada – Aircraft panel found that the EDC Canada Account
debt financing at issue in that case was "contingent … upon export performance". 268 F o r t h e s e
reasons, we find that support provided under the Canada Account programme, including the financing
to Air Nostrum, is "contingent in law … upon export performance" within the meaning of Article
3.1(a) of the SCM Agreement.
5. Conclusion
7.314 To conclude, we find that financing provid ed under the EDC Corporate Account to ASA,
ACA, Kendell, Air Nostrum and Comair in December 1996, March 1997 and March 1998 is not a
subsidy.
7.315 We find, however, that the EDC's Corporate A ccount financing to Comair in July 1996,
August 1997 and February 1999, and the EDC's Canada Account financing to Air Nostrum, take the
form of subsidies that are "contingent … upon export performance". We therefore find that the EDC's
Corporate Account financing to Comair in July 1996, August 1997 and February 1999, and the EDC's
Canada Account financing to Air Nostrum, are prohibited export subsidies, contrary to Article 3.1(a)
of the SCM Agreement.

264 Export Development Act, footnote 42, supra, Section 10(1).
265 Industry Canada News Release, 10 January 2001(Exhibit BRA-3).
266 Id.
267 Export Development Act, footnote 42, supra, Section 10(1).
268 See Canada – Aircraft, Report of the Panel, footnote 35, supra, para. 9.230.

H. IQ EQUITY GUARANTEES
7.316 Brazil claims that a number of equity guarantees provided by IQ to airlines constitute
prohibited export subsidies, contrary to Article 3.1(a) of the SCM Agreement. Brazil's claim concerns
IQ equity guarantees provided to ACA (May 1997 ), Air Littoral (August 1997), Midway (July 1998),
Mesa Air Group ("Mesa") (September 1998 and De cember 1999), Air Nostrum (January 1999), and
Air Wisconsin (December 2000).269
7.317 Brazil claims that these IQ equity guarantees are subsidies because they are "financial
contributions" that confer a "benefit". Brazil asserts that an IQ equity guarantee constitutes a
"financial contribution" within the meaning of Ar ticle 1.1(a)(1)(i) and (iii) of the SCM Agreement.
Brazil submits that an IQ equity guarantee confers a "benefit" because equity guarantees are not
available in the market, 270 and because they allow recipient airlines to pay less for equity than they
would have to absent the IQ equity guarantee. Brazil submits that IQ equity guarantees are both de
jure and de facto "contingent … upon export performance".
7.318 Canada acknowledges that IQ equity guarantees constitute potential direct transfers of funds,
and therefore "financial contributions", within the meaning of Article 1.1(a)(1)(i) of the SCM
Agreement. Canada denies that the IQ equity guarantees at issue confer a "benefit", however, because
IQ charges market-based fees for those equity guarantees. Canada rejects Brazil's claim that IQ
equity guarantees are either de jure or de facto "contingent … upon export performance".
7.319 In order to examine Brazil's claim against the aforementioned IQ equity guarantees, we must
determine whether or not IQ equity guarantees are "financial contributions" that confer a "benefit". If
so, we must determine whether such IQ subsidies are "contingent … upon export performance".
1. Are IQ equity guarantees "financial contributions"
7.320 The parties agree that IQ equity guarantees are "potential direct transfers of funds" within the
meaning of Article 1.1(a)(1)(i). We see no reason to disagree, and therefore find that IQ equity
guarantees are "financial contributions".271
2. Do the IQ equity guarantees confer a "benefit"?
(a) Arguments of the parties
7.321 Brazil asserts that equity guarantees, otherwise known as first loss deficiency guarantees, do
not appear to be available commercially. According to Brazil, Embraer has been informed that equity
guarantees are not available in the market. In support, Brazil has submitted letters from two
commercial banks.272 Brazil submits that because IQ is offering something that the market does not
provide, the provision of an equity guarantee by IQ is "quintessentially" a benefit.

269 Brazil initially alleged IQ support to Atlantic Southeast and Northwest ( See First Written
Submission of Brazil, para. 91 (Annex A-3)). However, Canada has denied any IQ or SDI involvement in those
transactions (See Response of Canada to Question 38 from the Panel, Responses of Canada to Questions from
the Panel Prior to the Second Meeting of the Panel (Annex B-9)).
270 See, for example, Response of Brazil to Question 53 from the Panel, Responses of Brazil to
Questions from the Panel Prior to the Second Meeting of the Panel (Annex A-11).
271 Since we have found that IQ equity guarantees are "financi al contributions" on the basis of
Article 1.1(a)(1)(i), there is no need for us to examine Brazil's claim that IQ equity guarantees constitute
"financial contributions" by virtue of Article 1.1(a)(1)(iii).
272 See Exhibit BRA-50.

7.322 Irrespective of the availability of equity guarantees in the market, Brazil submits that
government guarantees to an equity investor protect that investor from the risks inherent in the equity
market, and confer a "benefit" by making equity capital available to finance aircraft transactions on
terms more favourable than would be the case in the market in the absence of the guarantee. Brazil
asserts that, in order to demonstrate that there is no "benefit", Canada would have to prove that IQ's
fees are equal to those charged regional aircraft purchasers by commercial guarantors with A+ credit
ratings. Furthermore, drawing on the logic of Article 14(c) of the SCM Agreement, Brazil asserts that
there will be a "benefit" whenever a regional aircraft purchaser – which inevitably has a lower credit
rating than the Government of Québec – receives an IQ equity guarantee, and there is a difference
between the amount it pays for equity and the amount it would pay for equity absent the IQ guarantee.
7.323 Canada denies that IQ equity guarantees confer a "benefit" by providing something not
available in the market. Canada asserts that equity guarantees are offered commercially in the market.
Canada refers to evidence concerning the provision of equity guarantees by engine suppliers.
273
Canada also refers to evidence regarding risk transfer instruments available in the market.
7.324 Canada asserts, on the basis of the Appellate Body report in Canada – Aircraft, that whether a
benefit has been conferred can be determined by whether a recipient has received a financial
contribution on terms more favourable than those available to it in the market. Canada notes the
Appellate Body's finding that Article 14 of the SCM Agreement is relevant context in interpreting
Article 1.1(b) and supports its view that the marketplace is an appropriate basis for comparison.
According to Canada, however, there is no reason why Article 14(c) would be more relevant than any
other part of Article 14, because Article 14(c) addresses loan guarantees, which are not at all
equivalent to equity or first-loss deficiency guarantees. For Canada, the question of whether or not a
"benefit" is conferred by IQ equity guarantees is a function of whether or not the recipient ( i.e. the
aircraft purchaser) obtains the financial contribution on terms more favourable than those available to
it in the market.
7.325 Canada denies that IQ equity guarantees confer a "benefit", and accuses Brazil of failing to
recognise that most guarantors, including IQ, charge fees for their guarantees.
274 In particular, IQ
receives both an up-front fee of [] basis points to cover its administrative costs, as well as an annual
fee equivalent to [] basis points on its effective exposure.275
7.326 According to Canada, the market nature of the IQ guarantee can only be demonstrated by
considering the value of the guarantee in light of the risk exposure of IQ. In this regard, Canada
asserts that IQ's risk exposure is greatly diminished []. 276 Bombardier provides to IQ a counter-
guarantee pursuant to which []. [] are more than adequate to compensate it for its risk and service.
7.327 Canada submits that the market nature of the annual fee is further demonstrated by the fact
that, on average, Bombardier customers using IQ equity guarantees have chosen to do so on less than
[] per cent of their unit volume. According to Canada, this proves that in practice, IQ provides
financing services in competition with other financia l institutions interested in participating in the

273 See, for example, Exhibit CAN-13.
274 Brazil has asserted that IQ Decree 1488-2000 eliminates fees as a condition for the grant of IQ
equity guarantees. Canada denies this. The Panel does not consider it necessary to address this issue at this
juncture, as we are not at present examining the IQ programme "as such". To the extent that Decree 1488-2000
relates to fees charged for any of the specific IQ transactions at issue, we shall examine that instrument when
reviewing those specific transactions.
275 Bombardier counter-guarantees [].
276 Brazil queried whether such counter-guarantees are actually offered by Bombardier per se , or by
Canadair Québec Capital ("CQC"), a company capitalized in equal parts by Bombardier and a company wholly-
owned by IQ. Canada has confirmed that it is Bombardier, not CQC, that is responsible for the counter-
guarantees. [].

