BRAZIL – EXPORT FINANCING PROGRAMME FOR AIRCRAFT – RECOURSE BY CANADA TO ARTICLE 21.5 OF THE DSU
Document: Report of the panel
Date: 9 May 2000
Document codes: WT/DS46/RW
Complainant: Canada
Respondent: Brazil
Third parties: Australia, EU, South Korea, U.S.
Dispute stage: Retaliation & Arbitration
Agreements cited: Art. XVI  GATT 1994Art. 3, 27  Subsidies and Countervailing Measures (SCM)

BRAZIL – EXPORT FINANCING PROGRAMME FOR
AIRCRAFT –
RECOURSE BY CANADA TO ARTICLE 21.5 OF THE DSU
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 9 May 2000 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.

I. PROCEDURAL BACKGROUND
1.1 On 20 August 1999, the Dispute Settlement Body ("DSB") adopted the Appellate Body
Report in , and the Panel Report in as modified by the Appellate Body
Report, in the dispute Brazil – Export Financing Programme for Aircraft ("Brazil – Aircraft").
1.2 The DSB recommended that Brazil bring its export subsidies found in the Appellate Body
Report, and in the Panel Report as modified by th e Appellate Body report, to be inconsistent with
Brazil’s obligations under Articles 3.1(a) and 3.2 of the Agreement on Subsidies and Countervailing
Measures ("SCM Agreement") into conformity with its obligations under that Agreement. The DSB
further recommended that Brazil withdraw the export subsidies for regional aircraft within 90 days.
1.3 On 19 November 1999, Brazil submitted to the Chairman of the DSB, pursuant to
Article 21.6 of the Dispute Settlement Understanding ("DSU"), a status report () on
implementation of the Appellate Body’s and the Panel’s recommendations and rulings in the dispute.
The status report described measures taken by Brazil which, in Brazil’s view, implemented the DSB's
recommendation to withdraw the measures within 90 days.
1.4 The status report indicated that the interest rate equalisation payments under PROEX would
be granted only to the extent that the net interest rate applicable to a transaction under that programme
was brought down to the appropriate international market "benchmark". The implementing
legislation included: (i) a Resolution by the National Monetary Council altering its own
Resolution 2576 dated 17 December 1998, which establishes the criteria applicable to PROEX
interest rate equalisation payments; and (ii) a Central Bank Circular Letter which establishes new
maximum equalisation percentages and revokes Circular Letter 2843 dated 25 March 1999.
1.5 On 23 November 1999, Canada submitted a communication to the Chairman of the DSB
(WT/DS46/13), seeking recourse to Article 21.5 of the DSU. In that communication, Canada
indicated that there was a disagreement between Canada and Brazil as to whether the measures taken
by Brazil to comply with the 20 August 1999 ruli ngs and recommendations of the DSB in fact bring
Brazil into conformity with the provisions of the SCM Agreement and result in the withdrawal of the
export subsidies to regional aircraft under PROEX and Canada, therefore, requested that the DSB
refer the matter to the original panel, pursuant to Ar ticle 21.5 of the DSU. Canada attached the terms
of an agreement reached by Canada and Brazil concerning the procedures to be followed pursuant to
Articles 21 and 22 of the DSU.
1.6 At its meeting on 9 December 1999, the DSB decided, in accordance with Article 21.5 of the
DSU, to refer to the original panel the matter ra ised by Canada in document WT/DS46/13. At that
DSB meeting, it also was agreed that the Panel should have standard terms of reference as follows:
"To examine, in the light of the relevant provisions of the covered agreements cited
by Canada in document WT/DS46/13, the matter referred to the DSB by Canada in
that document and to make such findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in those agreements."
1.7 The Panel was composed as follows:
Chairperson: Dr. Dariusz Rosati
Members: Prof. Akio Shimizu
Mr. Kajit Sukhum

1.8 Australia, the European Communities and the United States reserved their rights to participate
in the Panel proceedings as third parties.
1.9 The Panel met with the parties on 3-4 February 2000. It met with the third parties on
4 February 2000.
1.10 The Panel submitted its interim report to the parties on 31 March 2000. On 7 April 2000,
Brazil submitted a written request that the Panel review precise aspects of the interim report. Neither
party requested an interim meeting. The Panel submitted its final report to the parties on
28 April 2000.
II. FACTUAL ASPECTS
2.1 As described in our original Panel Report,
1 PROEX was created by the Government of Brazil
on 1 June 1991 by Law No. 8187/91 and is currently being maintained by provisional measures issued
by the Brazilian government on a monthly basis. 2 PROEX provides export credits to Brazilian
exporters either through direct financing or interest rate equalisation payments.3
2.2 With direct financing, the Government of Brazil lends a portion of the funds required for the
transaction. With interest rate equalisation, underlying legal instruments provide that the "National
Treasury grant[s] to the financing party an equali sation payment to cover, at most, the difference
between the interest charges contracted with the buyer and the cost to the financing party of raising
the required funds."4
2.3 The financing terms for which interest rate equalisation payments are made are set by
Ministerial Decrees. The terms, determined by the product to be exported, vary normally from one
year to ten years. In the case of regional aircraft, however, this term has often been extended to
15 years, by waiver of the relevant PROEX guidelines. The length of the financing term, in turn,
determines the spread to be equalised: the payment ranges from 0.5 percentage points per annum, for
a term of up to six months, to 2.5 percentage points per annum, for a term of nine years or more.
5 The
spread is fixed and does not vary depending on the lender's actual cost of funds. 6 As discussed in
Section VI of this Report, Resolution No. 2667 of 19 November 1999 provides that, in respect of
regional aircraft financing, "equalisation rates shall be established on a case by case basis and at levels
that may be differential, preferably based on the United States Treasury Bond 10-year rate, plus an
additional spread of 0.2% per annum, to be reviewed periodically in accordance with market
practices."
2.4 PROEX is administered by the Comitê de Crédito as Exportações ("Committee"), a 13-
agency group, with the Ministry of Finance serving as its executive. Day-to-day operations of
PROEX are conducted by the Banco do Brasil. For applications for financing transactions not
exceeding US$5 million, whose terms otherwise fall within PROEX guidelines, Banco do Brasil has
pre-approved authority to provide PROEX support without requesting the approval of the Committee.
All other applications are referred to the Committee, which has the authority to waive some of the
published PROEX guidelines. In the case of regional aircraft, the most frequent waiver has been to
extend the length of the financing term from ten to fifteen years.

1 Brazil – Export Financing Programme for Aircraft ("Brazil- Aircraft"), Report of the Panel ("original
Panel Report") adopted on 20 August 1999, WT/DS46/R, paras. 2.1-2.6.
2 As of the date of Canada's request for the matter of implementation to be referred to the original
panel, the relevant legal instrument was Provisional Measure 1892-33 of 23 November 1999.
3 Law No. 8187 of 1 June 1991, replaced by Provisional Measure No. 1629 of 12 February 1998.
4 See, for example, Resolution No. 2380 of 25 April 1997.
5 See Central Bank of Brazil Circular Letter No. 2881 of 19 November 1999.
6 Evaluation of the Brazilian Export Program ("Finan Report") p. 2.7.

2.5 PROEX involvement in aircraft financing transactions begins when the manufacturer requests
a letter of commitment from the Committee prior to conclusion of a formal agreement with the buyer.
This request sets forth the terms and conditions of the proposed transaction. If the Committee
approves, it issues a letter of commitment to the manufacturer. This letter commits the Government
of Brazil to providing support as specified for the transaction provided that the contract is entered into
according to the terms and conditions contained in the request for approval, and provided that it is
entered into within a specified period of time, usually 90 days (and provided the aircraft is exported,
as explained below). If a contract is not entered into within the specified time, the commitment
contained in the letter of approval expires.
2.6 PROEX interest rate equalisation payments, pursuant to the commitment, begin after the
aircraft is exported and paid for by the purchaser. PROEX payments are made to the lending financial
institution in the form of non-interest-bearing National Treasury Bonds (Notas do Tesouro Nacional –
Série I), referred to as NTN-I bonds. The bonds are issued by the Brazilian National Treasury to its
agent bank, Banco do Brasil, which then passes them on to the lending banks financing the
transaction. The bonds are issued in the name of the lending bank which can decide to redeem them
on a semi-annual basis for the duration of the financing or discount them for a lump sum in the
market. PROEX resembles a series of zero-coupon bonds which mature at six-month intervals over
the course of the financing period. The bonds can only be redeemed in Brazil and only in Brazilian
currency at the exchange rate prevailing at the time of payment. If the lending bank is outside of
Brazil, it may appoint a Brazilian bank as its agent to receive the semi-annual payments on its behalf.
III. FINDINGS AND RECOMMENDATIONS REQUESTED BY THE PARTIES
3.1 Canada requests that the Panel find that Brazil's measures are not in compliance with the
recommendations and rulings of the DSB in that, first, Brazil continues to pay export subsidies
committed on exports of regional aircraft not yet granted as of 18 November 1999; and, second,
Brazil has failed to implement measures that would bring the PROEX export subsidy programme into
conformity with the SCM Agreement , because: (a) PROEX payments continue to constitute
prohibited export subsidies, (b) the first paragraph of item (k) of the Illustrative List of Export
Subsidies, Annex I, SCM Agreement ("Illustrative List"), does not give rise to an a contrario
exception, and (c) even if item (k) were considered to give rise to an a contrario exception, PROEX
export subsidies are not "payments" of the kind referred to in the first paragraph of item (k) and
PROEX export subsidies under the revised programme would continue to "secure a material
advantage" in the field of export credit terms. Canada further requests that the Panel suggest, in
accordance with Article 19.1 of the DSU, that the parties develop verification procedures so as to
permit verification that future Brazilian financing of exported regional aircraft conforms with the
SCM Agreement without the need for further recourse to the DSU.
3.2 Brazil requests the Panel to reject Canada’s claims in their entirety, and find that Brazil is in
full compliance with all of its obligations under the SCM Agreement, as interpreted by the Panel and
the Appellate Body, with regard to PROEX interest rate equalisation payments for regional aircraft.
IV. ARGUMENTS OF THE PARTIES AND THIRD PARTIES
4.1 The Panel has decided, with the agreement of the parties, that in lieu of the traditional
descriptive part of the Panel report setting forth the arguments of the parties, the parties’ submissions
will be annexed in full to the Panel’s report. Accordingly, the submissions of Canada are set forth in
Annex 1, and the submissions of Brazil are set forth in Annex 2. In addition, the submissions of the
third parties – the European Communities and the United States – are set forth in Annex 3. Australia
made neither a written nor an oral submission.
4.2 In addition, both parties have incorporated by reference their arguments in the original dispute
with reference to whether the first paragraph of item (k) of the Illustrative List may be used to

establish that an export subsidy is "permitted" and whether payments under PROEX are "payments"
within the meaning of the first paragraph of item (k) of the List.7
V. INTERIM REVIEW
5.1 Canada did not provide any comments on the interim report of the Panel.
5.2 Brazil submitted the following comments. Brazil notes that, in paragraph 6.41, infra, the
Panel states that it does not appear that Brazil argued that its a contrario interpretation of paragraph 1
of item (k) of the Illustrative List applied even when the subsidies "do not fall within the scope of
footnote 5". Brazil states that it does not recall confining its interpretation of item (k) to the "scope of
footnote 5", and certainly did not intend to do so. In this regard, Brazil notes that, in response to a
question from the Panel, Brazil stated, "Footnote 5 to the SCM Agreement makes clear that the List
has a purpose other than pure illustration." 8 Beyond this, Brazil submits, the response deals with the
text of item (k), not the scope of footnote 5.
5.3 With reference to Brazil’s argument that its interpretation of item (k) was not confined to the
scope of footnote 5, we note that, in the original dispute, Brazil’s arguments appeared to evolve over
time.9 In Brazil’s first submission in the original dispute, the focus of Brazil’s arguments was not on
footnote 5. 10 However, in its second submission in the original dispute, Brazil argued that the
“material advantage” clause fell within the scope of footnote 5.11 Brazil has not, however, limited its
arguments regarding the interpretation of item (k) to the scope of footnote 5, and we have, therefore,
made appropriate modifications to paragraph 6.41 of this Report. In any event, as we have indicated
in paragraph 6.41, we consider that footnote 5 controls the interpretation of item (k) with respect to
when the Illustrative List can be used to demonstrate that a measure is not a prohibited export subsidy.
5.4 Brazil also notes that, in paragraph 6.53 of this Report, the third sentence begins, "Because
banks in many cases have a lower cost of borrowing than the governments of developing countries . .
." (Emphasis added by Brazil). Brazil argues that, if banks were the only actors in the market for
aircraft financing, Brazil would not need to provide interest rate support for Embraer's transactions. It
is the fact that governments (Emphasis added by Brazil) – particularly Canada through its Export
Development Corporation – are able to offer potential customers financing support on terms that are
more attractive than the terms offered by banks that requires Brazil to act.
5.5 In respect of Brazil’s comments regarding the Panel’s reference to the cost of borrowing of
banks, the Panel wishes to point out that paragraph 6.53 of this Report represents a discussion of the
way in which developing-country governments can utilise commercial lenders rather than provide
direct export credit financing. The Panel in fact paraphrases Brazil’s own arguments as to the relative
cost of different modalities of providing export credits. 12 In that context, it is clear that utilising
commercial lenders would be less expensive than providing direct financing, because the government
can take advantage of the lower cost of borrowin g enjoyed by commercial lenders. Footnote 53 is
merely an illustration of this fact. Paragraph 6.53 is in no sense intended to suggest that Brazil argues
that it provides PROEX interest rate equalisation in order to meet competition from export credit
financing provided by commercial banks. We have, therefore, made appropriate modifications to
paragraph 6.53 of this Report.

7 Original Panel Report, paras. 4.53-4.71 and paras. 4.72-4.78, respectively.
8 See Response of Brazil to Question 10 from the Panel, infra, Annex 2-4, p. 133.
9 As indicated in para. 4.2, supra, Brazil has incorporated by reference its arguments in the original
dispute regarding whether the first paragraph of item (k) of the Illustrative List may be used to establish that an
export subsidy is “permitted”. See Response of Brazil to Further Question 1 from the Panel, infra, Annex 2-4,
p. 137.
10 See original Panel Report, paras. 4.53-4.54.
11 Ibid, at para. 4.67.
12 See Oral Statement of Brazil, paras. 11-20, infra, Annex 2-3, p. 115.

