WTO Rules on Canada-Brazil Aircraft Subsidy Dispute

On July 26, the World Trade Organization issued a panel report on Brazil's subsidies of its aircraft industry at the request of Canada. This was the second time Canada, a major competitor with Brazil for status in the world aircraft industry, had requested such a report.

Canada has specifically challenged the subsidies granted under the Brazilian Program of Export Financing (PROEX) to foreign purchasers of Brazil's EMBRAER aircraft. The WTO panel report concurred with the Canadian position that the subsidies granted under PROEX were not consistent with Article 4 of the Agreement on Subsidies and Countervailing Measures of the WTO.

PROEX was created by the government of Brazil in 1991 and is currently being maintained by provisional measures issued by the Brazilian government on a monthly basis. The program provides export credits to Brazilian exporters either through direct financing or interest rate equalization payments. With direct financing, Brazil lends a portion of the funds required for the transaction (similar to the $1.2 billion loan guaranteed by the Chretien government to Northwest Airlines to purchase aircraft from Bombardier last month). With interest equalization, Brazil grants the financing party an equalization payment to cover the difference between the interest charges contracted with the buyer and the cost to the financing party of raising the required funds.

As a result of this ruling, the Canadian government's subsidy of Bombardier would presumably also be found to violate WTO rules, if the Brazilian government decides to file a formal complaint.

The World Trade Organization, successor to the General Agreement on Tariffs and Trade, rules on thousands of disputes between member nations. Much like its predecessor, the WTO espouses concepts such as global free trade and equality of all member-states when in fact, it is the smallest economies which are most affected by its rulings. Both the United States and the European Commission have had hundreds of rulings against some of their subsidy policies; their response is almost always to change domestic legislation so that the subsidies in question become exempt (such as the decision to place agriculture subsidies within the scope of National Defence in the U.S.). At the same time, they are quick in pursuing cases against protectionist measures of smaller economies.

Brazil is in a rather unique situation for a so-called developing nation. Devastated by the global recession of the early 1980s, Brazil's capitalist class has slowly recovered as a result of the kind of extensive investments seen in the advanced capitalist countries during the 1950s and 60s. Brazil's protectionist policies have long been a source of frustration to the U.S., which is hungering for complete access to the biggest market of consumers in South America. More recently, Canada has begun to expand investment throughout Latin America and now has a twofold interest in weakening Brazil's protectionism: to increase penetration by Canadian capital in the Brazilian market and to ensure Canadian capitalists like Bombardier can undercut EMBRAER for multi-billion dollar contracts in the aircraft industry. As well, companies in both countries are positioning themselves to receive contracts as the Bush administration proceeds with its National Missile Defence Program.

As the global crisis of overproduction intensifies over the next few years, trade disputes such as this one are also bound to increase in frequency and intensity. These disputes will deepen the conflicts within the WTO and regional trading blocs, making it increasingly difficult for the forces of neo-liberal globalization to reach a consensus on any of the major issues facing them.