aircraft financing market and that for the great majority of aircraft sold by Bombardier, the IQ
guarantee is not sufficiently attractive to Bombardier’s customers. In other words, the fact that [] per
cent of the aircraft being financed are financed without IQ equity guarantees demonstrates that most
of the time, Bombardier’s customers are, at best, indifferent to IQ equity guarantees. For Canada, the
necessary implication of these circumstances is that the fees charged by IQ in return for the
guarantees are market rate; otherwise Bombardier’s customers would not be so indifferent as to their
availability.
7.328 Brazil asserts that whether or not Bombardier or some other entity provides [] counter-
guarantees to IQ is irrelevant. By providing guarantees to the borrower, IQ facilitates more
favourable financing terms because of Québec’s superior credit rating, thus conferring a benefit. This
is what "sweetens" the deal for the purchaser of Bombardier aircraft, and therefore, for Bombardier
itself.
7.329 Brazil notes Canada's argument that, because [] per cent of the aircraft being financed are
financed without IQ equity guarantees, Bombardier’s customers are indifferent to IQ equity
guarantees, and the fees charged by IQ in return for the guarantees are market rate. According to
Brazil, Canada’s logic is flawed, since the fact that [] per cent of the aircraft being financed are
financed without IQ equity guarantees is irrelevant. Brazil asserts that what matters is the terms of IQ
equity guarantees in the cases where they are provided, whatever the percentage of those cases is.
7.330 Furthermore, Brazil asserts that IQ has provided guarantees with no fees charged and, when it
has charged fees, IQ uniformly charges a [] per cent fee, regardless of the credit ratings of the airlines
involved. According to Brazil, it is hard to trace in this pattern any effort to follow a market. Brazil
submits that no market guarantor would charge the same fee to recipients with varying credit ratings.
(b) Evaluation by the Panel
7.331 We shall first address Brazil's argument that IQ equity guarantees (also known as "first loss
deficiency guarantees")277 "quintessentially" confer a "benefit" because IQ is providing something not
available in the market. We shall then address Brazil's broader argument that IQ equity guarantees
otherwise confer a "benefit" by making equity capital available to finance aircraft transactions on
terms more favourable than would be the case in the market absent such guarantees.
(i) Do IQ equity guarantees necessarily confer a "benefit" because equity guarantees are not
available in the market?
7.332 We shall begin by examining the factual issue of whether or not equity guarantees (also
known as "first loss deficiency guarantees") are available in the market. Only if equity guarantees are
not available in the market will we consider whether or not, as a matter of law, the provision by a
government of support not available in the market necessarily confers a "benefit".
7.333 As a preliminary matter, we note that the two commercial bank letters submitted by Brazil do
not state that equity guarantees are not available in the market. The first letter does not expressly refer
to the availability of equity guarantees in the market . [] Thus, while both letters indicate that equity
guarantees are "uneconomic", neither letter states categorically that equity guarantees are not
available in the market.

277 We note that, in its request for the establishment of a panel, Brazil claims that "first loss deficiency
guarantees", in addition to equity guarantees, provided by IQ are prohibited export subsidies
(See WT/DS222/2).

7.334 We note that Canada has referred to the provision of equity guarantees by certain engine
suppliers. Brazil submits that these guarantees were furnished by a participant in the sale, and not by
a financial institution in the market. We agree with Brazil that the evidence adduced by Canada
regarding the provision of equity guarantees to purchasers of aircraft by companies supplying the
engines in the aircraft being purchased does not demonstrate that equity guarantees are available in
the market.
7.335 Very late in these proceedings, in response to a question from the Panel at the second
meeting, Canada also submitted evidence
278 regarding the existence of a market for financial
instruments that transfer risk in a manner similar to the equity guarantees provided by IQ. According
to Canada, Bombardier has used private sector alternatives in precisely the same manner as IQ. []
7.336 Canada submits that, not only is this transaction analogous in structure to IQ guarantees, but
the position in the financing and size of the [] tranche is identical to that of IQ in the vast majority of
the latter’s transactions. According to Canada, th e only significant difference is that while the []
transaction was a [], the IQ structure features []. Canada submits that this has the effect of
substantially lowering the risk assumed by the insurer (IQ).
7.337 Canada also submitted evidence 279 which, in its view, shows that aircraft manufacturers can
create innovative financing mechanisms centered around risk and remuneration. []
7.338 Canada has also submitted letters 280 from two financial services institutions, indicating that
there is an active private sector market for "risk tr ansfer", the technical term for transactions of this
kind. The first institution states that , []. The second institution states that [].
7.339 Brazil asserts that the evidence submitted by Canada does not demonstrate that Embraer
would be able to find a guarantee equal to that offered by IQ in the market. With respect to the equity
guarantee offered by a private insurer to Bombardier, Brazil notes that this guarantee is only for []
percent of the price of the aircraft for [], not the [] per cent for [] Embraer unsuccessfully offered Air
Wisconsin, or the [] per cent for [] that Canada provided to Air Wisconsin through IQ. Brazil also
notes that Canada failed to indicate the premiu m paid for the insurance, so there is no way to
determine how the premium charged for this guarante e compared to the apparent [] per cent premium
charged by IQ. Brazil asserts that the [] insurance programme only covers an apparent [] per cent
effective guarantee through insurance, and notes that the cost of that guarantee has not been disclosed.
7.340 In light of the above, we consider that Canada has adduced sufficient evidence to establish the
existence of equity guarantee-like instruments (including first loss deficiency guarantees) in the
market. Brazil notes that the instruments identified by Canada have a different duration, and different
coverage, than the IQ equity guarantees at issue. In our view, however, differences in duration and
coverage do not negate a finding that equity guarantee-like instruments are available in the market.281
7.341 Given the availability of equity guarantee-like instruments in the market, we find that there is
no factual basis to Brazil's claim that IQ equity guarantees "quintessentially" confer a "benefit"
because IQ is providing something that is not available in the market. For this reason, it is not
necessary for us to consider whether or not, as a matter of law, the provision by a government of
support not available in the market necessarily confers a "benefit".

278 See Exhibit CAN-74.
279 See Exhibit CAN-75.
280 See Exhibit CAN-76.
281 Brazil also notes that Canada has not provided any evidence regarding the fees levied for these
equity guarantee-like instruments. The question of fees is addressed at paras 7.348-7.357.

(ii) Do IQ equity guarantees otherwise confer a "benefit"?
7.342 In addressing this issue, we must first identify the appropriate method for determining
whether or not IQ equity guarantees confer a "benefit" within the meaning of Article 1.1(b) of the
SCM Agreement. We start by recalling the findings of the panel and Appellate Body in Canada –
Aircraft. In that case, the panel found that
a financial contribution will only confer a "benefit", i.e., an advantage, if it is
provided on terms that are more advantageous than those that would have been
available to the recipient on the market.282
7.343 The Appellate Body upheld the findings of the panel, ruling that
the marketplace provides an appropriate basis for comparison in determining whether
a "benefit" has been "conferred", because the trade-distorting potential of a "financial
contribution" can be identified by determining whether the recipient has received a
"financial contribution" on terms more favourable than those available to the recipient
in the market.
283
7.344 Consistent with the findings of the panel and Appellate Body in Canada – Aircraft , we
consider that IQ equity guarantees will confer a "benefit" to the extent that they are made available to
Bombardier customers on terms more favourable than those on which such Bombardier customers
could obtain comparable equity guarantees in the market. We note that the parties appear to agree
that this standard can be applied by reviewing the fees
284, if any, charged by IQ for providing its
equity guarantees.285 We agree that the "benefit" standard could be applied to IQ equity guarantees in
this manner. Thus, to the extent that IQ's fees are more favourable than fees that would be charged by
guarantors with Québec's credit rating in the market for comparable transactions, IQ's equity
guarantees may be deemed to confer a "benefit".
7.345 We note Brazil's argument that even if IQ's fees are equal to those charged regional aircraft
purchasers by commercial guarantors with A+ credit ratings, under Article 14(c) of the SCM
Agreement there would still be a "benefit" as long as there is a difference between the amount the
purchaser pays for equity using an IQ equity guarantee and the amount it would pay for equity absent
the IQ equity guarantee. Canada queries the relevance of Article 14(c) in this context, since that
provision is concerned with "benefit" in the context of loan guarantees, rather than equity guarantees.
In our view, although Article 14(c) is expressly concerned with "benefit" in the context of loan
guarantees, there are perhaps sufficient similarities between the operation of loan guarantees and
equity guarantees for it to be appropriate to rely on Article 14(c) for the purpose of establishing the
existence of "benefit" in the context of equity guar antees in certain circumstances. Thus, a "benefit"
could arise if there is a difference between the cost of equity with and without an IQ equity guarantee,
to the extent that such difference is not covered by the fees charged by IQ for providing the equity
guarantee. In our opinion, it is safe to assume that such cost difference would not be covered by IQ's
fees if it is established that IQ's fees are not market-based.