VI. FINDINGS
A. INTRODUCTION AND CLAIMS OF CANADA
6.1 This dispute under Article 21.5 of the DSU concerns a disagreement between Canada and
Brazil as to the existence or consistency of measures taken by Brazil to comply with the
recommendation of the DSB pursuant to Article 4.7 of the SCM Agreement that Brazil withdraw
export subsidies for regional aircraft under PROEX without delay.13
6.2 In the dispute ("original dispute") giving rise to this Article 21.5 dispute, the Panel found that
the prohibition on export subsidies in Article 3.1(a) of the SCM Agreement applied to Brazil because
Brazil had failed to comply with certain of the c onditions of Article 27.4 of that Agreement. The
Panel further found that PROEX payments were subsidies contingent upon export performance within
the meaning of Article 3.1(a). Finally, the Panel rejected Brazil's defence that PROEX payments were
"permitted" because they were "payments" within the meaning of the first paragraph of item (k) which
were not "used to secure a material advantage in the field of export credit terms". The Panel found
that, assuming that the first paragraph of item (k) could be used to establish that a subsidy that is
contingent upon export performance was "permitted", and that PROEX payments were "payments"
within the meaning of that paragraph, Brazil had fa iled to establish that PROEX payments were not
"used to secure a material advantage in the field of export credit terms". Accordingly, the Panel
requested that the DSB recommend that Brazil withdraw the prohibited subsidies without delay. The
Appellate Body modified certain aspects of the Panel's reasoning but upheld the Panel's conclusions
as stated above.
6.3 In this Article 21.5 dispute, Canada raises two issues regarding the existence or consistency
with the SCM Agreement of measures taken by Brazil to comply with the recommendation of the
DSB.
First, Canada contends that Brazil cannot, consistent with the recommendation of the
DSB, continue to issue NTN-I bonds pursuant to letters of commitment issued under
PROEX as it existed prior to the end of the implementation period, i.e.,
18 November 1999. Brazil responds that the DSB's recommendation to withdraw the
prohibited subsidy does not require it to cease issuing NTN-I bonds pursuant to such
pre-existing letters of commitment.
Second, Canada contends that payments in respect of regional aircraft pursuant to
PROEX as modified by Brazil continue to be subsidies contingent upon export
performance within the meaning of Article 3.1(a) of the SCM Agreement and thus
prohibited. Brazil responds that under PROEX as modified payments no longer are
"used to secure a material advantage in the field of export credit terms" and therefore
are "permitted" by the SCM Agreement.
We will take up each of these issues in turn.
B. MAY BRAZIL CONTINUE TO ISSUE NTN-I BONDS PURSUANT TO LETTERS OF
COMMITMENT ISSUED UNDER PROEX AS IT EXISTED BEFORE
18 NOVEMBER 1999?
6.4 Canada claims that Brazil has failed to withdraw the export subsidies for regional aircraft
under PROEX, because it continues to grant, through the issuance of NTN-I bonds, PROEX subsidies
found to constitute prohibited export subsidies pursuant to commitments made prior to

13 Brazil Aircraft, Report of the Appellate Body ("Appellate Body Report") adopted on 20

18 November 1999, the date by which Brazil was required to withdraw the export subsidies in
question. Brazil considers that, in fulfilling its pre-18 November 1999 commitments through the
issuance of NTN-I bonds after that date upon the expor t of regional aircraft, it is "not creating new
subsidies"14 and therefore not acting in a manner inconsistent with its obligations under the
SCM Agreement.
6.5 Canada notes that Brazil is required to withdr aw the prohibited export subsidies, and submits
that the word "withdraw", in its plain meaning, conveys as a minimum the notion of ceasing to grant
or maintain the illegal subsidies. Article 3.2 of the SCM Agreement provides that a Member shall not
"grant or maintain" prohibited subsidies. Canada recalls that the Appellate Body had found that
PROEX subsidies are granted for the purposes of Article 27.4 of the SCM Agreement when Brazil
issues NTN-I bonds. There is no reason in Canada's view to interpret the word "grant" differently for
the purposes of Article 3.2 than for the purposes of Article 27.4. Accordingly, Brazil must, in
Canada's view, cease issuing NTN-I bonds in respect of pre-18-November-1999 letters of
commitment.
6.6 In Brazil's view, Canada has confused the find ing of the Appellate Body as to when PROEX
subsidies are granted for the purposes of Article 27.4 of the SCM Agreement with the issue of when
PROEX subsidies come into existence within the m eaning of Article 1 of that Agreement. Brazil
considers that under Article 1 a subsidy shall be deemed to exist when there is a financial contribution
by a government and a benefit is thereby conferred. In the case of PROEX subsidies, the benefit
arises when Brazil makes a legally binding commitment to provide PROEX support.
15 Because the
financial contribution must logically precede or coincide with the benefit, the financial contribution
must be in the form of a potential direct transfer of funds. In the view of Brazil, an interpretation of
Article 1 that resulted in the conclusion that PROEX subsidies come into existence only when aircraft
are exported would render whole clauses of Part III of the SCM Agreement ("Actionable Subsidies") a
nullity because, although the impact of PROEX on the domestic industry of a competitor would be
felt when Embraer obtains an order, no subsidy would exist and thus no countervailing measure be
possible until the aircraft was exported. Finally, Brazil argues that it is legally obligated to issue
bonds pursuant to letters of commitment issued prior to the date of implementation of the DSB's
recommendations or be subject to damages for breach of contract.
6.7 In considering this issue, we first note that Brazil does not deny that it continues to issue
NTN-I bonds in respect of commitments made prior to 18 November 1999. Further, Brazil has stated,
in response to a question from the Panel, that Resolution 2667 does not modify pre-existing PROEX
commitments pertaining to aircraft to be exported after 22 November 1999, the date of publication of
Resolution 2667.
16 We recall that, in the original dispute, the Panel found that PROEX payments on
exports of Brazilian regional aircraft were export subsidies prohibited by Article 3.1(a) of the SCM
Agreement. This finding was upheld by the Appellate Body. We also recall that the DSB
recommended, pursuant to Article 4.7 of the SCM Agreement , that Brazil "withdraw the [export]
subsidies . . . without delay".
6.8 The issue Canada has put before us is whether the continued issuance of NTN-I bonds in
respect of commitments entered into prior to 18 November 1999, on terms found by the Panel and the
Appellate Body to give rise to a prohibited export subsidy, is inconsistent with Brazil's obligation to
withdraw the export subsidies in question. Thus, we need not for the purposes of this dispute develop
a comprehensive understanding of the scope of the obligation to "withdraw" a prohibited subsidy.
Rather, it suffices to conclude – and Brazil does not contest – that a Member cannot be deemed to

15 In the early phases of this proceeding, Brazil stat ed that the subsidy comes into existence when the
letter of commitment is issued. Subsequently, Brazil clarified that in its view the subsidy exists when a sales
contract is signed pursuant to a letter of commitment. Response of Brazil to Question 12 of the Panel.
16 Response of Brazil to Question 4 of the Panel.

have withdrawn prohibited subsidies if it has not ceased to act in a manner inconsistent with the WTO
Agreement in respect of those subsidies. We are therefore of the view that the DSB's recommendation
that Brazil withdraw the prohibited subsidies in question clearly includes an obligation on the part of
Brazil to cease violating the SCM Agreement by the end of the implementation period in respect of the
measures in question.17
6.9 Article 3.2 of the SCM Agreement provides as follows:
"A Member shall neither grant nor maintain 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]."
It follows that the continuing granting or maintaining of prohibited export subsidies after the end of
the implementation period would be inconsistent with Brazil's obligation to withdraw those subsidies.
Accordingly, we must consider whether the continued issuance of NTN-I bonds by Brazil pursuant to
letters of commitment issued under PROEX prior to its modification constitutes the "grant" of
prohibited export subsidies within the meaning of Article 3.2 of the SCM Agreement.
6.10 In the original dispute, we held that, for the purposes of Article 27.4, export subsidies for
regional aircraft under PROEX are "granted" for the purposes of calculating the level of Brazil's
export subsidies under Article 27.4 of the SCM Agreement when the NTN-I bonds are issued. Brazil
appealed this finding. The Appellate Body confirmed our holding, finding that:
"We agree with the Panel that 'PROEX payments may be 'granted' where the
unconditional legal right of the beneficiary to receive the payments has arisen, even if
the payments themselves have not yet occurred.' We also agree with the Panel that
the export subsidies . . . have not yet been 'granted' when the letter of commitment is
issued, because, at that point, the export sales contract has not yet been concluded and
the export shipments have not yet occurred. For the purposes of Article 27.4, we
conclude that the export subsidies . . . are 'granted' when all the legal conditions have
been fulfilled that entitle the beneficiary to receive the subsidies. We share the
Panel's view that such an unconditional legal right exists when the NTN-I bonds are
issued."
18
6.11 We note that Article 3.2 and Article 27.4 are provisions of the same Agreement. Further,
both provisions relate to the prohibition on export subsidies set out under that Agreement. We do not
perceive any basis to attribute to the term "grant" as used in Article 3.2 of the SCM Agreement a

17 We are aware that a panel established under Article 21.5 of the DSU recently found that a
recommendation to "withdraw" a prohibited subsidy under Article 4.7 of the SCM Agreement "is not limited to
prospective action only but may encompass repayment of the prohibited subsidy." Australia – Subsidies
Provided to Producers and Exporters of Automotive Leather , Recourse to Article 21.5 of the DSU by the United
States, Report of the Panel adopted on 11 February 2000, WT/DS126/RW, para. 6.39. In that dispute, which
involved one-time subsidies paid in the past whose retention was not contingent upon future export
performance, the United States as complainant argued that the "prospective portion" of the subsidy granted by
Australia, i.e., $A26 million out of a total grant of $A30 million, had to be repaid. In this dispute, Canada has
not claimed that the non-repayment, in whole or in part, of subsidies granted by Brazil represents a failure to
"withdraw" the prohibited export subsidies in question. We recall that, under Article 3.7 of the DSU, the aim of
the dispute settlement mechanism is to secure a positive resolution to a dispute, and that our role under
Article 21.5 is to render a decision "where there is di sagreement" as to the existence or consistency with a
covered agreement of measures taken to comply with the recommendations or rulings of the DSB. Accordingly,
we shall address only claims that are put before us. Our silence on issues that are not before us should not be
taken as expressing any view, express or implied, as to whether or not a recommendation to "withdraw" a
prohibited subsidy may encompass repayment of that subsidy.
18 Appellate Body Report, para. 158.

meaning different from that attributed to that term by this Panel and the Appellate Body as used in
Article 27.4 of the SCM Agreement. It follows that the issuance of NTN-I bonds by Brazil constitutes
the granting of export subsidies within the meaning of Article 3.2.
6.12 Brazil urges the Panel to consider the issue of when a subsidy may be deemed to exist under
Article 1 of the SCM Agreement, and the form of the financial contribution involved, when deciding
when PROEX subsidies are granted for the purposes of Article 3.2. Thus, Brazil states, in response to
a question from the Panel, that:
". . . a financial contribution is made and a benefit is conferred within the meaning of
Article 1 of the SCM Agreement, and a subsidy is thereby granted within the meaning
of Article 3.2 of the SCM Agreement , when contracts are signed pursuant to letters of
commitment." (emphasis added)
6.13 We recall however that the Panel, in orde r to respond to the question of when PROEX
payments should be considered to have been granted for the purposes of Article 27.4 in the original
dispute, also focused on the language of Article 1 of the SCM Agreement. The Appellate Body held,
however, held this to be error:
"In our view, the Panel reached the correct conclusion. However, it did so on the
basis of faulty reasoning. The issue in this case is when the subsidies for regional
aircraft under PROEX should be considered to have been "granted" for the purposes
of calculating the level of Brazil's export subsidies under Article 27.4 of the SCM
Agreement. The issue is not whether or when there is a "financial contribution", or
whether and when the subsidy "exists", within the meaning of Article 1.1 of that
Agreement."(emphasis in original.)
19
The Appellate Body further explained that:
"[T]he issue before the Panel under the heading 'Has Brazil increased the level of its
export subsidies?' was simply this: given that the export subsidies in this case were
already deemed to 'exist', when were they 'granted'? At issue was the interpretation
and application of Article 27.4, not of Article 1 . . . [F]or the purposes of Article 27.4,
we see the issue of the existence of a subsidy and the issue of the point at which that
subsidy is granted as two legally distinct issues (emphasis in original). Only one of
those issues is raised here and, therefore, must be addressed".20
6.14 We recognize that the distinction made by the Appellate Body was between the existence of a
subsidy and when a subsidy is granted related to when a subsidy is granted for the purposes of
Article 27.4 of the SCM Agreement, and not when it was granted for the purposes of Article 3.2. As a
matter of logic, however, we cannot perceive – nor has Brazil identified – any basis for us to conclude
that, while the existence of a subsidy is a legall y distinct issue from when it is granted for the
purposes of Article 27.4, it is not a legally distinct issue from when it is granted for the purposes of
Article 3.2. In other words, if the issue of when a subsidy is "granted" for the purposes of Article 27.4
is legally distinct from when it "exists" for the purposes of Article 1, then it follows that the issue of
when a subsidy is granted for the purposes of Article 3.2 is also legally distinct from the issue when it
is exists for the purposes of Article 1. Accordingly, we decline Brazil's invitation to consider when

19 Appellate Body Report, para. 154.
20 Appellate Body Report, para. 156.

the subsidy "exists" within the meaning of Articl e 1 when examining when the subsidy is "granted"
for the purpose of Article 3.2.21
6.15 Brazil contends that requiring Brazil to cease issuing NTN-I bonds pursuant to commitments
made prior to 18 November 1999 amounts to a retroactive remedy. We cannot agree. In our view,
the obligation to cease performing illegal acts in the future is a fundamentally prospective remedy.22
6.16 Nor are we convinced that a different interpretation is required because Brazil asserts that it
has a contractual obligation to issue PROEX bonds pursuant to commitments already entered into, and
that it would be liable to damages for breach of cont ract if it failed to do so. Assuming that Brazil is
correct in this regard, 23 the implication of this view would be that Members could contract to grant
prohibited subsidies for years into the future and be insulated from any meaningful remedy under the
WTO dispute settlement system. Nor is this a purely hypothetical situation. If Canada's figures are
correct – and Brazil has not disputed their overall accuracy – Brazil has outstanding commitments to
issue NTN-I bonds pursuant to PROEX as it existed before modification in respect of nearly 900
regional aircraft that have yet to be exported. Letters of commitment in respect of some 300 regional
aircraft were issued after the Panel Report in the original dispute was circulated to Members on
14 April 1999. By Brazil's reasoning, it should be allowed to continue issuing bonds upon the
exportation of these aircraft for years to come.
6.17 For all of the reasons set forth above, we conclude that the continued issuance of NTN-I
bonds pursuant to letters of commitment issued prior to 18 November 1999 represents the granting of
subsidies contingent upon export performance within the meaning of Article 3.2 of the
SCM Agreement. Accordingly, we conclude that in this respect Brazil has failed to implement the
recommendation of the DSB that it withdraw the e xport subsidies for regional aircraft under PROEX
within 90 days.
C. ARE PAYMENTS PURSUANT TO THE PROEX SCHEME AS MODIFIED BY BRAZIL
CONSISTENT WITH THE SCM AGREEMENT?
6.18 In the first section of this Report, we addressed the existence of measures taken to comply
with the recommendation of the DSB in respect of payments on exports of regional aircraft pursuant
to letters of commitment issued under PROEX prior to its modification by Brazil. In this section, we
address the consistency with the SCM Agreement of measures taken by Brazil to comply with the

