Brazil--Aircraft: Qualitative and temporal aspects of "withdrawal" under SCM article 4.7

Law and Policy in International Business, Summer 2002 by Krmpotic, Ivan

(ii) Brazil Failed to Carry its Burden of Proof Regarding the Affirmative Defense under the "Material Advantage" Clause of Item (k) of the Illustrative List

measures certainly were export subsidies, Brazil claimed that the subsidies were "permitted" by virtue of footnote 5 that modifies SCM Article 3.1 (a). Specifically, item (k) of the illustrative list of export subsidies permitted the payment of export subsidies "in so far" as they are not used to "secure a material advantage in the field of export credit terms."45 As discussed earlier, Brazil asserted that it was not securing a material advantage through the issuance of PROEX payments because it was merely accounting for "Brazil risk" and was "matching" the subsidies that Canada was granting to Bombardier and the Canadian aerospace industry. In this manner, Brazil argued that it was only compensating for inherent risks and rigidities in the realm of international economics and was not securing a "material advantage" for Embraer.46

The panel began its analysis of this question with an interpretation of the meaning of the "material advantage" clause contained within the first paragraph of item (k).47 Both the panel and the Appellate Body were in full agreement that the term "advantage" meant a "more favorable or improved condition."48 However, the Appellate Body considered that it was an error to omit the adjective "material" from the interpretation of the clause.49 The panel was inconsistent in its use of the term "materially" when referring to "advantage" throughout its report, and the Appellate Body elected to clarify the reasoning in its own analysis.50

Similarly, the panel was inconsistent in its discussion of the proper benchmark with which to compare the PROEX interest rate subsidies. On two occasions, the panel characterized a proper point of reference for any interest rate comparison as the "marketplace," while on another two occasions it merely referred to the benchmark as terms "available in the absence of [a] payment."51 The Appellate Body clarified the reasoning of the panel by assuming that the panel meant to refer to the marketplace in all of its discussions concerning benchmarks.52

According to the Appellate Body, the issue of whether the PROEX subsidies were used to secure a material advantage in the field of export credit terms rested upon paragraph 2 of item (k), which reads:

. . . if a Member is a party to an international undertaking on official export credits . . . or if in practice a Member applies the interest rates provisions of the relevant undertaking, an export credit practice which is in conformity with those provisions shall not be considered an export subsidy prohibited by this Agreement.53

Considering paragraph 2 of item (k) as a "useful context" for the interpretation of paragraph 1, the Appellate Body determined that the Organization for Economic Cooperation and Development (OECD) Arrangement is a proper benchmark for analyzing interest rates in the area of export subsidies.54 Noting that the OECD Arrangement is an "international undertaking" under paragraph 2 of item (k), the Appellate Body concluded 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.'"55