282 Canada – Aircraft, Report of the Panel, footnote 35, supra, para. 9.112.
283 Canada – Aircraft, Report of the Appellate Body, footnote 35, supra, para. 157.
284 For example, Brazil asserts that, in order to demonstrate that there is no "benefit", Canada would
have to prove that IQ's fees are equal to those charged regional aircraft purchasers by commercial guarantors
with A+ credit ratings. For its part, Canada (although it rejects Brazil's argument regarding the burden of proof)
asserts that there is no "benefit" because the annual fees for IQ equity guarantees are market-based.
285 We note that IQ purports to levy both an up-front [] per cent administrative fee, and an annual fee of
[] per cent on IQ's effective exposure. We do not understand Brazil to raise any claims regarding the up-front
administrative fee. We understand that Brazil's claims are concerned only with the annual fee allegedly levied
by IQ.

(iii) Burden of proof
7.346 Having established the proper "benefit" test to be applied in respect of IQ equity guarantees,
we consider it important to clarify which party bears the burden of proof in respect of that standard.
Brazil asserts that Canada bears the burden to prove that IQ equity guarantees do not confer a
"benefit" (by proving that IQ's fees are equal to those charged to regional aircraft purchasers by
commercial guarantors with A+ credit ratings). Canada asserts that the burden is on Brazil to prove
that IQ equity guarantees do confer a benefit.
7.347 It is now well established that the initial burden lies on the complaining party, which must
establish a prima facie case of inconsistency. The burden then shifts to the defending party, which
must counter or refute the claimed inconsistency. 286 In order to demonstrate that the IQ equity
guarantees confer a "benefit", the initial burden ther efore lies on Brazil, as the complaining party, to
demonstrate that any fees levied by IQ are more favourable than those that would be charged by
equity guarantors in the market. We therefore reject Brazil's argument that, in order to demonstrate
that there is no "benefit", Canada would initially have to prove that IQ's fees are equal to those
charged regional aircraft purchasers by commercial guarantors with A+ credit ratings.
(iv) Application of the "benefit" standard to specific IQ transactions
7.348 We shall now determine whether or not Brazil has demonstrated that any of the IQ equity
guarantees at issue confer a "benefit". In this regard, we note Brazil's arguments that IQ equity
guarantees confer a "benefit" either because they are provided free of charge, or because any fees
levied by IQ are below market.
No fees charged
7.349 In its oral statement at the Panel's second substantive meeting with the parties, Brazil claimed
that IQ has provided guarantees with no fees charged, "[a]s [Brazil] will show below in our discussion
of specific transactions". 287 Brazil did not indicate precisely which specific transaction(s) it was
referring to in this regard. We have carefully re viewed the remainder of Brazil's oral statement, and
consider that the only portion that could be interpreted as a claim of IQ providing an equity guarantee
without charge is [], concerning the [] transaction. Since Brazil has not clearly identified any
additional transactions where IQ allegedly provided equity guarantees without levying any fee, we
shall address Brazil's argument (that IQ provides equity guarantees free of charge) by examining
whether or not IQ charged fees for its equity guarantee to [].
288, 289

286 See European Communities – Hormones, Report of the Appellate Body, footnote 45, supra.
287 Oral Statement of Brazil at the Second Meeting of the Panel, para. 23 (Annex A-12).
288 In its written submission of 20 August 2001, Brazil asserts that for transactions for which Canada
has shown evidence of a fee, it has only shown the [] basis point up-front administrative fee, and not the [] basis
point annual fee Canada claims is also charged ( See Comments of Brazil on Responses of Canada to Questions
and Additional Questions from the Panel Following the Second Meeting of the Panel (Annex A-16)). [].
289 Oral Statement of Brazil at the Second Meeting of the Panel, para. 110 (Annex A-12). In para. 106
of that submission, Brazil submits that the evidence provided by Canada suggests that IQ also provided [], in
addition to the equity guarantee. In para. 61 of its 20 August 2001 comments on Canada's 13 August 2001
submission, Brazil notes that Canada does not deny the provision of [] ( See Comments of Brazil on Responses
of Canada to Questions and Additional Questions from the Panel Following the Second Meeting of the Panel
(Annex A-16)). While we accept that the documentary ev idence presented by Canada appears to indicate the
existence of [], Brazil has made no attempt to assert that such [] constitutes a subsidy. Thus, even if IQ did
provide [], we have no basis on which to make any findings against such []. Brazil has requested adverse
inferences regarding IQ support to certain airlines (including []) more generally. We address this issue below.

7.350 Brazil claims that, according to the summary of the transaction provided by Canada, IQ
provided both an equity guarantee and []. According to Brazil, "the fee for the guarantee provided by
CQC – [] percent – appears to have been [] for the transaction. Depending on how you look at it,
therefore, either the guarantee was provided []. Canada does not respond to this argument.
7.351 The documentary evidence regarding the [] transaction is contained in Exhibit CAN-77.290 In
a table describing the details of the transaction, provision is made for a [] per cent annual fee. []. 291
We are in no doubt – and Canada has not argued – that equity guarantees would not be provided in the
market []. Since the IQ equity guarantee to [] was therefore provided on terms more favourable than
[] could have obtained in the market, we find that the IQ equity guarantee to [] confers a "benefit".
Below-market fees
7.352 Brazil asserts that IQ's annual fees are below-market because they are levied uniformly, at []
per cent, regardless of the credit ratings of the airlines involved.
7.353 Canada disagrees, on the basis of []. According to Canada, in large part the risk represented
by the possible default of a particular aircraft purchaser is []. Canada asserts that, [], it is entirely
appropriate that the fee charged to different purchasers would be the same.
7.354 Brazil raises two counter-arguments. First, Brazil asserts that Bombardier counter-guarantees
may well reduce IQ's risk exposure, but they are between Bombardier and IQ, and not between
Bombardier and the purchaser. []. Second, Brazil asserts that []. Thus, IQ's risk exposure is not
diminished with respect to the remaining [] (or []) per cent of its guarantee.
7.355 In support of its argument that uniform fees are necessarily below-market, Brazil asserts that
"[n]o market guarantor would charge the same fee to recipients with wildly varying credit ratings".
292
While we agree that market operators would normally charge different equity guarantee fees to
customers with different credit ratings, to reflect the different degrees of risk exposure, it is
theoretically possible that a uniform fee could be set in such a manner that it covers the risk exposure
resulting from the provision of equity guarantees to customers with the lowest credit ratings. For

Brazil also claims that IQ provided financing to Midway, and that Canada has failed to provide full
information regarding the terms of the IQ equity support to Midway. Brazil therefore requests an adverse
inference in respect of the IQ equity guarantee to Midway. Canada denies that IQ provided financing to
Midway, and suggests that Brazil confused the equity guar antee with direct financing. Given Canada's denial,
and since we do not see anything in Exhibit CAN-61 that would indicate the existence of IQ financing to
Midway, we see no basis for Brazil's assertion that IQ provided financing to Midway. Furthermore, Brazil has
failed to specify why, in its view, Canada has failed to disclose full information regarding the IQ equity
guarantee to Midway. For our part, we do not see what additional information should have been provided by
Canada. We therefore reject Brazil's request for an adverse inference regarding the IQ equity guarantee to
Midway.
Brazil also asked the Panel to draw an adverse inference regarding IQ's equity guarantee to ACA, again
alleging that Canada failed to provide full information regarding the terms of that transaction. We assume that
Brazil is referring to the fact that Exhibit CAN-63 does not identify the creditor providing debt financing. In our
view, however, the fact that Canada has failed to disclose the identity of the loan creditor has no bearing on the
consistency of the IQ equity guarantee with the SCM Agreement. We therefore reject Brazil's request for an
adverse inference regarding the IQ equity guarantee to ACA.
290 Canada initially submitted details of the first approval of the IQ equity guarantee to [] in Exhibit
CAN-64. Canada subsequently informed the Panel that the first approval did not reflect the final terms and
conditions of IQ's offer, which were then submitted as Exhibit CAN-77.
291 In response to Question 47 from the Panel, Canada asserted that " IQ has charged fees for every
transaction in which it has participated and has provided for fees in every financing offer it has made"
(Responses of Canada to Questions from the Panel Prior to the Second Meeting of the Panel (Annex B-9)). []
292 Oral Statement of Brazil at the Second Meeting of the Panel, para. 23 (Annex A-12).