21 Brazil argues that a finding that a subsidy within the meaning of Article 1 of the SCM Agreement
does not exist until NTN-I bonds are issued would render provisions of Part III of the Agreement ineffective.
Because our finding regarding when PROEX subsidies are "granted" within the meaning of Article 3.2 does not
imply a view as to when PROEX subsidies "exist", we need not further address the issue raised by Brazil.
22 Cf., Vienna Convention on the Law of Treaties, Article 28. This provision, entitled "Non-
Retroactivity of Treaties", provides that, unless a differ ent intention appears from the treaty, its provisions do
not bind a party "in relation to any act or fact that took place or situation which ceased to exist" before the date
of entry into force of the treaty for that party. By negative implication, it would not be retroactive application to
bind a party with respect to acts that took place after a treaty entered into force. Although this article addresses
the temporal application of treaties, and not of DSB recommendations, it nevertheless provides some guidance
in respect of the meaning of the concept of retroactivity in public international law.
23 A resolution of the question whether Brazil would be liable to damages for breach of contract for
failure to issue NTN-I bonds in respect of existing commitments would require consideration not only of
Brazilian administrative and contract law, but also of the role of the WTO Agreement in Brazil's domestic legal
system. See Response of Brazil to Question 12 of the Panel. Although a Panel may examine municipal law in
order to determine whether a Member has complied with the WTO Agreement, ( See, e.g., India – Patent
Protection for Pharmaceutical and Agricultural Chemical Products , Report of the Appellate Body adopted on
16 January 1998, WT/DS50/AB/R, para. 66), we are reluctant to enter into such an examination here, as the
issues are complex, not fully briefed, and ultimately not essential to our resolution of the case at hand. In any
event, we recall that, under Article 27 of the Vienna Convention on the Law of Treaties, a party to a treaty may
not invoke the provisions of its internal law as justification for its failure to perform a treaty.

recommendation of the DSB in respect of payments on exports of regional aircraft pursuant to letters
of commitment issued under PROEX after its modification by Brazil.
1. Steps taken by Brazil to comply with the recommendation of the DSB
6.19 The basic language authorising PROEX interest rate equalisation, found in Provisional
Measure 1892-33, has not changed since the date of establishment of the original panel in this
dispute.24 Brazil however argues that it has implemented the DSB's recommendation in this dispute
through Resolution 2667 of 19 November 1999. 25 Article 1 of the Resolution repeats the basic
standard of Provisional Measure 1892-33 that the National Treasury may grant equalisation sufficient
"to ensure that the relevant financial charges are consistent with standard practices on the international
market." Article 1 further provides that:
"Paragraph 1. In the financing of aircraft exports for regional aviation markets,
equalisation rates shall be established on a case by case basis and at levels that may
be differential, preferably based on the United States Treasury Bond 10-year rate,
plus an additional spread of 0.2% per annum, to be reviewed periodically in
accordance with market practices.
Paragraph 2. The equalisation rate shall be limited to the percentages established by
the Central Bank of Brazil, and shall remain fixed throughout the period in question."
6.20 As discussed in paras. 6.75-6.77, infra, Brazil considers that, as a result of this Resolution,
PROEX payments are no longer used to secure a material advantage in the field of export credit terms
and are hence "permitted" by the first paragraph of item (k) of the Illustrative List.
2. Assessment of the Panel
6.21 In the original dispute, we found that Brazil ha d failed to comply with certain conditions of
Article 27.4 of the SCM Agreement, and that the prohibition of Article 3.1(a) of the SCM Agreement
was therefore applicable to Brazil.
26 The Appellate Body sustained this finding on appeal. 27 Brazil
has not suggested before this Article 21.5 Panel that this situation has changed in any respect.
Accordingly, we conclude that Article 3.1(a) continues to apply to Brazil. We further found, and
Brazil did not dispute, that PROEX payments are s ubsidies within the meaning of Article 1 of the
SCM Agreement that are contingent upon export performance within the meaning of Article 3.1(a) of
that Agreement. This finding was not appealed, nor has Brazil suggested that Resolution 2667 in any
way affects the status of PROEX payments as export subsidies.

24 Provisional Measure 1892-33 of 23 November 1999 and Provisional Measure 1700-15 of 30 June
1998 both provide in Article 2 that, "[i]n operations to finance the export of domestic goods and services not
covered by the preceding article and in financing for the production of goods for export, the National Treasury
may grant the financing entity equalisation funding sufficient to make the financing charges consistent with
practices on the international market."
25 Canada Documentary Annex 5, Exhibit Bra-1. Brazil informed the DSB that it had implemented its
recommendation through two pieces of "implementing legislation", Resolution 2667 and Circular Letter 2881 of
19 November 1999 published by the Central Bank of Brazil. Circular Letter 2881 establishes "the maximum
percentages that may be applied under tax rate equa lisation systems used for PROEX operations." These
maximum percentages cover financing for up to ten years, with the highest interest rate equalisation rate set at
2.5 per cent for financing of "over 9 years and up to 10 years", down from 3.8 per cent previously. In the First
Submission of Brazil, however, Brazil indicated that Circular Letter 2881 represents "an additional action that
does not directly affect the question before this Panel". From this we conclude that Brazil does not assert that
Circular Letter 2881 is relevant to our consideration whether PROEX as modified is consistent with the SCM
Agreement.
26 Original Panel Report, para. 8.1.
27 Appellate Body Report, para. 164.

6.22 Brazil does however assert that PROEX payments are "payments" within the meaning of the
first paragraph of item (k) of the Illustrative List which are not "used to secure a material advantage in
the field of export credit terms" and which are therefore "permitted". Thus, Brazil's defence in this
dispute depends upon the proposition that the first paragraph of item (k) may be used to establish that
an export subsidy within the meaning of item (k) is "permitted" by the SCM Agreement. It further
depends upon Brazil establishing that (a) PROEX payments are "payments" within the meaning of
item (k); and (b) PROEX payments are not "used to secure a material advantage in the field of export
credit terms". Further, Brazil has acknowledged that it is asserting an affirmative defence, and that
the burden of establishing entitlement to it is thus on Brazil.
28
6.23 We note that, in the original dispute, this Panel restricted itself to a finding that PROEX
payments were used to secure a material advantage in the field of export credit terms. We did not
address the two other elements necessary to Brazil's defence, i.e., whether the first paragraph of
item (k) can be used to establish that an export subsidy is "permitted", and whether PROEX payments
are "payments" within the meaning of item (k). Nor did the Appellate Body make findings on these
issues. In this Article 21.5 dispute, however, we have decided to address all three elements of Brazil's
defence. In our view, this more comprehensive approach will provide a greater degree of clarity and
guidance to the parties in respect of implementation. It also facilitates a better understanding of the
relevant provisions in the context of the broader operation of the SCM Agreement.
(a) May the first paragraph of item (k) be used to establish that an export subsidy is "permitted"?
6.24 The first paragraph of item (k) of the Illustrative List identifies as an export subsidy:
"The grant by governments (or special institutions controlled by governments) of
export credits at rates below those which they actually have to pay for the funds so
employed (or would have to pay if they borrowed on international capital markets in
order to obtain funds of the same maturity and other credit terms and denominated in
the same currency as the export credit), or the payment by them of all or part of the
costs incurred by exporters or financial institutions in obtaining credits, in so far as
they are used to secure a material advantage in the field of export credit terms ."
(emphasis added).
6.25 As noted above, Brazil's "material advantage" defence is predicated on the proposition that
payments within the meaning of the first paragraph of item (k) that are not "used to secure a material
advantage in the field of export credit terms" are "permitted" by the SCM Agreement.29 Accordingly,
we will first consider whether, as a matter of law, the first paragraph of item (k) can be used to
establish that a subsidy which is contingent upon export performance within the meaning of
Article 3.1(a) is nevertheless "permitted", or whether, as argued by Canada, the first paragraph of
item (k) cannot be used in this manner.
(i) Has this issue already been addressed by the Appellate Body?
6.26 In considering this question, we first observe that this issue has not been decided, either by
the Panel or by the Appellate Body, in the original dispute. To the contrary, both the Panel and the
Appellate Body specifically declined to rule on this issue. In the words of the Appellate Body:
"Nor do we opine on whether a 'payment' within the meaning of item (k) which is not
'used to secure a material advantage in the field of export credit terms' is, a contrario,
'permitted' by the SCM Agreement, even though it is a subsidy which is contingent

28 Original Panel Report, para. 7.17.
29 First Submission of Brazil, para. 4 ("The Appellate Body, noted, however, that Members are
permitted to obtain an 'advantage' in the field of export credit terms, provided that advantage is not material'").

upon export performance within the meaning of Article 3.1(a) of that Agreement.
The Panel did not rule on these issues, and the lack of Panel findings on these issues
was not appealed."30
6.27 Nor do we accept Brazil's contention that we should infer some implicit finding on this issue
by the Appellate Body. The fact that the Appellate Body considered and decided the issue of whether
PROEX payments are used to "secure a material ad vantage in the field of export credit terms" does
not mean that the Appellate Body accepted (nor, for th at matter, that it rejected) Brazil's view that the
first paragraph of item (k) can be used to establish that an export subsidy is "permitted". We decline
to speculate about how the Appellate Body might have resolved this issue had it been before it.
Rather, we will make our finding on this issue on the basis of the SCM Agreement as interpreted in
accordance with customary rules of public international law.
(ii) The relationship between Article 3.1(a) and the Illustrative List of Export Subsidies
6.28 In examining whether the first paragraph of item (k) can be used to establish that a subsidy
which is contingent upon export performance within the meaning of Article 3.1(a) is nevertheless
"permitted", our starting point is of course the text of the SCM Agreement. In this respect, and turning
first to the text of Article 3.1(a), we note that that Article states that:
"Except as provided in the Agreement on Agriculture, the following subsidies within
the meaning of Article 1, shall be prohibited:
(a) Subsidies contingent [footnote omitted], in law or in fact, whether solely or as
one of several other conditions, upon export performance, including those illustrated
in Annex I5;
………………………………………………………………………………………….
5 Measures referred to in Annex I as not constituting export subsidies shall not be
prohibited under this or any other provision of this Agreement.
6.29 Leaving aside for the moment the issue of the role of footnote 5 – an issue to which we will
return shortly – we consider that two conclusions can be derived from the text of Article 3.1(a).
6.30 First, Annex I is purely illustrative, i.e., it does not purport to be an exhaustive list of export
subsidies. In other words, it contains examples of prohibited export subsidies. It is clear, however,
that it is legally possible – and, as a matter of fact, highly likely – that there are prohibited export
subsidies within the meaning of Article 3.1(a) that do not fall within the scope of Annex I. Should
there be any doubt on this score – and neither the parties nor the third parties have expressed any such
doubt – this conclusion is borne out by the title given to Annex I, to wit, "Illustrative List of Export
Subsidies".
6.31 Second, a measure that falls within the scope of the Illustrative List is deemed to be a
prohibited export subsidy. In other words, a Member may establish that a measure is a prohibited
export subsidy by going directly to the Illustrative List, without first demonstrating that a measure
falls within the scope of Article 3.1(a). This is confirmed from the words "subsidies contingent . . .
upon export performance, including those illustrated in Annex I" (emphasis added), which in their
ordinary meaning tell us that measures identified in the Annex are ipso facto "subsidies contingent
upon export performance".

30 Appellate Body Report, para. 187.

6.32 There is however a third conclusion that we cannot draw from the text of Article 3.1(a).
Canada argues that a finding that the Illustrative List could be used a contrario to establish that
measures were "permitted", would turn the Illustrative List into an exhaustive list. We do not agree.
Rather, another possible interpretation is that offered by Brazil but perhaps expressed most clearly by
the United States as third party:
"The Illustrative List does not deal with all possible financial contributions, but for
those it does deal with, it establishes, by virtue of footnote 5, a dispositive legal
standard insofar as prohibited subsidies are concerned."31
Without necessarily agreeing with the US interpretation of the role of the Illustrative List – as our
subsequent discussion will clearly demonstrate – we do not consider that we can conclude, based on
the mere fact that the Illustrative List is "illustrative", that the List cannot be used a contrario.
(iii) The role of footnote 5 to the SCM Agreement
6.33 How thus may we resolve the question whether and under what conditions the Illustrative List
can be used to demonstrate that a subsidy which is contingent upon export performance is not
prohibited, i.e., that it is "permitted"? One possibility would be to resort to general interpretive
techniques. Thus, it could be argued that the Panel should interpret the Illustrative List a contrario
sensu, a term defined as meaning "on the other hand; in the opposite sense",
32 or should apply the
principle of lex specialis . For the reasons discussed below, however, we need not rely on such
general principles in this case.
6.34 The drafters of the SCM Agreement must have recognized that the insertion of the Illustrative
List of Export Subsidies – which was imported with only minor modifications from the Tokyo Round
Subsidies Code – into an Agreement that contained for the first time definitions of "subsidy" and
"export subsidy" would create interpretive difficulties, as the SCM Agreement provides us with a
specific textual basis to resolve this question. This textual basis is footnote 5 to the
SCM Agreement.33
Footnote 5 provides that:
"Measures referred to in Annex I as not constituting export subsidies shall not be
prohibited under this or any other provision of this Agreement".
6.35 Brazil contends that payments within the meanin g of the first paragraph of item (k) that are
not used to secure a material advantage in the fiel d of export credit terms fall within the scope of this
footnote. We disagree.
6.36 In its ordinary meaning, footnote 5 relates to situations where a measure is referred to as not
constituting an export subsidy. Thus, one example of a measure that clearly falls within the scope of
footnote 5 involves export credit practices that are in conformity with the interest rate provisions of
the Arrangement on Guidelines for Officially Supported Export Credits ("Arrangement"). The second

31 Oral Statement of the United States at the third-party session, para. 15.
32 Black's Law Dictionary, Seventh Edition, West Group, 1999 at 23.
33 The SCM Agreement also includes a provision governing the relationship between certain elements
of the Illustrative List and Article 1 of the Agreement. Footnote 1 to the Agreement provides that, "[i]n
accordance with the provisions of Article XVI of GATT 1994 (Note to Article XVI) and the provisions of
Annexes I through III of this Agreement , the exemption of an exported product from duties or taxes borne by the
like product when destined for domestic consumption, or the remission of such duties and taxes in amounts not
in excess of those which have accrued, shall not be deemed to be a subsidy." (emphasis added). This footnote,
of course, is not applicable to the situation at hand, as PROEX payments are unrelated to the exemption of an
exported product from duties or taxes.

paragraph of item (k) provides that such measures "shall not be considered an export subsidy
prohibited by this Agreement". Arguably, footnote 5 in its ordinary meaning could extend more
broadly to cover cases where the Illustrative List contains some other form of affirmative statement
that a measure is not subject to the Article 3.1(a) prohibition, that it is not prohibited, or that it is
allowed, such as, for example, the first and last sentences of footnote 59 34 and the proviso clauses of
items (h)35 and (i)36 of the Illustrative List.37
6.37 The first paragraph of item (k), however, does not contain any affirmative statement that a
measure is not an export subsidy nor that measures not satisfying the conditions of that item are not
prohibited. To the contrary, the first paragraph of item (k) on its face simply identifies measures that
are prohibited export subsidies. Thus, the first paragraph of item (k) on its face does not in our view
fall within the scope of footnote 5 read in conformity with its ordinary meaning.
6.38 We recall the view of Brazil and the United States that "the Illustrative List does not deal with
all possible financial contributions, but for those it does deal with, it establishes, by virtue of
footnote 5, a dispositive legal standard insofar as prohibited subsidies are concerned."
38 In other
words, we understand them to argue that, with resp ect to financial contributions dealt with by the
Illustrative List, the List provides the sole basis to determine whether the measure is prohibited or
permitted. While we agree that an illustrative list could in principle operate in such a manner, we do
not consider that such an interpretation is readily supported by the text of footnote 5 itself. To the
contrary, if the drafters had intended the meaning which the United States attributes to footnote 5,
they could certainly have found appropriate language to do so.
6.39 The United States advances arguments based on the negotiating history of footnote 5 in
support of its broad interpretation of that footnote to apply to the first paragraph of item (k). In this
respect, it points out that in a Chairman's text of the SCM Agreement known as Cartland III,
footnote 5 provided as follows:
"Measures expressly referred to as not constituting export subsidies shall not be
prohibited under this or any other provision of this Agreement." (emphasis added).
39
As the United States correctly observes, a new Chairman's text (known as "Cartland IV") was released
just a few days later.
40 In that new text, the word "expressly" was dropped from the footnote, which
took its present form. In the view of the United States, this change demonstrates that the drafters
"intended to expand, rather than restrict" the scope of footnote 5, and that "they did not intend the sort
of narrow construction of footnote 5 advanced by Canada and the EC."41

34 The first sentence of footnote 59 provides that "Members recognize that deferral need not amount to
an export subsidy where, for example, appropriate interest charges are collected." The last sentence states that
"[p]aragraph (e) is not intended to limit a Member from taking measures to avoid the double taxation of foreign-
source income earned by its enterprises or the enterprises of another Member."
35 ". . . provided, however, that prior-stage cumulative indirect taxes may be exempted, remitted or
deferred on exported products even when not exempted, remitted or deferred on like products sold for domestic
consumption, if the prior stage cumulative indirect taxes are levied on inputs that are consumed in the
production of the exported product . . . ." (emphasis added).
36 ". . . provided, however, that in particular cases a firm may use a quantity of home market inputs
equal to, and having the same quality and characteristics as, the imported inputs as a substitute for them . . . ."
37 In any event, such measures may well fall within the scope of footnote 1, and thus not represent
subsidies at all, whether prohibited or otherwise.
38 Oral Statement of the United States at the third-party session, para. 15.
39 Draft Text by the Chairman, MTN/GNG/NG10/W/38/Rev.2, 2 November 1990.
40 Draft Text by the Chairman, MTN/GNG/NG10/W/38/Rev.3, 6 November 1990.
41 Oral Statement of the United States at the third-party session, para. 12.

6.40 We agree with the United States that the deletion of the term "expressly" appears to have
broadened the scope of footnote 5 in Cartland IV beyond its scope in Cartland III. We do not agree,
however, that it served to broaden footnote 5 to th e extent suggested by the United States. As we
discussed above, the Illustrative List contains – and already contained at the time of Cartland III and
IV – a number of provisions that include affirmative statements that arguably represent authorizations
to use certain measures. The language of Cartland III ("expressly referred to") could have precluded
asserting that footnote 5 applied to any of these provisions, and it may be that the purpose of the
modification was to rectify this situation. If on the other hand the intention of the drafters in changing
footnote 5 had been to extend the scope of that footnote to cover situations where the Illustrative List
merely referred to things that were export subsidies, they might have been expected to modify the
structure of the second part of the footnote, and not merely delete the word "expressly". At the very
least, we conclude that the implications of the negotiating history referred to by the United States are
inconclusive and cannot lead us to disregard the ordinary meaning of the footnote.
6.41 Of course, it could be argued that, based on an a contrario argument, the Illustrative List
permits admitted export subsidies even where those subsidies do not fall within the scope of
footnote 5. As we have already indicated, however, the drafters have provided us with a specific
textual provision that addresses the issue when the Illustrative List can be used to demonstrate that a
measure is not a prohibited export subsidy. The fact that this footnote was adjusted on at least one
occasion suggests that the drafters gave this issu e consideration and provided the answer to this
question.
42 If we were to conclude that the Illustrative List by implication gave rise to "permitted"
measures beyond those allowed by footnote, we would be calling into serious question the raison
d'être of footnote 5.
(iv) The material advantage clause and the principle of effective treaty interpretation
6.42 Brazil, and the United States as third party, contend that a finding that the first paragraph of
item (k) cannot be used a contrario to permit export credits and payments that are not used to secure a
material advantage would render the "material advantage" clause ineffective. 43 We do not agree. In
our view, the primary role of the Illustrative List is not to provide guidance as to when measures are
not prohibited export subsidies – although footnote 5 allows it to be used for this purpose in certain
cases – but rather to provide clarity that certain measures are prohibited export subsidies. Thus, it
would be possible to demonstrate that a measure falls within the scope of an item of the Illustrative
List and was thus prohibited without being required to demonstrate that Article 3, and thus Article 1,
was satisfied. To borrow a concept from the field of competition law, the Illustrative List could be
seen as analogous to a list of per se violations. Seen in this light, the material advantage clause is not
"ineffective", in the sense that it is reduced to redundancy or inutility, by a finding that the first
paragraph of item (k) cannot be used a contrario to establish that a measure is permitted. To the
contrary, the material advantage nevertheless continues to serve an important role by narrowing the
range of measures that would otherwise be subject to the " per se " violation set forth in the first
paragraph of item (k), as discussed below.

42 The Illustrative List was imported with only modest changes from the Tokyo Round Agreement on
Interpretation and Application of Article VI, XVI and XXIII of the General Agreement on Tariffs and Trade
("Subsidies Code" ). The Subsidies Code prohibited Signatories (other than developing country Signatories)
from granting export subsidies on products other than certain primary products and included a list of practices
that were "illustrative of export subsidies". See Articles 9 and 14.2. The Subsidies Code defined neither the
term "subsidy" nor the term "export subsidy", and the drafters must have been aware that the importation of the
List into a new agreement with groundbreaking new definitions would give rise to a need for textual
clarification.
43 The principle of effectiveness in the interpreta tion of treaties has been recognised in the WTO
dispute settlement system. As the Appellate Body explained in United States – Gasoline, "an interpreter is not
free to adopt a reading that would result in reducing whole clauses or paragraphs of a treaty to redundancy or
inutility" (United States – Standards for Reformulated and Conventional Gasoline , Report of the Appellate
Body adopted on 20 May 1996, WT/DS2/AB/R, footnote 10, p. 23).

6.43 Let us consider the first situation envisioned by the first paragraph of item (k), the grant by
governments of export credits at rates below their cost of funds. It may generally be assumed that in
such circumstances there will be a benefit to the recipient and thus a subsidy. This is however not
always the case. Whenever a government's cost of f unds is higher than that of the borrower, a loan at
below the government's cost of funds may nevertheless fail to confer a benefit on the recipient. For
example, Brazil argues in this dispute that its cost of funds is in excess of 13 per cent. By contrast, it
is likely that many purchasers of Brazilian exports could obtain private export credit financing, not
benefiting from government intervention of any kind, at an interest rate significantly lower than 13
per cent. Thus, direct financing by Brazil in these circumstances could well entail a cost to the
government but provide no advantage, material or otherwise, to the recipient. Under these
circumstances, and in the absence of the material advantage clause, Brazil would be prohibited from
providing export credits at an interest rate lower than 13 per cent
44, even if the export credits provided
no advantage whatsoever.45 The role of the material advantage clause in this situation is to narrow the
scope of the per se prohibition in such cases.
6.44 A similar situation could arise in cases of payments under the first paragraph of item (k).
Without the material advantage clause, a complainant could demonstrate the existence of a prohibited
subsidy merely by demonstrating the existence of a payment within the meaning of item (k).
However, a financial institution in a developing country may have a higher cost of funds than
financial institutions in developed countries, and thus be unable to provide export credits on terms
competitive with those of foreign financial institutions. A payment by Brazil that allowed a Brazilian
financial institution to provide export credits to an overseas customer on precisely the same terms as
that customer could have obtained in international financial markets could, absent the material
advantage clause, constitute a prohibited export subsidy, even though the borrower – and hence the
exporter – was no better off than it would have been but for the payment.
46 The material advantage
clause narrows the scope of the " per se" violation in the first paragraph of item (k) and precludes this
result.47
6.45 In light of the foregoing, we consider that the "material advantage" clause would not be
rendered "ineffective" by a finding that the first paragraph of item (k) cannot serve as a basis to
establish that a measure is "permitted".
(v) Developing countries and the object and purpose of the SCM Agreement
6.46 Finally, we recall Brazil's view that the first paragraph of item (k) must be read to "permit"
payments that are not used to secure a material advantage – and that for this reason footnote 5 must be
read broadly to apply to the first paragraph of item (k) – in order to ensure that developing country
Members are not placed at a "permanent, structural disadvantage" in the field of export credit terms.
Because this argument appears to us to be at the core of Brazil's defence, we consider that we must
address it in some detail.

44 Except to the extent it successfully invoked the second paragraph of item (k).
45 We are assuming that the material advantage clause applies with respect to both forms of government
activity referred to in the first paragraph of item (k), i.e., direct export credit financing and payments. If it does
not, then the ability of a developing country not exempted from the export subsidy prohibition to provide direct
export credit financing could in practice be limited to si tuations where it could invoke the second paragraph of
item (k).
46 In such a case, there would be a benefit and thus a subsidy, but it would be a subsidy to a service
provider, the financial institution.
47 In fact, Brazil made a similar argument regarding the need for PROEX payments due to "Brazil risk"
in the original dispute in this case. In the case of PROEX payments, however, the aircraft purchaser is free to
seek the best export credit terms available in the market, whether from a Brazilian or foreign bank, and then
receive a reduction in that interest rate in the amount of the payments. Thus, PROEX payments by definition
allow a purchaser/borrower to obtain export credits at interest rates lower than it could obtain in the market with
respect to the transaction in question.

6.47 We agree with Brazil that the SCM Agreement should not be interpreted in a manner that
provides special and less favourable treatment for developing country Members in the field of export
credit terms if the text of the Agreement permits of an alternative interpretation. In particular, an
interpretation of the SCM Agreement that allowed developed country Members to consistently offer
export credit terms more favourable than those that could in practice be offered by developing country
Members – at least as of the date the export subsidy prohibition applies to any given developing
country Member
48 – would be at odds with one of the objects and purposes of the WTO Agreement
generally and the SCM Agreement specifically.49
6.48 We consider however that the broad reading of footnote 5 urged by Brazil is not necessary in
order to ensure equitable treatment for developing country Members. To the contrary, we fear that a
broad interpretation of footnote 5 would have the opposite effect, and we consider that the natural
reading of the footnote discussed above is more in keeping with this important object and purpose of
the WTO Agreement.
6.49 The essence of Brazil's argument in this Article 21.5 dispute, and in the original dispute which
gave rise to the recommendation the implementation of which we are considering here, is that items
(j) and (k) of the Illustrative List permit developed country Members to provide, consistent with the
WTO Agreement and the Arrangement, export credit terms that a developing country would not be
able to meet. Brazil further considers that the onl y way in practice to rectify this imbalance is to
interpret the first paragraph of item (k) to permit Me mbers to provide payments in so far as they are
not used to secure a material advantage and to interpret that clause in a sufficiently broad manner so
as to allow developing countries to meet developed country export credit terms.50
6.50 In the original dispute, Brazil's developing country argument focused on the second paragraph
of item (k). We will therefore first address the implications of that paragraph for developing
countries.
6.51 The second paragraph of item (k) creates a safe harbour for export credit practices that are in
conformity with the interest rate provisions of the Arrangement.
51 The Arrangement is a plurilateral

48 In this respect, we recall that the prohibition on export subsidies does not apply to least-developed
country Members, nor to Members listed in Annex VII until their GNP per capita reaches US$1,000 per annum.
Further, the prohibition does not apply to other developing country Members pursuant to Article 27 during an
eight-year transition period ( i.e., until 1 January 2003) unless and until another Member demonstrates that a
developing country Member has not complied with at least one of the elements set forth in Article 27.4. It will
be recalled that Brazil is subject to the prohibition because it failed to abide by certain of these elements
(Para 6.20, supra).
49 The preamble to the WTO Agreement 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."
This overarching concern of the WTO Agreement finds ample reflection in the SCM Agreement. Article 27 of
that Agreement recognizes that "subsidies may play an important role in economic development programmes of
developing country Members" and provides substantial special and differential treatment for developing
countries, including in respect of export subsidies.
50 Due to the nature of Brazil's defence in this case, we are required either to address the meaning of a
number of provisions not directly invoked by Brazil, or to leave Brazil's fundamental object and purpose
argument unanswered. Accordingly, and because, in our vi ew, it is difficult to interpret the provisions invoked
by Brazil without examining the broader context of other provisions of the SCM Agreement relating to export
credit practices, we have chosen the latter course.
51 The text of the second paragraph of item (k) in fact refers 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)". We note that several "Sector