example, if market operators normally charge a two per cent fee to customers with CCC credit ratings,
and a 0.25 per cent fee to customers with AAA+ ratings, the levying of a uniform two per cent fee
would not necessarily indicate the existence of a "benefit". Instead, a "market" fee would effectively
be charged to CCC recipients, while an above-market fee would be charged to AAA+ recipients. For
this reason, we are unable to accept Brazil's argument that uniform fees are necessarily below-market.
7.356 Brazil could have sought to establish the existence of a "benefit" by producing evidence to the
effect that the levying of a uniform [] fee (on IQ's remaining [] per cent exposure) is not sufficient to
cover the risk to which IQ is exposed when providing equity guarantees to airlines with the lowest
credit ratings. Brazil might have done this, for example, with the assistance of the two financial
institutions that provided the letters contained in Exhibit BRA-50. Both financial institutions asserted
that the provision of equity guarantees of the sort offered by IQ would be uneconomic. In making
these assertions, these institutions would presumably have made a preliminary estimation of the
nature of the fee that would have to be charged when providing such equity guarantees. This
preliminary estimation may have been useful in assessing whether or not the uniform [] fee levied by
IQ is sufficient to cover the risk exposure resulting from the provision of equity guarantees to airlines
with the lowest credit ratings. Brazil presented no such evidence, however. We note that we do not
accept Canada’s argument that the [] totally eliminate IQ’s exposure. Thus, to offer such guarantees
on a market basis, IQ would still need to concern itself with the credit ratings of the beneficiaries of
its guarantees. Nonetheless, it seems clear that the existence of [] would make it possible for IQ (or
for a commercial bank or insurer) to charge a mu ch lower fee (based on market considerations) than
would otherwise be the case. In these circumstances, we cannot conclude that IQ’s uniform fee is
necessarily a below-market fee for the beneficiaries with the lowest credit ratings. To do so, we
would need some evidence of the market fees for these or similar guarantees, and we have none.
7.357 In light of the above, we find that Brazil has failed to establish its claims that the fee-based IQ
equity guarantees confer a "benefit" and that the levying of a uniform fee for IQ equity guarantees
necessarily confers a "benefit".
Conclusion
7.358 To conclude, we recall our finding that the IQ equity guarantee to Air Nostrum conferred a
"benefit", and therefore constituted a subsidy. We also recall our finding that Brazil has failed to
establish that the remaining IQ equity guarantees at issue conferred a "benefit", and therefore reject
Brazil's claims against those remaining IQ equity guarantees. In order to determine whether or not the
IQ equity guarantee to [] is a prohibited export subsidy, we must now consider whether or not it is
"contingent … upon export performance" within the meaning of Article 3.1(a) of the SCM
Agreement.
3. Are IQ equity guarantees "contingent … upon export performance"?
(a) Arguments of the parties
7.359 Brazil asserts that the IQ equity guarantees at issue are both de jure and de facto "contingent
… upon export performance". Regarding de jure export contingency, Brazil relies on the arguments it
made in support of its claim that the IQ programme "as such" is "contingent … upon export
performance".
293 Thus, Brazil refers to Section 25 of the IQ Act, which specifies "export activities" as
one of the missions of IQ. Brazil also refers to IQ Decrees 572-2000 and 841-2000. Brazil notes that
Decree 572-2000 enables IQ to provide financial support for investment projects or export projects,
including the sale of goods outside of Québec, and that Decree 841-2000 grants IQ the authority to

293 Second Written Submission of Brazil, para. 148 (Annex A-10).

support market development projects, including projects ultimately focused on the sale of goods
outside of Québec.
7.360 Regarding de facto export contingency, Brazil relies on the findings of the Australia –
Leather panel.294 Brazil cites para. 9.67 of that panel's report to argue that a Member's awareness that
its domestic market is too small to absorb domestic production of a subsidised product indicates the
subsidy is granted on the condition that it be exported. In this regard, Brazil notes that [] per cent of
Bombardier's regional aircraft have been sold outside of Canada, and that [] per cent of the regional
aircraft transactions receiving IQ support have been for export outside of Canada.
295
7.361 Brazil also asserts that Canada failed to provide certain documentation requested by the Panel
that would have indicated whether or not the IQ equity guarantees at issue were contingent on export.
Brazil submits that Canada's failure to provide that documentation should lead the Panel to draw
adverse inferences regarding the export contingency of the IQ equity guarantees at issue.
7.362 Canada denies that any of the IQ equity guarantees at issue are "contingent … upon export
performance". In response to Brazil's arguments regarding de jure export contingency, Canada asserts
that the legal basis for IQ financing for aircraft sales is Section 28 – not 25 - of the IQ Act. Canada
asserts that Section 28 is used for many types of projects, whether or not they have export potential.
Canada also asserts that Decrees 572-2000 and 841-2000 have nothing to do with aircraft sales
financing and are not used for aircraft sales financing. In any event, Canada asserts that the term
"exportation" in Decree 572-2000 refers to the sale of goods outside of Québec, and not outside of
Canada.
7.363 Regarding Brazil's claim of de facto export contingency, Canada asserts that Brazil's
reference to the panel's finding in Australia – Leather is both inaccurate and taken out of context. In
particular, Canada considers that Brazil implies incorrectly that the Australia – Leather panel
considered a Member's awareness that its market could not absorb subsidised domestic production to
be sufficient to prove de facto export contingency. In fact, Canada argues, the subsidy in that case
was conditioned in part on sales performance targets. Since the Australian government was aware of
the fact that the recipient of the subsidy would have to maintain or increase export sales in order to
meet those sales performance targets, the panel considered that those sales performance targets were
in fact export performance targets. Canada also refers to the Canada – Aircraft proceedings, in which
the Appellate Body found that it is not sufficient for a complainant alleging de facto export
contingency to "demonstrate solely that a government granting a subsidy anticipated that exports
would result".
296
7.364 Regarding Brazil's request for adverse inferences, Canada asserts that, to the best of its
knowledge, it has provided all of the documenta tion that exist regarding the review of the IQ equity
guarantee transactions.
(b) Evaluation by the Panel
7.365 We shall begin by addressing Brazil's claim that the IQ equity guarantees at issue are de jure
"contingent … upon export performance". In this regard, we are guided by the finding of the
Appellate Body in Canada – Autos that a subsidy is de jure conditional on export performance "when

294 Australia – Subsidies Provided to Producers and Exporters of Automotive Leather , Report of the
Panel, WT/DS126/R, adopted 16 June 1999.
295 See Responses of Canada to Questions 19 and 20 from the Panel, Responses of Canada to Questions
from the Panel Following the First Meeting of the Panel (Annex B-7).
296 Canada – Aircraft , Report of the Appellate Body, footnote 35, supra, para. 171 (emphasis in
original).

the existence of that condition can be demonstrated on the basis of the very words of the relevant
legislation, regulation, or other legal instrument constituting the measure". 297 Furthermore, in Canada
– Aircraft the Appellate Body stated that "the ordinary connotation of 'contingent' is 'conditional' or
'dependent for its existence on something else'".298
7.366 Brazil asserts that the de jure export contingency of the IQ equity guarantees at issue results
from Section 25 of the IQ Act, and from Decrees 572-2000 and 841-2000. First, we note Canada's
assertion that the legal basis for the guarantees at issue was actually Section 28 of the IQ Act, and not
Section 25 as initially alleged by Brazil. Brazil appears to have accepted that " IQ guarantees to
regional aircraft purchasers were issued pursuant to [Section] 28" of the IQ Act.299 Section 28 of the
IQ Act provides
The Government may, where a project is of major economic significance for Québec,
mandate [IQ] to grant and administer the assistance determined by the Government to
facilitate the realization of the project. The mandate may authorize the agency to fix
the terms and conditions of the assistance.
7.367 We see nothing in the words of Section 28 of the IQ Act to suggest that IQ equity guarantees
based on that provision are de jure export contingent. Nor has Brazil argued that Section 28 of the IQ
Act demonstrates export contingency.300 301
7.368 Regarding Decrees 572-2000 and 841-2000, we note that these legal instruments entered into
force in June 2000. With the exception of the Air Wisconsin transaction, all of the IQ equity
guarantees at issue were provided before June 2000. Furthermore, Brazil itself has asserted that the
legal basis for the IQ equity guarantee to Air Wisconsin was Decree 1488-2000, 302 and not Decree
572-2000 and / or 841-2000. Since none of the IQ equity guarantees at issue were provided on the