"gentlemen's" agreement, negotiated in the context of the Organization for Economic Cooperation and
Development. The purpose of the Arrangement, as stated in its Introduction, is to "provide a
framework for the orderly use of officially supported export credits" and to "encourage competition
among exporters from the OECD-exporting countries based on quality and price of goods and
services rather than on the most favourable officially supported terms". The Arrangement sets forth
certain guidelines with respect to the terms and conditions of officially supported export credits with
repayment terms of two years or more, including minimum interest rates for export credits benefiting
from official financing support
52 based on Commercial Interest Reference Rates, or CIRRs. There is
a CIRR for the currency of each Participant to the Arrangement, which is constructed based upon
long-term bond yields for that Participant plus a fixed margin (which for most currencies is 100 basis
points, i.e., one percentage point).
6.52 Brazil does not dispute that any Member, whether or not a Participant to the Arrangement,
can invoke the second paragraph of item (k) in respect of its export credit practices which are in
conformity with interest rate provisions of the Arrangement. Thus, in the case at hand, Brazil could
provide dollar-denominated export credits in respect of Brazilian regional aircraft on terms that might
otherwise be prohibited by Article 3.1(a) of the SCM Agreement , provided those export credits
conformed to the interest rate provisions of the Arrangement.
6.53 Brazil argued, however, that developing countries could not afford to provide direct export
credit financing at the CIRR rate, because of their high cost of funds, and thus could not in practice
use the safe harbour created by the second paragraph of item (k). In order to avoid the high cost of
direct financing, developing countries such as Brazil had to use a system of payments in support of
export credits provided through commercial banks. Because commercial lenders in many cases have
a lower cost of borrowing than the governments of developing countries, those governments could
afford to "buy down" interest rates provided by co mmercial lenders at much lower cost than if they
offered direct export credit financing itself.
53 Thus, developing countries needed to be able to use the
first paragraph of item (k) as a safe harbour for payments that were equivalent in effect to the direct
financing provided pursuant to the safe harbour in the second paragraph of item (k) by developed
countries. This would only be possible if the first paragraph of item (k) could be used to establish that
"payments" under the first paragraph of item (k) were "permitted" under certain circumstances.
6.54 Brazil's argument in the original dispute was not well-founded. Under the Arrangement,
minimum interest rates in the form of CIRRs apply with respect to "official financing support", which
includes "interest rate support". Thus, there is no reason why a developing country could not invoke
the second paragraph of item (k) in respect of a payment scheme such as PROEX, provided that it is
"in conformity with the interest rate provisions" of the Arrangement. In short, Brazil's argument that
developing country Members needed to be able to use the first paragraph of item (k) as a safe harbour
for their export credit interest buy-down schemes (and that footnote 5 thus had to be interpreted to

Understandings" (relating to ships, nuclear power plants, and civil aircraft) are annexed to the Arrangement, and
that for some products – not including regional aircraft – a minimum interest rate different from the CIRR
applies. We assume – but need not here decide – that an export credit practice in conformity with the interest
rate provisions of these Sector Understandings woul d also be entitled to the safe harbour of the second
paragraph of item (k).
52 As discussed infra at footnote 68, "official support" is a broader concept than "official financing
support".
53 To take a hypothetical and highly simplified example, imagine that the yield on the relevant US
Government bonds (and thus the US Government's cost of borrowing) is 5 per cent, Brazil's cost of borrowing is
10 per cent and the interest rate on commercial export credits is 8 per cent. Because it is constructed based on
the relevant US Government bond yields plus 1 percentage point, the US dollar CIRR would be 6 per cent.
While developed countries could afford to borrow at 5 per cent and provide export credits at 6 per cent, Brazil
could only do so by providing direct export financing at 4 percentage points below its own cost of borrowing, an
expensive proposition. It would be much less costly for Brazil to allow a commercial lender to provide the
export credits, and pay the lender 2 percentage points in the form of interest rate support.

apply in respect of the first paragraph of item (k)) because they could not in practice benefit from the
safe harbour in the second paragraph was, in our view, simply incorrect.54
6.55 In this implementation dispute, Brazil continues to argue that it must be allowed to use the
first paragraph of item (k) to establish that an ad mitted export subsidy is "permitted" so that it can
ensure the availability of WTO-consistent export credit financing for Brazilian products on terms
equivalent to those that Canada is allowed to provide by the SCM Agreement and the Arrangement.
Specifically, Brazil argues that Canada is allowed by the Arrangement and the SCM Agreement to
provide or support below-CIRR export credits which, in the absence of the legal interpretations of the
first paragraph of item (k) advanced by Brazil, cannot be met by Brazil as a practical matter without
violating its WTO obligations.
6.56 In our view, however, the rules of the SCM Agreement as properly interpreted do not give rise
to what Brazil refers to as a "permanent, structural disadvantage" in the field of export credit terms.
We consider, however, that an unduly broad interpretation of footnote 5 to mean that measures not
prohibited by an item of the Illustrative List are permitted would place developing country Members
at a systematic disadvantage in respect of export credits.
55
6.57 To understand why this is so, we will first consider the implications in respect of direct export
credit financing if the Panel were to find that footnote 5 should be interpreted to provide that measures
not prohibited by the first paragraph of item (k) were "permitted". Under the first paragraph of
item (k),
"[t]he grant by governments . . . of export credits at rates below those which they
actually have to pay for the funds so employed . . . in so far as they are used to secure
a material advantage in the field of export credit terms"
is an export subsidy prohibited by the SCM Agreement. The two conditions for the grant of export
credits to fall within the scope of this paragraph – that (a) they are at rates below the government's
cost of funds, and (b) they are used to secure a "material advantage" – are cumulative, i.e. they must
both be satisfied in order for an export credit to fall within the scope of the paragraph. Thus, if we
were to find that this paragraph could be used not only to establish that a measure is prohibited, but
also to establish that certain measures are "permitted", it would follow that a WTO Member benefited
from a safe harbour and provided a "permitted" export subsidy whenever it provided an export credit
at above its own cost of funds (whether or not that export credit was used to secure a material
advantage in the field of export credit terms).
6.58 As Brazil itself has so forcefully argued before the Panel, developing countries' costs of
borrowing are almost inevitably higher than those of developed countries
56. Accordingly, if we
adopted the interpretation advocated by Brazil, the first paragraph of item (k) would "permit"
developed countries to provide export credits at an interest rate – the developed countries' own cost of
funds – which developing countries would almost neve r be able to meet without falling afoul of the
SCM Agreement. Thus, not only is a broad interpretation of footnote 5 not necessary in order to
prevent placing developing countries at a "permanent, structural disadvantage" in the field of export

54 We found in our original Report that "a developing country Member could under the second
paragraph of item (k) provide interest rate support to reduce the interest rates on export credits to the levels
allowed by the OECD Arrangement if it considered that direct financing at those rates was too expensive."
There is no indication in the Appellate Body Report that Brazil challenged this conclusion on appeal, nor did the
Appellate Body find to the contrary.
55 Of course, the SCM Agreement cannot remove competitive disadvantages arising from structural
differences between WTO Members; it should not however be interpreted in such a manner that the rules
themselves place developing country Members at a disadvantage vis-à-vis developed country Members.
56 According to Brazil – and Canada has not challe nged Brazil's assertion – Brazil's cost of borrowing
as of 1 February 2000, based on 10-year bond yields – was more than twice that of Canada.

credit terms but, to the contrary, such a broad interpretation of footnote 5 would in fact place
developing countries at precisely the type of disadvantage in the field of export credit terms feared by
Brazil.
6.59 The same situation exists in respect of item (j) of the Illustrative List. Brazil argues that its
interpretation of the first paragraph of item (k) is necessary to allow it to meet export credit terms
provided by developed country Members through export credit guarantees. 57 If footnote 5 is
interpreted broadly to encompass the first paragra ph of item (k), however, it presumably would also
apply to item (j) and thus "permit" export credit guarantees at premium rates adequate to cover long-
term operating costs and losses, even where the guarantees constituted a subsidy contingent upon
export performance within the meaning of Article 3.1(a). 58 As Canada points out, however, in the
case of a government guarantee, a lending bank establishes financing terms in light of the risk of the
guarantor government, not the borrower. 59 Developed countries generally present a lower risk of
default than developing countries, and a developing country may often be perceived as posing a
higher risk than even the borrower to whom a guarantee might be extended. As a result, while
developing countries in theory could utilise any "safe harbour" under item (j) to provide loan
guarantees at the same premium rates as developed countries, the effect of guarantees by developing
country Members on the interest rate of the guaranteed export credits would be minimal or non-
existent in most cases. In other words, a broad reading of footnote 5 would, in respect of item (j),
allow developed countries to support export credits at interest rates that would be consistently lower
than those of export credits supported by developing countries.
6.60 If, on the other hand, we interpret footnote 5 in accordance with its ordinary meaning, and
conclude that it does not apply to items such as the first paragraph of item (k) and item (j), then all
WTO Members are faced with a common set of rules in respect of export credit practices.
60 First,
they can ensure that those practices do not confer a benefit within the meaning of Article 1 and are
therefore not subsidies.61 Because the existence of benefit is determined based on the existence of a
benefit to a recipient, and without regard to whether there is a cost to the government, 62 all Members
compete on a level playing field in respect of this assessment, i.e., a measure which constitutes an
export subsidy when provided by Brazil ipso facto will also constitute a subsidy when provided by
Canada, and vice versa.
6.61 Second, they can establish that a measure that is a subsidy contingent on export performance
is nevertheless permitted because it benefits from the safe harbour provided by the second paragraph
of item (k) for export credit practices that are in conformity with the interest rate provisions of the

57 As Brazil explained in its first submission (para. 11), when presenting evidence of an export credit
transaction supported by loan guarantees, "export credit guarantee programs are permitted by item (j) of Annex I
to the SCM Agreement, provided they are at premium rates that are adequate to cover the long-term operating
costs and losses of the program".
58 Brazil in fact so argues. See Oral Statement of Brazil at the Meeting of the Panel, para. 34 ("There is
nothing in the text of either item (j) or (k) to support the conclusion that an a contrario argument is permitted in
one but not the other"). Canada does not disagree; rather, it takes the view that item (j), like item (k) first
paragraph, cannot be used a contrario to establish that export credit gua rantees at premium rates that are
adequate to cover long-term operating costs and losses are "permitted". Canada points out that, if this were the
case, then item (j), which operates on a cost-to-government basis, would be manifestly at odds with Article 14,
which sets out a market-based benchmark for determining whether there is a benefit from a loan guarantee. In
the Second Submission of Canada, para. 23.
59 In the Second Submission of Canada, paragraph 36.
60 Except, of course, to the extent that the SCM Agreement provides special and differential treatment
for particular Members, as provided for in Articles 27 and 29 of that Agreement.
61 Assuming that their export credit practices are not per se violations under item (j) or item (k) first
paragraph of the Illustrative List.
62 Canada – Measures Affecting the Export of Civilian Aircraft ("Canada – Aircraft") , Report of the
Appellate Body adopted on 20 August 1999, WT/DSB70/AB/R, para. 156.

Arrangement. As noted earlier in this Report (para. 6.52, supra), the export credit practice of a
Member which is not a Participant to the Arrangement but which "in practice applies the interest rate
provisions" of the Arrangement benefits from the safe harbour of the second paragraph of item (k)
provided that the practice is "in conformity with those [i.e., the interest-rate] provisions."
6.62 We have already seen that, even if a developing country Member cannot in practice afford to
provide direct export credit financing at the CIRR rate, it can take advantage of the safe harbour in the
second paragraph of item (k) by providing interest rate support in order to bring export credits
provided by commercial lenders down to the CIRR rate.
63 The question remains whether the second
paragraph of item (k) would otherwise permit developed country Members to provide or support
export credits which developing countries could meet only through the a contrario invocation of the
first paragraph of item (k) argued by Brazil.
6.63 In this respect, Brazil first refers to the issue of "market windows". According to Brazil, some
Participants to the Arrangement, including Canada, take the view that export credits provided by their
export credit agencies are not "official support" and thus not subject to the terms of the Arrangement
if they are provided at rates equal to or above their cost of funds. 64 According to Brazil, "this means
that developed countries that are able to borrow US dollars at a rate below the CIRR rate are able to
lend at that below-CIRR rate in conformity with the Arrangement as presently interpreted".65 In other
words, Brazil seems to be arguing that developed countries are permitted by the Arrangement, and
thus by the WTO Agreement , to provide such below-CIRR export credits. Because developing
countries have a higher cost of funds than do developed countries, their minimum interest rate under
the second paragraph would be CIRR, and they would be unable to meet developed countries' market
window operations. Thus, Brazil argues, developing countries must be "permitted" by operation of
the first paragraph of item (k) to make payments resulting in export credits on equivalent terms.
6.64 Canada responds that Brazil confuses Canada's position on market windows. In Canada's
view, the term "market windows" refers to circumstan ces where an export credit agency offers direct
financing on terms comparable to those the recipient may receive in the market. In such
circumstances, the agency is operating similarly to a private commercial bank, rather than as an
official export credit agency. Thus, Canada argues that, for example, the Canadian Export
Development Corporation, when operating under its Corporate Account, does not in any event confer
a benefit and accordingly does not provide a subs idy within the meaning of Article 1 of the
SCM Agreement.66
6.65 We understand that the "market windows" debate, which is an ongoing one among the
Participants, relates to whether or not certain export credit practices are "official support" and thus
subject to the Arrangement. An export credit practice is not however " in conformity with " the
"interest rate provisions" of the Arrangement within the meaning of the second paragraph of item (k)
of the SCM Agreement merely because it is not subject to the Arrangement. To the contrary, we
consider that the "interest rate provisions" to which the second paragraph of item (k) refers are those
provisions that establish minimum interest rates.
67 At present, the only generally applicable minimum