297 Canada – Certain Measures Affecting the Automotive Industry ("Canada – Autos "), Report of the
Appellate Body, WT/DS139/AB/R-WT/DS142/AB/R, adopted 19 June 2000, para. 100.
298 Canada – Aircraft, Report of the Appellate Body, footnote 35, supra, para. 166.
299 See Second Written Submission of Brazil, para. 120 (Annex A-10).
300 Brazil relies on Section 25 of the IQ Act to establish the de jure export contingency of IQ equity
guarantees. Section 25 sets forth the "mission" of IQ. Even if IQ equity guarantees were provided on the basis
of Section 25, we do not consider that Section 25 would necessarily render such guarantees de jure export
contingent. Brazil has relied on that part of the IQ mission dealing with the "[g]rowth of enterprises", described
in Section 25 as including "export activities". Without finding that this part of the IQ mission would
demonstrate de jure export contingency, we note that the IQ mission set forth in Section 25 also includes, for
example, "[s]upport to enterprises", whereby IQ "shall also work to retain current investment in Québec by
providing support to enterprises established in Québec that show particular dynamism or potential". In our
view, there is nothing in the latter description of IQ's mission that would suggest export contingency.
Furthermore, even if the IQ guarantees at issue were provided on the basis of Section 25, there is nothing to
suggest that they were necessarily provided as part of the "[g]rowth of enterprises", rather than "[s]upport to
enterprises". We have already stat ed our view that that part of IQ's mission regarding "[s]upport to enterprises"
would not suggest export contingency. Accordingly, even if Section 25 were the legal basis for the IQ
guarantees at issue, that fact alone would not necessarily mean that they were de jure export contingent.
301 To the extent that para. 131 of the Appellate Body's report on Canada – Autos (on the use of
domestic over imported goods) requires an examination of the actual operation of a statute to determine whether
or not there is de jure export contingency, we note that we have found no aspect of the operation of the IQ Act in
specific transactions that would suggest export contingency ( See our findings on de facto export contingency
below).
302 See Second Written Submission of Brazil, paras. 110 and 118 (Annex A-10).

basis of Decrees 572-2000 and / or 841-2000, the wordin g of those instruments could not render the
IQ equity guarantees at issue de jure export contingent.303
7.369 For these reasons, we find that the IQ equity guarantees at issue are not de jure "contingent …
upon export performance".
7.370 In addressing Brazil's de facto export contingency claim, we shall be guided by note 4 to
Article 3.1(a) of the SCM Agreement, whereby a subsidy is "contingent … in fact … upon export
performance" when
the facts demonstrate that the granting of a subsidy, without having been made legally
contingent upon export performance, is in fact tied to actual or anticipated exportation
or export earnings. The mere fact that a subsidy is granted to enterprises which
export shall not for that reason alone be considered to be an export subsidy within the
meaning of this provision.
7.371 Brazil's de facto export contingency claim is based on its interpretation of the findings of the
Australia – Leather panel. That panel found that
the Australian market for automotive leather is too small to absorb Howe's
production, much less any expanded production that might result from the financial
benefits accruing from the grant payments, and the required capital investments,
which were to be specifically for automotive leather operations.* Therefore, we
conclude that, in order to expand its sales in a manner that would enable it to reach
the sales performance targets (interim targets and the aggregate target) set out in the
grant contract, Howe would, of necessity, have to continue and probably increase
exports. At the time the contract was entered into, the government of Australia was
aware of this necessity, and thus anticipated continued and possibly increased exports
by Howe. In our view, these facts effectively transform the sales performance targets
into export performance targets. We thus consider that Howe's anticipated export
performance was one of the conditions for the grant of the subsidies. Australia argues
that this consideration would lead to a result that would penalize small economies,
where firms are often dependent on exports in order to achieve rational economic
levels of production. Nevertheless, in the specific circumstances of this case, we find
this consideration compelling evidence of the close tie between anticipated
exportation and the grant of the subsidies.
304 (* footnote omitted)
7.372 According to the Australia – Leather panel, therefore, in certain circumstances (in the
presence of export performance targets, for examples) a Member's awareness that its domestic market
is too small to absorb domestic production of a subsidised product may indicate that the subsidy is
granted on the condition that it be exported. In this regard, we note that IQ was very likely aware that
the Canadian domestic market was too small to absorb Bombardier production, because [] per cent of
Bombardier's regional aircraft have been sold outside of Canada, and [] per cent of the regional
aircraft transactions receiving IQ support have been for export outside of Canada.
7.373 However, in Canada – Aircraft, the Appellate Body stated that

303 In the context of Brazil's claim against the IQ programme "as such", the parties disagreed as to
whether or not Decrees 572-2000 and 841-2000 could be used for providing IQ support for regional aircraft
transactions. Since Decrees 572-2000 and 841-2000 are not relevant to the IQ equity guarantees at issue, we do
not consider it necessary to resolve this issue.
304 Australia – Leather, Report of the Panel, footnote 294, supra, para. 9.67.

169. … satisfaction of the standard for determining de facto export contingency
set out in footnote 4 requires proof of three different substantive elements: first, the
"granting of a subsidy"; second, "is … tied to …"; and, third, "actual or anticipated
exportation or export earnings". (emphasis added) We will examine each of these
elements in turn.
170. The first element of the standard for determining de facto export contingency
is the "granting of a subsidy". In our view, the initial inquiry must be on whether the
granting authority imposed a condition based on export performance in providing the
subsidy. …
171. The second substantive element in footnote 4 is "tied to". The ordinary
meaning of "tied to" confirms the linkage of "contingency" with "conditionality" in
Article 3.1(a). Among the many meanings of the verb "tie", we believe that, in this
instance, because the word "tie" is immediately followed by the word "to" in
footnote 4, the relevant ordinary meaning of "tie" must be to "limit or restrict as to …
conditions".* This element of the standard set forth in footnote 4, therefore,
emphasises that a relationship of conditionality or dependence must be demonstrated.
The second substantive element is at the very heart of the legal standard in footnote 4
and cannot be overlooked. In any given case, the facts must "demonstrate" that the
granting of a subsidy is tied to or contingent upon actual or anticipated exports.* It
does not suffice to demonstrate solely that a government granting a
subsidy anticipated that exports would result. The prohibition in Article 3.1(a)
applies to subsidies that are contingent upon export performance.
172. We turn now to the third substantive element provided in footnote 4. The
dictionary meaning of the word "anticipated" is "expected".* The use of this word,
however, does not transform the standard for "contingent … in fact" into a standard
merely for ascertaining "expectations" of exports on the part of the granting authority.
Whether exports were anticipated or "expected" is to be gleaned from an examination
of objective evidence. This examination is quite separate from, and should not be
confused with, the examination of whether a subsidy is "tied to" actual or anticipated
exports. A subsidy may well be granted in the knowledge, or with the anticipation,
that exports will result. Yet, that alone is not sufficient, because that alone is not
proof that the granting of the subsidy is tied to the anticipation of exportation.
173. There is a logical relationship between the second sentence of footnote 4 and
the "tied to" requirement set forth in the first sentence of that footnote. The second
sentence of footnote 4 precludes a panel from making a finding of de facto export
contingency for the sole reason that the subsidy is "granted to enterprises which
export". In our view, merely knowing that a recipient's sales are export-oriented does
not demonstrate, without more, that the granting of a subsidy is tied to actual or
anticipated exports. The second sentence of footnote 4 is, therefore, a specific
expression of the requirement in the first sentence to demonstrate the "tied to"
requirement. We agree with the Panel that, under the second sentence of footnote 4,
the export orientation of a recipient may be taken into account as a relevant fact,
provided that it is one of several facts which are considered and is not the only fact
supporting a finding. (* footnotes omitted)
7.374 Thus, even if a Member were to anticipate that exports would result from the grant of a
subsidy (because, for example, of the export-orient ation of the recipient), the Appellate Body has
made it clear that such anticipation "alone is not proof that the granting of the subsidy is tied to the
anticipation of exportation" within the meaning of note 4 to Article 3.1(a).