63 Provided, as discussed below, they respect the other provisions of the Arrangement which affect
interest rates.
66 Second Submission of Canada, para. 48. The disagreement between Brazil and Canada regarding
what export credit practices qualify as "market window" operations appears to reflect that Canada's position on
this question has evolved in the relatively recent past.
67 This does not mean, however, that a Member may demonstrate that its export credit practice is in
conformity with the interest rate provisions of the Arrangement merely by demonstrating that it has respected
the minimum interest rates, irrespective of the other terms and conditions of the export credit in question. In our
view, it would not be possible to make a meaningful assessment as to whether a Member has respected

interest rate under the Arrangement is the CIRR. Thus, an export credit which is provided through
"market windows" at an interest rate below CIRR cannot be said to be "in conformity with" the
interest rate provisions of the Arrangement and thus cannot benefit from the safe harbour provided for
in that paragraph. 68 Accordingly – and in light of our understanding of the ordinary meaning of
footnote 5 – whether an export credit practice involving below-CIRR interest rates is or is not
prohibited by the SCM Agreement will depend solely upon whether or not it falls within the scope of
Article 3.1(a), and in particular whether it confers a benefit and therefore represents a subsidy within
the meaning of Article 1.69
6.66 In short, an interpretation of footnote 5 which accords with its ordinary meaning and does not
allow the first paragraph of item (k) to be read in an a contrario manner to "permit" certain measures
not only does not generate a "permanent, structural disadvantage" for developing country Members in
the field of export credit terms but, to the contrary, prevents developed country Members from
obtaining, through the a contrario invocation of the Illustrative List, a consistent advantage over
developing countries in the field of export credit terms. Accordingly, we do not agree with Brazil that
the object and purpose of the SCM Agreement requires us to read footnote 5 more broadly than its
ordinary meaning would suggest.
(vi) Conclusion
6.67 For the foregoing reasons, we conclude that the first paragraph of item (k) cannot be used to
establish that a subsidy which is contingent upon export performance within the meaning of
Article 3.1(a) is "permitted".70
(b) Are payments under PROEX "payments" within the meaning of the first paragraph of item (k)
which are "used to secure a material advantage in the field of export credit terms"?
6.68 As discussed above, we do not consider that the first paragraph of item (k) can be used to
establish that a measure which is a subsidy contingent upon export performance within the meaning of
Article 3.1(a) is nevertheless "permitted". Nevertheless, we consider that we should resolve the issue
whether payments under the "new" PROEX are used to secure a material advantage in the field of

minimum interest rates without verifying as well that it has respected those provisions of the Arrangement
which affect interest rates.
68 Our reasoning would apply equally to any other situation where the Arrangement's minimum
interest rates do not or may not apply. Thus, export credit guarantees, although "official support" subject to the
Arrangement, are not "official financing support" and thus are not subject to minimum interest rates. While
guaranteed export credits thus may be provided at below-CIRR interest rates without violating the Arrangement,
they cannot be considered to be "in conformity with" the interest rate provisions of the Arrangement. Similarly,
there is no consensus among Participants about the treatment of official financing support for export credits at
floating interest rates. While Canada considers that such export credits need not comply with the CIRR – given
that the CIRR logically is relevant only to export cred its at fixed interest rates – floating rate export credits
provided at an interest rate below CIRR cannot be considered to be "in conformity with" the interest rate
provisions of the Arrangement. Finally, while the Arrangement authorizes Participants to "match" export credit
terms and conditions offered by Participants or non-Participants that do not conform to the Arrangement, it
cannot be said that an export credit benefiting from offi cial financing support that derogates from the minimum
interest rate provisions of the Arrangement is "in conformity with" the interest rate provisions of the
Arrangement.
69 We recall in this respect our view that the first paragraph of item (k) does not "permit" the grant of
export credits that are at or above a government's cost of borrowing. See para. 6.43, supra.
70 Of course, we do not preclude that, in appropriate circumstances, an item of the Illustrative List
might represent context relevant to an interpretation of Article 1 (or vice versa), although in this regard
substantial caution would certainly be appropriate given that, on its face, the Illustrative List focuses on whether
a measure is a prohibited export subsidy, not on whether it is a subsidy. See generally United States – Tax
Treatment for "Foreign Sales Corporations" , Report of the Appellate Body adopted on 20 March 2000,
WT/DS108/AB/R, para. 92.

export credit terms because such findings should fa cilitate Brazil's task in implementing the DSB's
recommendations.
(i) Are payments under PROEX "payments" within the meaning of the first paragraph of
item (k)?
6.69 Brazil argues that PROEX payments constitute the payment by Brazil of all or part of the
costs incurred by Embraer or financial institutions in obtaining credits within the meaning of the first
paragraph of item (k). As explained in our original Panel Report, 71 Brazil's argument appears to be
two-fold. First, Brazil contends that financial institutions must borrow funds in order to finance their
lending, that the export credits so funded are provided at below their cost of borrowing, and that
PROEX payments are provided to compensate the lenders for this difference. The difference between
the lender's cost of borrowing and the rate it charges on the export credits represents a "cost incurred
by . . . financial institutions in obtaining credits". Second, Brazil asserts that, although Embraer does
not itself extend export credits to its customers, it incurs certain costs in relation to the provision of
export credits by financial institutions. Brazil's arguments are linked to the principle that both
Embraer and Brazilian financial institutions have high costs of borrowing as a result of "Brazil risk",
i.e., the Government of Brazil has a high cost of borrowing and Brazilian entities cannot borrow on
terms more favourable than those of their government.
6.70 Canada agrees with the basic thrust of Brazil's interpretation of the notion of payments. In
Canada's view, a payment exists within the meaning of the first paragraph of item (k) where an
exporter or financial institution obtains credits at an interest rate higher than the rate at which it would
provide export credits to a buyer and incurs a cost as a result, and the government pays for all or part
of this difference. In Canada's view, however, PROEX payments are not "payments" in this sense. In
this regard, it emphasises that Embraer does not itself provide export financing to its purchasers.
Further, Canada asserts that PROEX payments are in practice paid when non-Brazilian purchasers
finance their purchases through non-Brazilian financial institutions. Thus, Brazil risk is not relevant.
Accordingly, Canada considers that PROEX payments are not payments to cover the costs incurred by
exporters or Brazilian financial institutions in raising funds used for financing purchases.
6.71 It will be recalled that item (k) refers to the payment by governments of "all or part of the
costs incurred by exporters or financial institutions in obtaining credits". In interpreting this
provision, we must of course start with its ordinary meaning. In this respect, we note first the use of
the word "credits" in the plural. It seems clear in context that the word "credits" refers to "export
credits" as used earlier in the paragraph. Second, the costs involved are those relating to obtaining
export credits, and not costs relating to providing them.
6.72 Read in light of the foregoing considerations, we do not believe that PROEX payments can be
said to constitute "the payment by [a government] of all or part of the costs incurred by exporters or
financial institutions in obtaining export credits". Brazil's argument equates the cost for a financial
institution of raising capital with the cost of "obtaining [export] credits". While the financial
institutions involved in financing PROEX-supported transactions certainly provide export credits,
they cannot be seen as obtaining such credits. Further, if the drafters had intended to refer to
payments related to a financial institution's cost of borrowing, the first part of the first sentence of
item (k) demonstrates that they knew how to do so. In short, we do not agree that payments to a
lender that amount to interest rate support can reasonably be understood to be payments of all or part
of the costs of obtaining export credits.
6.73 Even if we did agree that the provision of export credits at below a financial institution's cost
of borrowing entailed a "cost incurred by . . . financial institutions in obtaining credits", we are
unconvinced that PROEX payments necessarily serve to reimburse such below-cost-of-borrowing

71 Original Panel Report, footnote 198, p. 80.

export credits. In this respect, we note that Brazil's argument focused on the fact that Embraer and
Brazilian financial institutions had a high cost of borrowing as a result of "Brazil risk". As Canada
points out, however, Embraer does not itself provide export credit financing, and the financial
institutions receiving PROEX payments are not necessarily Brazilian financial institutions. Rather,
they are in many cases leading international financial institutions unhampered by "Brazil risk". Thus,
there is no basis for us to conclude, nor even to hypothesise, that the financial institutions in question
are providing export credits at below their cost of funds.
(ii) Are PROEX payments "used to secure a material advantage in the field of export credit
terms"?
6.74 The third and final element of Brazil's material advantage defence is that PROEX payments
are not "used to secure a material advantage in the field of export credit terms" within the meaning of
the first paragraph of item (k).
6.75 Brazil considers that it has modified PROEX in respect of regional aircraft such that PROEX
payments are no longer used to secure a material advantage in the field of export credit terms.
Specifically, Brazil argues that Resolution 2667
"means, effectively . . . that no application for PROEX interest rate equalisation
support for regional aircraft will be favorably considered unless it reflects a net
interest rate to the borrower equal to or more than the 10-year United States Treasury
Bond ('T-Bill') plus 0.2 percent per annum. While the use of the T-Bill as the
benchmark is preferred, the authorities retain the authority to utilise LIBOR as an
alternative reference point in appropriate market circumstances "
72
Brazil requests the Panel to find that, "by requiring the net interest rate for any transaction supported
by PROEX to equal or exceed an appropriate market benchmark – with the preferred benchmark
being the T-Bill plus 20 basis points – Brazil has withdrawn the prohibited aspects of the PROEX
programme."
73
6.76 In order to determine whether Brazil is correc t in its view that payments pursuant to the
PROEX scheme no longer are used to secure a material advantage in the field of export credit terms,
we must first seek to resolve certain differences of view among the parties regarding the meaning of
the "material advantage" clause as interpreted by the Appellate Body, and in particular the role of the
CIRR in determining whether payments are or are not used to secure a material advantage in the field
of export credit terms.
6.77 In Brazil's view, the Appellate Body found that PROEX was flawed because it lacked a
benchmark based on the marketplace. According to Brazil, the Appellate Body found that Members
are permitted to obtain an "advantage" in the field of export credit terms provided that advantage is
not "material". It also made clear that the appropriate benchmark for determining whether a material
advantage is secured is the marketplace and not a specific transaction.
74 Put another way, Brazil
argues that the "primary flaw" in PROEX identified by the Appellate Body was "the absence of a
floor net interest rate based on a cognizable benchmark rate in the commercial marketplace." 75 In the
view of Brazil, while the Appellate Body identified the CIRR as 'one example' of an appropriate

benchmark, Brazil chose a point of reference othe r than CIRR for PROEX based on evidence that, in
the case of aircraft, the marketplace in fact supports lower interest rates .76
6.78 Canada sees no basis in the rulings of the Appellate Body for Brazil's claim to a benchmark
below CIRR even if Brazil could demonstrate that interest rates in the marketplace were below CIRR
at some given moment. In the view of Canada, the Appellate Body used the second paragraph of
item (k), and therefore the Arrangement, as useful context for arriving at the appropriate benchmark to
be used in the first paragraph of item (k). The Appellate Body found that the CIRR constituted the
minimum commercial interest rate for the purposes of the Arrangement. It determined accordingly
that a net interest rate below the relevant CIRR was a positive indication that material advantage was
being secured. There was no suggestion at all by the Appellate Body that any other, lower benchmark
could appropriately be used instead of CIRR for item (k).
6.79 From the above, it is evident that Canada and Brazil have fundamentally different views about
the legal significance of the CIRR as a benchmark for determining whether or not a payment is used
to secure a material advantage. Canada considers that a payment that results in a net interest rate
below CIRR ipso facto secures a material advantage. Brazil considers that a lower benchmark for
determining whether a payment is used to secure a material advantage would be appropriate if it could
be established that the "marketplace" in fact supports lower rates.
6.80 As noted above, Resolution 2667 sets what Brazil characterises as a minimum net interest rate
for export credits supported by PROEX payments based on US 10-year Treasury Bonds plus 0.2 per
cent (20 "basis points"). Canada argues, and Brazil does not dispute, that such a minimum interest
rate is below CIRR.
77 Accordingly, if Canada is correct in its view that a payment that results in a net
interest rate below the CIRR is ipso facto used to secure a material advantage, then PROEX payments
are used to secure a material advantage. On the other hand, if Brazil is correct that an interest rate
below CIRR does not imply a material advantage if the marketplace supports such a lower interest
rate, then we must examine the evidence submitted by the parties in respect of the interest rates in the
marketplace for regional aircraft.
6.81 In considering this issue, we have carefully reviewed the Report of the Appellate Body in the
original dispute. The Appellate Body had before it the conclusion of the Panel that a payment is used
to secure a material advantage where the payment "has resulted in the availability of export credit on
terms which are more favourable than the terms that would otherwise have been available to the
purchaser in the marketplace with respect to the transaction in question".
78 The Appellate Body
rejected the Panel's interpretation for two reasons. First, the Appellate Body found that the Panel had
omitted the term "material" from its test, thus reading that term out of item (k). Second, the Appellate
Body found that the Panel had interpreted the material advantage clause as equivalent to the term
"benefit" in Article 1.1(b) of the SCM Agreement, thereby rendering that clause meaningless.
6.82 The Appellate Body then explained how the "m aterial advantage" clause should properly be
interpreted. Because the resolution of this dispute depends upon achieving a proper understanding of
this clause as interpreted by th e Appellate Body, we will quote in extenso from the Appellate Body's
findings:

77 Second Submission of Canada, footnote 33; Response of Brazil to Question 1 of the Panel ("Brazil
agrees that a net interest rate of 20 basis points above the 10-year US T-Bill normally is below the CIRR"). The
United States as third party indicated that a review of data for the period 1970-99 showed that at no point during
the period did the long-term CIRR go below the monthly average 10-year Treasury Bond plus 20 basis points,
and that on average the long-term CIRR was 73 basis points above that benchmark (Response of the United
States to Question 1 of the Panel to Brazil).
78 Appellate Body Report, para. 7.33.