7.375 In upholding the findings of the Canada – Aircraft panel, the Appellate Body noted that
the Panel took into account sixteen different factual elements, which covered a
variety of matters, including: TPC's statement of its overall objectives; types of
information called for in applications for TPC funding; the considerations, or
eligibility criteria, employed by TPC in deciding whether to grant assistance; factors
to be identified by TPC officials in making recommendations about applications for
funding; TPC's record of funding in the export field, generally, and in the aerospace
and defence sector, in particular; the nearness-to-the-export-market of the projects
funded; the importance of projected export sales by applicants to TPC's funding
decisions; and the export orientation of the firms or the industry supported.
305
7.376 On a general level, a number of the factors identified by the Appellate Body may be relevant
in the present case, particularly in respect of IQ's "overall objectives",306 IQ's "record of funding in the
export field", "the nearness-to-the-export-market of the projects funded", and "the export orientation
of the firms or the industry supported". In considering "the nearness-to-the-export-market of the
projects funded", we note the Appellate Body's stat ement that "[i]f a panel takes this factor into
account, it should treat it with considerable caution. In our opinion, the mere presence or absence of
this factor in any given case does not give rise to a presumption that a subsidy is or is not de facto
contingent upon export performance". 307 In considering "the export orientation of the firms or the
industry supported", we recall the Appellate Body's finding that a Member's awareness that the grant
of a subsidy may result in exports – because, for example, of the export orientation of the recipient
firm or industry – "alone is not proof that the granting of the subsidy is tied to the anticipation of
exportation" within the meaning of note 4 to Article 3.1(a).
7.377 With regard to the "overall objectives" of IQ, and its "record of funding in the export field",
we see important differences between the operation of the TPC programme and the operation of the
IQ programme. In particular, we note that TPC employees were required to focus on the volume of
export sales resulting directly from the project. There is no evidence to suggest that this was the case
in respect of IQ support. In addition, TPC Business Plans recorded the proportion of the aerospace
and defence industry's revenue allocable to exports. Again, there is nothing to suggest that IQ focused
on the proportion of revenue allocable to exports. Furthermore, while the 1996-1997 TPC Annual
Report stated that "[t]he 12 largest firms [in the A&D sector] account for most of the R&D and
shipments, of which 80 per cent are exported", 308 only [] per cent of total IQ support has directly or
indirectly concerned Bombardier regional aircraft (all of which were exported outside of Canada). 309
In other words, while TPC was clearly operated in a way that suggests that TPC support was "tied to"
anticipated exports, there is no evidence in the record to suggest that IQ is operated in a similar
manner.
7.378 In light of the above, we are not persuaded that IQ equity guarantees are de facto export
contingent.310

305 Canada – Aircraft, Report of the Appellate Body, footnote 35, supra, para. 175.
306 W e n o t e t h a t p a r t o f IQ's mission is to "participate in the growth of enterprises, in particular by
facilitating research and development and export activities" (Section 25, IQ Act (Exhibit BRA-18)).
307 Canada – Aircraft, Report of the Appellate Body, footnote 35, supra, para. 174.
308 Canada – Aircraft, Report of the Panel, footnote 35, supra, para. 9.340.
309 See Response of Canada to Questions 18 and 19 from the Panel, Responses of Canada to Questions
from the Panel Following the First Meeting of the Panel (Annex B-7).
310 We recall that, according to footnote 4 to Article 3.1(a) of the SCM Agreement, "[t]he mere fact that
a subsidy is granted to enterprises which export shall not for that reason alone be considered to be an export
subsidy".

7.379 Brazil has also asked the Panel to draw adverse inferences regarding the alleged export
contingency of the IQ equity guarantees at issue. Brazil's request is based on the alleged failure by
Canada to provide all the documentation requested by the Panel in its Question 14 to Canada, dated
29 June 2001. Question 14 reads:
Brazil has identified a number of IQ transactions in paragraphs 90 and 91 of its first
written submission. Canada has not denied that IQ was involved in any of these
transactions. Please provide full details of the terms and conditions of these
transactions. Please also provide all documentation regarding the review of these
transactions by IQ. Please also provide the credit ratings of the relevant airlines at the
time of these transactions.
7.380 In its response to Question 14, Canada asserted that IQ has been involved with only two of
the Bombardier customers identified by Brazil in its first written submission. Canada informed the
Panel of three additional airlines, not identified by Brazil, to which IQ had provided equity
guarantees. While Canada provided details of the terms and conditions of these IQ transactions, it
failed to provide any "documentation regarding the review of these transactions by IQ". Accordingly,
on 20 July 2001, we addressed the following Question 41 to Canada:
Please provide the documentation requested in Question 14 from the Panel,
particularly in respect of the specific guarantee fees involved, [], or explain why such
documentation is not available.
In addition, please provide all documentation regarding the review by IQ of the Air
Littoral, Atlantic Coast Airlines and Air Nostrum transactions referred to in Canada's
response to Question 14 from the Panel.
7.381 In its response to our Question 41, Canada provided documentary evidence regarding IQ's
review of the relevant transactions. Subsequently, in response to Question 71 from the Panel, Canada
informed us that the documentation it provided in respect of the IQ equity guarantee to Air Nostrum
did not reflect the final terms and conditions of that guarantee. It therefore submitted documents
regarding the final terms and conditions, apologising for the "error" and stating that it "was not
previously aware of the existence of the second set of documents for this transaction". In response to
Question 72 from the Panel, Canada then asserted that, "[t]o the best of its knowledge, Canada has
provided all of the documentation that exists regarding the review of these transactions by IQ".
7.382 Brazil made the following comment on Canada's response to Question 72 from the Panel:
In its response to Question 72, Canada states that it "has provided all of the
documentation that exists" regarding IQ's re view of the Mesa, Midway, Air Littoral,
Atlantic Coast Airlines, and Air Nostrum transactions. This response is highly
suspect in light of the conflicting answers and documentation that Canada has
produced to the Panel involving the Air Nostrum sale. Brazil asks the Panel to
consider the following points.
On 29 June 2001, the Panel asked Canada, in Question 14, to "provide full
details of the terms and conditions" of IQ's support for certain aircraft sales, and "all
documentation regarding the review of these transactions by IQ." On 6 July 2001,
Canada responded, in part, by firmly stating that IQ was only involved in the Air
Nostrum deal to the extent that it provided an "'equity guarantee' of up to a maximum
of []% of the aircraft purchase price." However this statement conflicts with the
summary of the Air Nostrum transaction that appears in Exhibit [CAN]-64, a
document that Canada withheld until 26 July 2001.

Exhibit [CAN]-64 contains [].
Instead of disclosing to the Panel this discrepancy, Canada now simply states
that Exhibit [CAN]-64 "did not reflect the final terms and conditions of the guarantee
provided by IQ". Instead, in response to Question 71, Canada now provides a new
document, Exhibit [CAN]-77, dated 18 June 1998. Canada states that this document
contains IQ's "final recommendation and transaction summary" for Air Nostrum. The
"Détails du Financement" chart provided with Exhibit [CAN]-77 indicates that the
percentages contained in Exhibit [CAN]-64 have changed. [].
Although the percentages and terms contained in Exhibit [CAN]-77 differ
from Exhibit [CAN]-64 only slightly, Brazil not es that they differ significantly from
those in Canada’s response to Question 14. More importantly, however, the
appearance of Exhibit [CAN]-77 at this late stage in this dispute is extremely
troubling, and casts a cloud on Canada’s statement that "it has provided all of the
documentation that exists regarding the review" of this and other transactions by IQ.
Canada states that it "was not previously aware of the existence" of Exhibit [CAN]-
77. If this is true, then one must question whether the documents that Canada has
provided regarding IQ do, in fact, represent IQ's final recommendations for the Mesa,
Midway, Air Littoral, Atlantic Coast Airlines, and Air Nostrum transactions. This is
particularly true in light of Canada's initial statement in response to Question 14 that
IQ only provided an "equity guarantee" to Air Nostrum. Brazil therefore asks the
Panel to take adverse inferences and presume that other documents exist that show
that subsidies contingent on export have been granted.
7.383 We understand Brazil's request for adverse inferences to be based on two considerations.
First, because Canada failed to disclose the provision of IQ financing to Air Nostrum. Second,
because of doubts as to whether Canada has submitted the final recommendations regarding the IQ
equity guarantees to Mesa Air Group, Midway, Air Littoral, ACA and Air Nostrum.
7.384 Regarding the first point, we note that the request we addressed to Canada in our Question 14,
and which we repeated in Question 41, did not specifically include IQ financing. Our requests
referred to the IQ transactions identified by Brazil in paragraphs 90 and 91 of its first written
submission, which only concerned equity guaran tees. Thus, although one might have hoped that
Canada would be more forthcoming,
311 Canada was not required to provide details of IQ financing in
order to respond fully to Questions 14 and 41. 312 Furthermore, we do not understand Canada to have