180. We note that there are two paragraphs in item (k), and that the "material
advantage" clause appears in the first paragraph. Furthermore, the second paragraph
is a proviso to the first paragraph. The second paragraph applies when a Member is
"a party to an international undertaking on official export credits" which satisfies the
conditions of the proviso, or when a Member "applies the interest rates provisions of
the relevant undertaking". In such circumstances, an "export credit practice" which is
in conformity with the provisions of "a n international undertaking on official export
credits" shall not be considered an export subsidy prohibited by the SCM Agreement.
The OECD Arrangement is an "international undertaking on official export credits"
that satisfies the requirements of the proviso in the second paragraph in item (k).
However, Brazil did not invoke the proviso in the second paragraph of item (k) in its
defence. Brazil argued before the Panel that it "has concluded that conformity to the
OECD provisions is too expensive."[footnote omitted].
181. Thus, this case falls under the first paragraph, and not under the proviso of the
second paragraph, of item (k) of the Illustrative List. Consequently, the issue here is
whether the export subsidies for regional aircraft under PROEX "are used to secure"
for Brazil "a material advantage in the field of export credit terms". Nevertheless, we
see the second paragraph of item (k) as useful context for interpreting the "material
advantage" clause in the text of the first paragraph. The OECD Arrangement
establishes minimum interest rate guidelines for export credits supported by its
participants ("officially-supported export credits"). Article 15 of the Arrangement
defines the minimum interest rates applicable to officially-supported export credits as
the Commercial Interest Reference Rates ("CIRRs"). Article 16 provides a
methodology by which a CIRR, for the currency of each participant, may be
determined for this purpose. We believe that the OECD Arrangement can be
appropriately viewed as one example of an international undertaking providing a
specific market benchmark by which to assess whether payments by governments,
coming within the provisions of item (k), are "used to secure a material advantage in
the field of export credit terms". Therefore, in our view, the appropriate comparison
to be made in determining whether a payment is "used to secure a material
advantage", within the meaning of item (k), is between the actual interest rate
applicable in a particular export sales transaction after deduction of the government
payment (the "net interest rate") and the relevant CIRR.
182. It should be noted that the commercial interest rate with respect to a loan in any
given currency varies according to the length of maturity as well as the
creditworthiness of the borrower. Thus, a potential borrower is not faced with a single
commercial interest rate, but rather with a range of rates. Under the OECD
Arrangement, a CIRR is the minimum commercial rate available in that range for a
particular currency. In any given case, whether or not a government payment is used
to secure a "material advantage", as opposed to an "advantage" that is not "material",
may well depend on where the net interest rate applicable to the particular transaction
at issue in that case stands in relation to the range of commercial rates available. The
fact that a particular net interest rate is below the relevant CIRR is a positive
indication that the government payment in that case has been "used to secure a
material advantage in the field of export credit terms".
183. Brazil has conceded that it has the burden of proving an alleged "affirmative
defence" under item (k). In light of our analysis, it was for Brazil to establish a
 prima facie case that the export subsidies for regional aircraft under PROEX do not
result in net interest rates below the relevant CIRR. We note, however, that Brazil
did not provide any information to the Panel on this point. We also note that Brazil
declined to provide this information, even when specifically requested to do so by the

Panel.[footnote omitted]. Because Brazil provided no information on the net interest
rates paid by purchasers of Embraer aircraft in actual export sales transactions, we
have no basis on which to compare the net interest rates resulting from the interest
rate equalisation payments made under PROEX with the relevant CIRR.
184. Accordingly, we find that Brazil has failed to meet its burden of proving that
export subsidies for regional aircraft under PROEX are not "used to secure a material
advantage in the field of export credit terms" within the meaning of item (k) of the
Illustrative List.
185. We are aware that the OECD Arrangement allows a government to "match",
under certain conditions, officially-supported export credit terms provided by another
government. In a particular case, this could result in net interest rates below the
relevant CIRR. We are persuaded that "matching" in the sense of the OECD
Arrangement is not applicable in this case. Before the Panel, Brazil argued for an
interpretation of the clause "in the field of export credit terms" that would include as
an "export credit term" the price at which a product is sold, and maintained that,
therefore, Brazil was entitled to "offset" all the subsidies provided to Bombardier by
the Government of Canada. The Panel rejected Brazil's argument, finding instead
that "[w]e see nothing in the ordinary meaning of the phrase to suggest that 'the field
of export credit terms' generally encompasses the price at which a product is sold."

We note that this finding was not appealed by either Brazil or Canada. Even if we
were to assume that the "matching" provisions of the OECD Arrangement apply in
this case (an argument Brazil did not make), those provisions clearly do not allow a
comparison to be made between the net interest rates applied as a consequence of
subsidies granted by a particular Member and the total amount of subsidies provided
by another Member. We also note that under PROEX, the interest rate equalisation
subsidies for regional aircraft are provided at an "across-the-board" rate of 3.8 per
cent for all export sales transactions.[footnote omitted] That rate is fixed, and does
not vary depending on the total amount of subsidies provided by another Member to
its regional aircraft manufacturers. Thus, we cannot accept Brazil's argument that the
export subsidies for regional aircraft under PROEX should be "permitted" because
they "match" the total subsidies provided to Bombardier by the Government of
Canada.
6.83 The text of the Appellate Body decision reveal s elements that support the view of Canada in
respect of the role of the CIRR. The language used by the Appellate Body in several places suggests
that the CIRR is the sole and immutable benchmark against which material advantage is to be
assessed. In particular, the Appellate Body's statement, in paragraph 182 of its Report, that "the
appropriate comparison to be made in determining whether a payment is "used to secure a material
advantage", within the meaning of item (k), is between the actual interest rate applicable in a
particular export sales transaction after deduction of the government payment (the " net interest rate")
and the relevant CIRR", is on its face absolute and would not allow of another benchmark. Similarly,
in paragraph 183 the Appellate Body Report states, somewhat categorically, that, "[i]n light of our
analysis, it was for Brazil to establish a prima facie case that the export subsidies for regional aircraft
under PROEX do not result in net interest rates below the relevant CIRR."
6.84 In our view, however, a careful reading of the Report leads to the conclusion that the CIRR
was not intended as the exclusive and immutable benchmark applicable in all cases. In this regard, we
note in particular certain more nuanced language in paragraph 182 of the Report. Thus, the Appellate
Body states that whether a payment is used to secure a material advantage " may well depend " on
where the net interest rate applicable to the particular transaction at issue in that case stands in relation
to the range of commercial rates available. In the very next sentence, the Appellate Body states that
the fact that a particular net interest rate is below the relevant CIRR is " a positive indication" that the

government payment in that case has been "used to secure a material advantage in the field of export
credit terms". The choice of the words "positive indication" strongly suggests that, while an interest
rate below CIRR might be strong evidence that a payment was used to secure a material advantage,
there could be circumstances where an interest rate below CIRR nevertheless was not used to secure a
material advantage in the field of export credit terms.79
6.85 Although we believe that the Appellate Body did not intend that a payment that resulted in a
net interest rate below CIRR would ipso facto be deemed to secure a material advantage, we are not
sure under exactly what circumstances this would not be the case. There are a number of possible
readings of the Appellate Body Report, each of which would suggest a different approach to
determining under what circumstances a payment resulting in a net interest rate below CIRR might
not be considered to have been used to secure a material advantage in the field of export credit terms.
6.86 One interpretation would be that the Appellate Body simply considered that a payment would
not be used to secure a material advantage in the field of export credit terms if it resulted in an export
credit on terms and conditions that would be protected by the safe harbour of the second paragraph as
being in conformity with the interest rate provisions of the Arrangement. If this were the case, then
our examination would focus on whether Brazil's below-CIRR benchmark could have been justified
as being equivalent to the terms and conditions of export credits that other Members could provide or
support, or perhaps were actually providing or supporting, pursuant to the safe harbour of the second
paragraph. The Appellate Body's reference to matching in the sense of the Arrangement, although by
no means amounting to a finding that Brazil would not be securing a material advantage in the field of
export credit terms if it were merely matching another Member's export credit terms, might be seen as
implying such an approach.
80
6.87 We do not believe, however, that the Appellat e Body report should be understood in this
manner. As we have seen, all WTO Members, whether or not Participants to the Arrangement, are
entitled to take advantage of the safe harbour in the second paragraph of item (k) to the extent their
export credit practices are in conformity with the interest rate provisions of the Arrangement. Further,
we have seen that, contrary to Brazil's assertions, the export credit practices which may benefit from
this safe harbour include interest rate support. Thus, even if a measure not prohibited by the first
paragraph of item (k) were "permitted", there is no obvious reason why the test in the second
paragraph of item (k), i.e., conformity with the interest rate provisions of the Arrangement, should be
simply duplicated in the first paragraph, as this would be re-creating in the first paragraph the very
safe harbour already provided for by the second paragraph. In addition, the fact that the Appellate
Body does not incorporate Arrangement requirements in respect of terms and conditions other than
interest rates in its material advantage test, such as minimum premiums for sovereign and country
credit risk
81 and maximum repayment periods, strongly suggests that it did not intend to equate the
concept of material advantage in the field of export credit terms with conformity with the interest rate
provisions of the Arrangement.
6.88 Another possible interpretation is that suggested by Canada. Although Canada does not say
so explicitly, its view seems to be that the Appellate Body did not overrule the Panel's finding that the
concept of "material advantage" was comparable to the question whether there was a benefit to the

79 Brazil also refers to the statement of the Appellate Body 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 are used to secure a material advantage (emphasis added). Given that the
Appellate Body referred to "one example" of an undertaking, and not "one example" of a benchmark, we are
unsure how much weight should be placed on this element.
80 For the reasons explained in paras. 6.62-6.65, supra, of this Report, however, we do not believe that
an interest rate below CIRR could in fact ever be deemed to be "in conformity with" the interest rate provisions
of the Arrangement.
81 Which, in the case of direct credits/financing and refinancing, must be charged on top of the CIRR.
See the Arrangement, Article 15.

recipient.82 Rather, the Appellate Body merely found that such an advantage had to be "material" and,
if the net interest rate was below CIRR, this was irrebutable evidence that the advantage was in fact
"material".83 Under this reading of the Appellate Body Report, if we understand it correctly, a
PROEX payment resulting in an export credit at an interest rate above CIRR would still be used to
secure a "material" advantage if it resulted in an export credit on "materially" better terms than the
terms that would otherwise have been available in the marketplace to the borrower in question . 84
Given Canada's references in this context to purely commercial transactions – i.e., transactions not
benefiting from official support – we assume that Canada defines the "marketplace" to mean the
purely commercial marketplace. Consistent with this interpretation, and in support of its position that
the advantage conferred by PROEX payments is "material", Canada submitted affidavits from airlines
indicating that a reduction in interest rates of as little as 25 basis points could have a material impact
on their choice of aircraft.
6.89 We cannot however interpret the Appellate Body Report in this manner. If the Appellate
Body meant what Canada now suggests it meant, there would have been no need for it to have
referred to the CIRR in order to establish that the advantage in question was "material". In this
respect, we recall that, under PROEX, a borrower negotiates the best interest rate it can obtain in
international financial markets, and then benefits from a buy-down of that interest rate of 2.5
percentage points (3.8 percentage points under PROEX as it existed at the time of the original Panel
Report). There was information in the record indica ting that this interest rate buy-down reduced the
total cost of an aircraft to a borrower by several million dollars
85, and in any event there could be little
doubt that a 3.8 percentage point reduction in the interest rate on a long-term export credit would
secure a "material" advantage in the field of export credit terms, if the point of comparison were in
fact the terms otherwise available to that borro wer in the commercial marketplace. Thus, the
Appellate Body could have noted the failure of the Panel to consistently state than an advantage had
to be "material", but concluded on the basis of the record that the amount of the PROEX payments
could not but be used to secure a material advantage. The fact that the Appellate Body did not
indicates to us that they considered the Panel's basic approach to be incorrect.
6.90 Brazil, by contrast, argues that "the appropriate reference for determining whether a material
advantage is secured is the 'marketplace' and not a specific transaction". 86 In referring to the
"marketplace", Brazil apparently means that a payment does not secure a material advantage if the net
interest rate on the export credits is no lower than that which is available to purchasers of competing
regional aircraft. In light of the "evidence" cited by Brazil ( See paras. 6.94 and 6.97, infra) regarding
interest rates in respect of regional aircraft, we conclude that Brazil would not distinguish between
commercial and non-commercial benchmarks in determining what interest rates prevailed in the
"marketplace". Put simply, Brazil's position seems to be that its payments do not secure a material

82 I.e., a payment is used to secure a material advantage where the payment has resulted in the
availability of an export credit on terms that are materially more favourable than the terms that would otherwise
have been available in the marketplace to the purchaser with respect to the transaction in question.
83 Thus, Canada asserts that, "in the unlikely event that PROEX results in a net interest rate that is
above CIRR, such a rate still secures a 'material advant age' . . . . By its design, PROEX secures a material
advantage". Response of Canada to Question 7 of the Panel.
84 See Oral Statement of Canada at the Meeting of the Panel, paras. 97-98 ("[I]f a net interest rate is
below the relevant CIRR, the 'payment' in question must be considered to have secured a material advantage. If,
however, a net interest rate is above the CIRR, a party that claims the benefit of an a contrario exception, if
such an exception existed, would have the burden of establishing that it does not secure a material advantage as
compared to the prevailing market rate . . . This is b ecause an interest rate buy-down of 2.5 percentage points
may well not bring the net interest rate in a transaction below the relevant CIRR in cases where the credit of the
borrower is particularly bad . But, it would be untenable to argue that such a massive subsidisation would not,
at the same time, secure a material advantage."(emphasis added).
85 A report by Ernst and Young estimated that the net present value of the equalisation payments would
total $2,454,162 per aircraft (Exhibit 23 to First Submission of Canada in the original dispute).

advantage provided that the resulting net interest ra te is no lower than the interest rates available in
respect of export credits for competing regional aircraft, irrespective of whether those interest rates
are the result of market forces or government intervention.
6.91 In our view, however, Brazil's approach is also inconsistent with the choice of CIRR as
benchmark by the Appellate Body. The Appellate Body seems to have identified the CIRR as a
relevant benchmark under the material advantage clause because it represents the " minimum
commercial interest rate" faced by a potential borrower in respect of a particular currency. In this
respect, we note that, under the Arrangement, the CIRR is established according to a number of
principles, including that the CIRR should represent final commercial lending interest rates in the
domestic market of the currency concerned, that it should closely correspond to the rate for first-class
domestic borrowers and to a rate available to first-class foreign borrowers and that it should not
distort domestic competitive conditions. 87 In other words, the CIRR is intended in principle to
approximate the interest rate that first- class borrowers would pay "commercially", i.e., in private
transactions not benefiting from official support. The reasoning of the Appellate Body in choosing
the CIRR seems to have been that a payment would be used to secure a material advantage, as
opposed to an advantage that was not material, if it resulted in an interest rate that was below the
lowest commercial interest rates available to the best borrowers in respect of a particular currency,
irrespective of whether that rate would have been available to the borrower in question.
6.92 For the foregoing reasons, we consider that a Member may under the first paragraph of
item (k) as interpreted by the Appellate Body establish that a payment was not used to secure a
material advantage in the field of export credit terms, even if it resulted in a below-CIRR interest rate,
if it could establish that the net interest rate resulting from the payment was not lower than the
minimum commercial interest rate in respect of that currency.88
6.93 That being the case, the next question we must address is whether Brazil has demonstrated
that the benchmark it has chosen as the floor net interest rate for export credits supported by PROEX
payments is in fact equal to or higher than the "minimum commercial interest rate" available in the
marketplace. In considering this question, we recall that Brazil is seeking to use the first paragraph of
item (k) as an affirmative defence and that it therefore bears the burden of establishing entitlement to
it.
89 At the same time, and conscious that Canada might have access to relevant information not in the
possession of Brazil, we have exercised our authority to seek certain information from Canada, 90 and
we have taken the responses of Canada into account when examining this issue.
6.94 The first piece of evidence relied on by Brazil in support of the view that there are
commercial interest rates below CIRR is documentation relating to the terms of an export financing
transaction at a floating interest rate for large civil aircraft supported by export credit guarantees from
the United States Export-Import Bank. Brazil compared the interest rate on this transaction (LIBOR
plus 3 basis points) plus an amount to reflect a one-time guarantee fee it estimated to have been
charged by the Export-Import Bank, to the "minimum" net interest rate for export credits benefiting