311 In this regard, we note Article 3.10 of the DSU which enjoins Members of the WTO, if a dispute
arises, to engage in dispute settlement procedures "in good faith in an effort to resolve the dispute". As the
Appellate Body has previously stated, the "procedural rules of WTO dispute settlement are designed to promote,
not the development of litigation techniques, but simply the fair, prompt and effective resolution of trade
disputes" ( United States – Tax Treatment of "Foreign Sales Corporations ", Report of the Appellate Body,
WT/DS108/AB/R, adopted 20 March 2000, para. 166).
312 Strictly speaking, our request for documentation was limited to the IQ transactions identified by
Brazil in its first written submission. Nevertheless, in responding to our question, Canada also referred to three
additional IQ transactions not identified by Brazil in its first written submission. That being said, we regret that
it was necessary for us to address a second request for documentary evidence to Canada, in the form of
Question 41 from the Panel ( See Responses of Canada to Questions from the Panel Prior to the Second Meeting
of the Panel (Annex B-9)). Canada has offered no explanation as to why such documentary evidence, which
was not supplied with respect to those transactions identified by the Panel or with respect to additional
transactions revealed by Canada, could not have been included in its initial response to Question 14 from the
Panel ( See Responses of Canada to Questions from the Panel Following the First Meeting of the Panel
(Annex B-7)). We do believe, however, that it was appropriate for us to request the documentation a second

stated that IQ "only" provided an equity guarantee to Air Nostrum. While Canada stated that IQ had
provided an equity guarantee to Air Nostrum, it did not exclude the possibility that other forms of IQ
support had also been provided. Again, Canada's response to our questions, which were based on
Brazil's first written submission, did not require it to disclose the existence of IQ financing to Air
Nostrum.
7.385 Regarding the second point, we are not persuaded that an "error" on the part of Canada
regarding the final terms and conditions of the IQ equity guarantee to Air Nostrum should cause us to
doubt whether Canada has provided details of the final terms and conditions of the IQ equity
guarantees to Mesa Air Group, Midway, Air Littoral, ACA and Air Nostrum. Canada has assured us
that "[t]o the best of its knowledge, Canada has provided all of the documentation that exists
regarding the review of these transactions by IQ". We see no reason to doubt Canada's assurance.
7.386 In light of the above, we do not consider it appropriate to draw the inference requested by
Brazil.
4. Conclusion
7.387 To conclude, while we find that the IQ equity guarantee to [] is a subsidy, we find that it is
neither de jure nor de facto "contingent … upon export performance", within the meaning of Article
3.1(a) of the SCM Agreement. Accordingly, we reject Brazil's claim that the IQ equity guarantee to []
is a prohibited export subsidy.
7.388 Since we have found that the remaining IQ equity guarantees at issue do not confer a
"benefit", we also reject Brazil's Article 3.1(a) claims against those measures.
I. IQ LOAN GUARANTEES
7.389 Brazil has made claims against loan guarantees provided by IQ to Mesa Air Group
(September 1998 and December 1999), and to the EDC in respect of the Air Wisconsin transaction
(December 2000).
(a) Arguments of the parties
7.390 Brazil asserts that loan guarantees are per se prohibited by item (j) to the Illustrative List of
Export Subsidies.313 An IQ loan guarantee constitutes a "financial contribution" within the meaning
of Article 1.1(a)(1)(i) and (iii) of the SCM Agreement. An IQ loan guarantee confers a benefit by
substituting a superior governmental credit rating for a borrower’s inferior credit rating. The loan
guarantee confers a "benefit" by enabling an airlin e to borrow funds based upon the credit rating of
the Government of Québec, which is A+ or A2. To demonstrate that the IQ loan guarantees at issue
are "contingent … upon export performance", Brazil invokes the same arguments that it relied on in
respect of the abovementioned IQ equity guarantees.
7.391 Canada acknowledges that IQ loan guarantees constitute "financial contributions". In
particular, they constitute potential direct transfers of funds or liabilities within the meaning of
Article 1.1(a)(1)(i) of the SCM Agreement. In particular Canada denies that the IQ loan guarantees
at issue confer a "benefit", however, because IQ charges market-based fees for those loan guarantees.
Canada rejects Brazil's claim that IQ loan guarantees are "contingent … upon export performance",
for the same reasons as Canada denied the export contingency of IQ equity guarantees.

time, rather than simply reject Canada's answer as incomplete or unresponsive, as Brazil seemed to suggest we
should do.
313 See Second Written Submission of Brazil, para. 112 (Annex A-10).

(b) Evaluation by the Panel
7.392 We shall first examine whether or not IQ loan guarantees are "financial contributions" that
confer a "benefit". If, as a result, we find that IQ loan guarantees constitute subsidies, we shall then
consider whether or not such subsidies are "contingent … upon export performance" within the
meaning of Article 3.1(a).
7.393 We note that Canada acknowledges that IQ loan guarantees constitute "financial
contributions" within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement. We agree and there
is therefore no need for us to examine this matter further.314
7.394 Brazil argues that loan guarantees are per se prohibited by item (j) to the Illustrative List of
Export Subsidies. Item (j) provides:
(j) The provision by governments (or special institutions controlled by
governments) of export credit guarantee or insurance programmes, of insurance or
guarantee programmes against increases in the cost of exported products or of
exchange risk programmes, at premium rates which are inadequate to cover the
long-term operating costs and losses of the programmes.
7.395 In our view, item (j) sets out the circumstances in which the grant of loan guarantees is per se
deemed to be an export subsidy (i.e., when the "premium rates … are inadequate to cover the
long-term operating costs and losses" of the loan guarantee). Item (j) certainly does not provide, as
alleged by Brazil, that all loan guarantees are per se prohibited by item (j). Since Brazil has made no
attempt to argue that the IQ loan guarantees at issue were provided "at premium rates which are
inadequate to cover the long-term operating costs and losses" thereof, we make no findings against the
IQ loan guarantees at issue on the basis of item (j) of the Illustrative List of Export Subsidies.
315
7.396 Brazil also asserts that the IQ loan guarantees at issue necessarily confer a "benefit" by
enabling the relevant airlines to borrow funds based upon the superior credit rating of the Government
of Québec, which is A+ or A2. This argument essentially means that any government loan guarantee
necessarily confers a "benefit" (since the very purpose of a government loan guarantee is to make
available the superior credit rating of the government concerned). We are unable to accept this
argument, since it ignores the clear distinction made in Article 1.1 of the SCM Agreement between a
"financial contribution" and a "benefit".
316 The term "benefit" relates to the effects of a "financial
contribution". Thus, in order to demonstrate the existence of a "benefit", a complaining party must do
more than establish the existence of a "financial contribution".
7.397 In considering precisely what Brazil must show in order to demonstrate the existence of a
"benefit", we note the findings of the panel and Appellate Body in Canada – Aircraft. We therefore
consider that IQ loan guarantees will confer a "benefit" to the extent that they are made available to
Bombardier customers on terms more favourable that those on which such Bombardier customers
could obtain comparable loan guarantees in the mark et. In applying this standard, we are guided by
Article 14(c) of the SCM Agreement, which provid es contextual guidance for interpreting the term

314 In particular, there is no need for us to consider whether or not IQ loan guarantees constitute the
provision of "goods or services other than general infrastructure" within the meaning of Article 1.1(a)(1)(iii) of
the SCM Agreement, as alleged by Brazil.
315 We also note that neither party has sought to rely on an a contrario reading of item (j) for the
purpose of demonstrating, or refuting, the existence of "benefit".
316 Brazil's argument also ignores the terms of Article 14(c), which explains the circumstances in which
government loan guarantees "shall not be considered as conferring a benefit" in the context of countervailing
duty investigations. If all government loan guarantees necessarily conferred a "benefit", as argued by Brazil, the
Article 14(c) guideline would be meaningless.

"benefit" in the context of loan guarantees. 317 Article 14(c) provides that, for the purpose of
calculating the amount of a subsidy in terms of the "benefit" to the recipient (for the purpose of a
countervailing duty investigation):
(c) a loan guarantee by a government shall not be considered as conferring a
benefit, unless there is a difference between the amount that the firm receiving the
guarantee pays on a loan guaranteed by the government and the amount that the firm
would pay on a comparable commercial loan absent the government guarantee. In
this case the benefit shall be the differ ence between these two amounts adjusted for
any differences in fees;
7.398 In our view, and taking into account the contextual guidance afforded by Article 14(c), we
consider that an IQ loan guarantee will confer a "benefit" when "there is a difference between the
amount that the firm receiving the guarantee pays on a loan guaranteed by [ IQ] and the amount that
the firm would pay on a comparable commercial loan absent the [ IQ] guarantee. In this case the
benefit shall be the difference between these two amounts adjusted for any differences in fees". In
other words, there will be a "benefit" when the cost-saving for a Bombardier customer for securing a
loan with an IQ loan guarantee is not offset by IQ's fees. In our opinion, it is safe to assume that this
will be the case if it is established that IQ's fees are not market-based.
7.399 In applying this "benefit" test to the two IQ loan guarantees at issue, we note Brazil has made
no arguments to the effect that "there is a difference between the amount that the [Mesa Air Group]
pays on a loan guaranteed by [ IQ] and the amount that the [Mesa Air Group] would pay on a
comparable commercial loan absent the [ IQ] guarantee", adjusted for any difference in fees. In
particular, although Brazil does not deny that loan guarantees are available on a commercial basis,
Brazil has failed to adduce any arguments or information regarding what Mesa Air Group might have
had to pay on a comparable commercial loan absent the IQ loan guarantee.
318 Nor has Brazil made
any other argument to the effect that IQ's fee for its loan guarantee to Mesa Air Group is not market-
based. Accordingly, we reject Brazil's claim that the IQ loan guarantee to Mesa Air Group confers a
"benefit".
7.400 Regarding the IQ loan guarantee to the EDC in respect of the Air Wisconsin transaction,
Brazil has asserted (in a letter dated 3 September 2001, commenting on certain documentary evidence
submitted by Canada at the request of the Panel) that IQ "charged [] for this guarantee". As noted
above, it is safe to assume that there is "a diff erence between the amount th at the firm receiving the
guarantee pays on a loan guaranteed by the government and the amount that the firm would pay on a
comparable commercial loan absent the government guarantee", adjusted for any differences in fees,
if the relevant fees are not market-based. There is no doubt that a fee of [] is not market-based,
because a market operator would not provide a loan guarantee [].
7.401 [] In fact, the evidence before us suggests that the IQ loan guarantee to the EDC is []. In a
table summarising the equity and loan guarantees to be provided by IQ in respect of the Air
Wisconsin transaction, [].
7.402 In light of the evidence before us, which suggests that the IQ loan guarantee for the Air
Wisconsin transaction is [], and in light of the contextual guidance afforded by Article 14(c) of the
SCM Agreement, we find that the IQ loan guarantee to the EDC for the Air Wisconsin transaction

317 See Canada – Aircraft , Report of the Appellate Body, footnote 35, supra, para. 155, regarding the
contextual relevance of Article 14 for the purpose of determining the existence of "benefit".
318 We recall that the initial burden lies on the complaining party to establish a prima facie case of
inconsistency (See para. 7.75, supra).

confers a "benefit" within the meaning of Arti cle 1.1(b) of the SCM Agreement, and therefore
constitutes a subsidy.
7.403 In order to determine whether or not the IQ loan guarantee for the Air Wisconsin transaction
constitutes a prohibited export subsidy, we must consider whether or not the loan guarantee is
"contingent … upon export performance". We note that Brazil's claim regarding the export
contingency of IQ loan guarantees is based on the same arguments as those advanced in support of its
claim regarding the export contingency of IQ equity guarantees. Since we have already found that
Brazil's arguments do not demonstrate that the IQ equity guarantees at issue in these proceedings are
"contingent … upon export performance", we are compelled to make the same finding in respect of
IQ's loan guarantees. Accordingly, we find that the IQ loan guarantee to the EDC for the Air
Wisconsin transaction is not "contingent … upon export performance" within the meaning of Article
3.1(a) of the SCM Agreement.
(c) Conclusion
7.404 We find that the IQ loan guarantee to Mesa Air Group is not a subsidy, since it does not
confer a "benefit" within the meaning of Article 1.1(b). We find that the IQ loan guarantee to Air
Wisconsin is a subsidy, but that it is not "contingent … upon export performance". For these reasons,
we reject Brazil's claim that the IQ loan guarantees to Mesa Air Group and Air Wisconsin constitute
prohibited export subsidies, contrary to Article 3.1(a) of the SCM Agreement.
VIII. CONCLUSIONS AND RECOMMENDATION
8.1 In conclusion, we:
(a) reject Brazil's claim that the EDC Corporate Account and Canada Account
programmes "as such" constitute prohibited export subsidies contrary to Article 3.1(a)
of the SCM Agreement;
(b) reject Brazil's claim that the IQ programme "as such" constitutes a prohibited export
subsidy contrary to Article 3.1(a) of the SCM Agreement;
(c) reject Brazil's claim that the EDC Corporate Account and Canada Account
programmes "as applied" constitute prohibited export subsidies contrary to
Article 3.1(a) of the SCM Agreement;
(d) reject Brazil's claim that the IQ programme "as applied" constitutes a prohibited
export subsidy contrary to Article 3.1(a) of the SCM Agreement;
(e) uphold Brazil's claim that the EDC Canada Account financing to Air Wisconsin
constitutes a prohibited export subsidy contrary to Article 3.1(a) of the SCM
Agreement;
(f) uphold Brazil's claim that the EDC Canada Account financing to Air Nostrum
constitutes a prohibited export subsidy contrary to Article 3.1(a) of the SCM
Agreement;
(g) uphold Brazil's claim that the EDC Corporat e Account financing to Comair in July
1996, August 1997 and February 1999 constitutes a prohibited export subsidy
contrary to Article 3.1(a) of the SCM Agreement;

(h) reject Brazil's claim that the EDC Corporate Account financing to ASA, ACA,
Kendell Air Nostrum and Comair in December 1996, March 1997 and March 1998
constitutes a prohibited export subsidy contrary to Article 3.1(a) of the
SCM Agreement;
(i) reject Brazil's claim that IQ equity guarantees to ACA, Air Littoral, Midway, Mesa
Air group, Air Nostrum and Air Wisconsin constitute prohibited export subsidies
contrary to Article 3.1(a) of the SCM Agreement; and
(j) reject Brazil's claim that IQ loan guarantees to Mesa Air Group and Air Wisconsin
constitute prohibited export subsidies contrary to Article 3.1(a) of the
SCM Agreement.
8.2 Pursuant to Article 3.8 of the DSU, the findings in sub-paragraphs (e), (f) and (g) of the preceding
paragraph also constitute a case of prima facie nullification or impairment of benefits accruing to
Brazil under the SCM Agreement, which Canada has not rebutted.
8.3 In light of the above findings, we are required to make the recommendation provided for in
Article 4.7 of the SCM Agreement. Accordingly, we recommend that Canada withdraw the subsidies
identified above without delay.
8.4 Article 4.7 further provides that "the panel shall specify in its recommendation the time-period
within which the measure must be withdrawn." In other words, we are required to specify what
period would represent withdrawal "without delay". Taking into account the procedures that may be
required to implement our recommendation on the one hand, and the requirement that Canada
withdraw its subsidies "without delay" on the other, we conclude that Canada shall withdraw the
subsidies identified in sub-paragraphs (e), (f), and (g) of paragraph 8.1 within 90 days.