87 OECD Arrangement, Article 15.
88 We note that it would make little sense to compare the interest rate on a floating rate loan with the
CIRR when determining whether an export credit or payment was "used to secure a material advantage in the
field of export credit terms". We assume that in such circumstances the issue of material advantage would be
assessed on the basis of the minimum commercial interest rate for comparable floating-interest rate export
credits.
89 Original Panel Report, para. 7.17. Of course, we have determined that the first paragraph of item (k)
cannot be used to establish that a measure is "permitted" (para. 6.67, supra). If a complainant sought to use the
first paragraph of item (k) to establish that a measure was prohibited, the complainant would, as in all cases,
bear the initial burden of presenting evidence and argument sufficient to establish a prima facie case of
violation. See EC – Measures Concerning Meat And Meat Products (Hormones) , Report of the Appellate Body
adopted on 13 December 1998, WT/DS26/AB/R, WT/DS48/AB/R, para. 98.
90 See Responses of Canada to Questions 4 and 5 of the Panel.

from PROEX payments (10-year US Treasury Bonds plus 20 basis points) and concluded that the
"minimum" net interest rate for PROEX-supported expo rt credits was higher than that of the Export-
Import Bank-supported transaction. Brazil further argued that this transaction appeared to involve a
Chinese purchaser, and that the guarantee fee in respect of airline borrowers from developed countries
such as Switzerland would be lower. In Brazil's view, this example demonstrates that the marketplace
supports interest rates below the "minimum" net inte rest rate for export credits supported by PROEX
payments, and that PROEX payments therefore are not used to secure a material advantage in the field
of export credit terms.
6.95 Canada challenges the relevance and comparability of the transaction referred to by Brazil.
First, it argues that this transaction involves a loan guarantee, rather than direct financing. It considers
that , because the first phrase of the first paragraph of item (k) refers to direct export credit financing,
it would be incongruous if "the field of export credit terms" in the second clause of that paragraph
included loan guarantees. In other words, Canada seems to be arguing that, in determining whether a
payment is used to secure a material advantage in the field of export credit terms, export credits
supported by government guarantees cannot be taken into account. We agree with Canada, but not for
the reasons it has expressed in this dispute. It seems clear to us that the fact the export credit terms in
question here are the result of a guarantee is of little relevance.
91 On the other hand, the fact that these
terms are the result of a government guarantee is highly relevant, if we are correct that, in order to
justify a benchmark below CIRR, Brazil must demonstrate that the commercial marketplace supports
interest rates as low as the rate for 10-year US Treasury Bonds plus 20 basis points. Clearly, Brazil
has not demonstrated that the interest rate on this financing transaction, which is the direct result of a
government guarantee, is a commercial or market rate of interest.
6.96 In any event, the financing transaction relied upon by Brazil is a floating-rate transaction,
while the "minimum" net interest rate set by Braz il in respect of export credits supported by PROEX
payments relates to transactions at fixed interest rates.92 In response to a question from the Panel as to
how Brazil's benchmark rate would be applied in the case of floating interest rate transactions, Brazil
explained that there are no records that PROEX transactions for aircraft have involved floating
interest rates, nor are such transactions anticipate d. Brazil further stated that it has not determined
what "floor" rate it would apply if it provided PR OEX payments in support of floating interest rate
transactions, although it would have to be compatible with market rates. 93 Under these circumstances,
it is hard to understand what relevance the terms of a floating interest rate transaction might have for
the case at hand.
6.97 The second piece of "evidence" cited by Brazil involves a legal issue related to the application
of the Arrangement known as "market windows". As noted earlier in this Report, the gist of the
market windows argument is the view of Canada th at an export credit agency, such as the Export
Development Corporation, under certain circumstances is not providing "official support", and is
therefore not subject to the Arrangement. It may therefore under certain circumstances provide export
credits on terms more favourable than those envisioned by the Arrangement (e.g., at an interest rate
below CIRR). Brazil relies on this fact as evidence that Canada may provide export credits for
regional aircraft at rates which are below the CIRR, and argues that under these circumstances Brazil
as well should be entitled to support through PROEX payments export credits at a net interest rate
below CIRR.

91 For example, a parent company might guarantee an export credit of a subsidiary, thereby allowing
the subsidiary to borrow at a lower interest rate.
92 Because a fixed interest rate locks in the lender for the duration of the export credit, lenders typically
charge higher interest on a fixed interest rate loan than on a floating interest rate loan. Thus, it makes little sense
to compare fixed interest rates to floating interest rates.
93 Response of Brazil to question 8 of the Panel.

6.98 Based on our understanding of the Appellate Body's Report, the fact that Canada considers
itself entitled to provide through its Export Development Corporation export credits on terms that are
more favourable than those allowed by the Arrangement is not in itself a reason to conclude that
Brazilian payments resulting in net interest rates comparable to those offered by Canada were not
used to secure a material advantage in the field of export credit terms. After all, and for the reasons
set forth in para. 6.65 of this Report, any export credits provided by the EDC in respect of regional
aircraft at an interest rate below CIRR are not protected by the safe harbour of the second paragraph
of item (k). Accordingly – and in light of our view that Members cannot use the first paragraph of
item (k) to establish that a subsidy is "permitted" – Brazil would be free to challenge any such export
credits to the extent that they were subsidies within the meaning of Article 1 that are contingent upon
export performance within the meaning of Article 3.1(a), just as Canada could challenge any export
credits on the same basis.
6.99 We were, however, struck by Canada's assertion that export credits provided by EDC through
the "market window", even at interest rates below CIRR, were nevertheless "commercial" export
credits that did not confer a benefit within the meaning of Article 1. Assuming this were the case,
then, applying the Appellate Body's reasoning as we understand it, the existence of these
"commercial" interest rates at below CIRR would mean that Brazil could itself provide PROEX
payments resulting in below-CIRR net interest ra tes without securing a material advantage and
therefore not fall within the scope of the per se prohibition.
94 Accordingly, and in light of the fact that
information regarding the terms of EDC export credits was in the sole control of Canada, the Panel
asked Canada to indicate whether any Canadian government agency, including EDC, had provided
export credits in respect of regional aircraft at an interest rate below CIRR since 1 January 1998 and,
if so, to indicate the interest rates at which such export credits were provided.
6.100 Canada responded that it has since 1 January 1998 provided export credits in respect of
regional aircraft at interest rates below CIRR.95 Although it does not identify the aircraft financed, the
borrowers or the precise terms and conditions of these transactions, it does provide certain
information in respect of them. In particular, we know that these transactions involved direct
financing (as opposed to guarantees) and that they involved fixed interest rates.
6.101 Canada informs us that one of these transactions was a Canada Account transaction which
involved "matching". Although Canada asserts that this transaction "was implemented in full
compliance with the Arrangement", it does not assert that this transaction was in any sense a market-
based transaction.
6.102 Canada further confirms that "there were instances where certain of EDC's financing
transactions were at a rate less than the CIRR applicable on the date the transaction closed." Canada
does not specify the number of such below-CIRR transactions, nor the share of EDC's regional
aircraft transactions made at below-CIRR interest rates. It does however insist that these transactions
were "market-based and commensurate with the risk associated with the particular borrower, and said
transactions included customary collateral security protection". Canada explains in some detail that
the situation of below-CIRR market rates can arise because the CIRR lags behind the market. Thus,
in cases where interest rates are falling, the market rate at the time a transaction is closed can be lower
than the CIRR, which is constructed on the basis of bond rates in an earlier period. For example, the

94 Canada asserts that in Canada - Aircraft the Panel and Appellate Body found that, in providing direct
financing under its Corporate Account, the EDC operates on the basis of commercial principles and does not
provide an advantage above and beyond the market. In fact, the Appellate Body upheld a finding by the Panel
that Brazil "had not established a prima facie case" that the debt financing activities of the EDC in support of
the Canadian regional aircraft industry confer a 'benefit' within the meaning of Article 1.1(b) of the
SCM Agreement. Appellate Body Report, para. 220. This falls far short of an affirmative finding that the
financing in question did not confer a benefit.
95 Response of Canada to Question 4 of the Panel.

CIRR applicable to transactions closing during the period 15 September – 15 October would be
constructed using the average of the 7-year Treasury for the month of August, plus 100 basis points.
Accordingly, Canada concludes, "[t]o an entity that operates on the basis of market principles, the
calculation of the CIRR is such that it would not be considered a reliable reflection of current market
conditions." Finally, Canada categorically asserts that, with the exception of the Canada Account
transaction, the interest rate "in every case has been well above Brazil's preferred PROEX rate of 10-
year Treasury plus 20 basis points."
6.103 We are not in a position to perform an independent assessment as to whether the below-CIRR
export credits provided by Canada in respect of regional aircraft were or were not at commercial rates,
as Canada has not provided us with any details concerning the specific terms and conditions of the
transactions in question. Nevertheless, in light of Canada's clear admission not only that there can be
commercial interest rates below CIRR but also that Canada itself has provided export credits in
respect of regional aircraft at such below-CIRR "commercial" interest rates, we conclude that
payments in respect of export credit financing for regional aircraft at below-CIRR interest rates are
not necessarily used to secure a material advantage in the field of export credit terms as that term has
been interpreted by the Appellate Body.
6.104 That said, the ultimate question in this dispute is not whether any below-CIRR commercial
interest rates in respect of regional aircraft financing may be said to involve a material advantage, but
whether Brazil has demonstrated that PROEX payments aimed at achieving the benchmark rate set by
Brazil – a net interest rate on fixed interest rate export credits based on the 10-year US Treasury Bond
plus 20 basis points – are not used to secure a material advantage in the field of export credit terms.
We recall that the benchmark established by Brazil in respect of export credits supported by PROEX
payments is below the relevant CIRR, and we note in addition that Brazil has presented no evidence
that export credits at fixed interest rates in respect of regional aircraft
96 are being provided in the
commercial market to any borrower at the benchmark rate of 10 year US Treasury bonds plus 20 basis
points established by Brazil. We recall that, because Brazil is seeking to assert an "affirmative"
defence, and that it bears the burden of demonstrating entitlement to that defence. We further note
that, in respect of access to information regarding commercial interest rates – and with the exception
of information regarding export credits provided by EDC at rates alleged by Canada to be
"commercial" – such information is equally accessible to Brazil and Canada.
6.105 In respect of that information which is in the exclusive possession of Canada, Canada has
categorically stated that, with the exception of one Canada Account transaction which clearly is not
commercial, all fixed interest rate export credit financing provided by Canadian government agencies,
including EDC export credits at rates below CIRR, has been at rates "well above" the Brazilian
benchmark. We cannot assume bad faith on the part of Canada and therefore must accept the veracity
of these statements.
97
6.106 For the foregoing reasons, we find that Brazil has failed to demonstrate that PROEX
payments are not "used to secure a material advantage in the field of export credit terms" within the
meaning of the first paragraph of item (k).
(c) Conclusions and closing remarks
In this section of our Panel Report, we have found that:

96 Or, for that matter, any aircraft. As noted in paras. 6.92 – 6.95 of this Report, the only evidence
presented by Brazil relevant to the interest rates in respect of export credits for aircraft involved non-
commercial, floating interest rates.
97 Cf., Chile - Taxes on Alcoholic Beverages , Report of the Appellate Body adopted on
12 January 2000, WT/DS87/AB/R-WT/DS/110/AB/R, para. 74.

(i) PROEX payments in respect of regional aircraft pursuant to the PROEX scheme as
modified are subsidies contingent upon export performance within the meaning of
Article 3.1(a) of the SCM Agreement;
(ii) Brazil has failed to demonstrate, both as a matter of law and as a matter of fact, that
PROEX subsidies are "permitted" by the first paragraph of item (k). In this respect,
we recall our finding that the first paragraph of item (k) cannot be used to
demonstrate that a subsidy contingent upon export performance within the meaning
of Article 3.1(a) is "permitted". We further recall our findings that Brazil has failed
to establish (a) that PROEX payments are "p ayments" within the meaning of the first
paragraph of item (k); and (b) that PROEX payments are not "used to secure a
material advantage in the field of export credit terms".
Therefore, we conclude that PROEX payments in respect of regional aircraft under the PROEX
scheme as modified by Brazil are export subsidies prohibited by Article 3 of the SCM Agreement.
Accordingly, we conclude that in this respect Brazil has failed to implement the recommendation of
the DSB that it withdraw the export subsidies for regional aircraft under PROEX within 90 days.
6.107 We note that Brazil's effort to defend PROEX payments as "permitted" under the first
paragraph of item (k) of the Illustrative List centred on the notion that a developing country Member
had to be "permitted" by that paragraph to provide otherwise prohibited export subsidies in order to
meet WTO-consistent competition from developed country Members in the field of export credit
terms. In our view, however, the SCM Agreement as properly interpreted establishes a level playing
field for all Members in respect of export credit practices (except, of course, to the extent that a
Member is exempted from the export subsidy prohibition by reason of special and differential
treatment). Under these circumstances, if a developing country Member (or indeed any Member)
encounters an export credit that has been provided on terms that it cannot meet consistent with the
SCM Agreement, the proper response is to challenge that export credit in WTO dispute settlement.98
VII. CONCLUSION
7.1 For the reasons set forth in this Report, we conclude that Brazil's measures to comply with the
Panel's recommendation either do not exist or are not consistent with the SCM Agreement .
Accordingly, we conclude that Brazil has failed to implement the DSB's 20 August 1999
recommendation that it withdraw the export subsidies for regional aircraft under PROEX within 90
days.
7.2 Canada requests that we suggest, pursuant to Article 19.1 of the DSU, that the parties develop
mechanisms that would allow Canada to verify compliance with the original recommendation of the
DSB. Canada notes that Brazil has a reciprocal interest in verifying Canada's compliance in a parallel
dispute, Canada – Aircraft.
99 Canada emphasises that it is not seeking a continuing role for the Panel
in proposing such verification procedures, nor is it requesting that we impose such procedures. Brazil
responds that, although it does not in principle oppose an agreement with Canada on reciprocal
transparency, it does not consider that it is an appropriate matter for a suggestion under Article 19.1 of
the DSU, but is better left to be agreed by the parties. Brazil notes that any such agreement would
have to involve balanced and truly reciprocal offers of transparency.

98 In this regard, we recall the statement of the Appellate Body in Canada – Aircraft that:
"we do not intend to suggest that Brazil is precluded from pursuing another dispute settlement
complaint against Canada, under the provisions of the SCM Agreement and the DSU,
concerning the consistency of certain of the EDC's financing measures with the provisions of
the SCM Agreement."

7.3 We note that Article 19.1 provides that "the panel . . . may suggest ways in which the Member
concerned could implement the recommendation". In our view, Article 19.1 appears to envision
suggestions regarding what could be done to a measure to bring it into conformity or, in case of a
recommendation under Article 4.7 of the SCM Agreement, what could be done to "withdraw" the
prohibited subsidy. It is not clear if Article 19.1 also addresses issues of surveillance of those steps.
That said, any agreement that WTO Members might reach among themselves to improve transparency
regarding the implementation of WTO obligations can only be encouraged.