Brazil cites rich-country bias in Embraer-Bombardier trade-subsidy conflict
Saturday, April 14, 2001
SAO JOSE DOS CAMPOS, Brazil (AP) -- If the trade spat between Brazil and Canada over aircraft subsidies were played out in the skies, it would be a real dogfight.
On the surface, the issue before the World Trade Organization is about how much each government subsidizes its regional jet maker -- Embraer SA (Quote) in Brazil and Bombardier Inc. (Quote|Profile) in Canada.
But the conflict runs deeper. Brazil claims the WTO rules, made by industrialized nations, are biased to keep emerging countries out of high-tech sectors like aeronautics.
The dispute has been running for five years, and so far Canada has had the upper hand.
Last year the WTO gave Canada permission to slap US$1.4 billion worth of trade sanctions on Brazilian products because the South American country had not brought its subsidies into line with WTO rules.
But last month, Brazil struck back. It asked the WTO to open a new inquiry based on Canada's recent announcement it would finance up to 75 per cent of a US$2-billion order for Bombardier jets by Air Wisconsin, a regional affiliate of United Airlines. [see: "Request for the Establishment of a Panel by Brazil" provided below]
"The problem is that there is no level playing field," said Henrique Rzezinski, Embraer's vice-president for external relations. "There's no conspiracy theory. It's simply that these rules were made by the industrialized countries."
Brazil complains that the WTO prohibits all export subsidies except some that conform to an agreement of the Organization for Economic Co-operation and Development, made up of 29 developed nations. Canada is an OECD member, but Brazil is not.
The result, Rzezinski claims, is that Canada can subsidize Bombardier through its Export Development Corp. and other government entities at a rate that Brazil's export-finance program, Proex, cannot match.
Paul Corriveau, strategy director at Bombardier, calls Rzezinski's arguments a "smokescreen" and "an old line ... which never stands up to careful scrutiny."
Proex has "nothing to do with Brazil's developing-country status. It has everything to do with distorting the market," Corriveau said. Canada has proposed a bilateral verification mechanism to police all financing offers.
Colin Lewis, senior lecturer in Latin American economic history at the London School of Economics, says Bombardier was surprised by how quickly Embraer has grabbed a big share of the regional-jet market.
"Brazil is trying very hard to upgrade industrial capacity -- especially in sensitive area like information technology, avionics and pharmaceuticals," Lewis said. "And this makes it more of a threat to existing producers."
cbs.marketwatch.com;
Brazil rejects Canada offer on air subsidy dispute
Friday April 6, 6:59 pm Eastern Time
By Gilbert Le Gras
BUENOS AIRES, Argentina, April 6 (Reuters) - Brazilian Foreign Minister Celso Lafer on Friday rejected a Canadian offer for early talks on a dispute over Canadian aid to aircraft maker Bombardier (Toronto:BBDb.TO - news).
The Canadian government provided financial assistance to Bombardier to help it win an order from United Airlines (NYSE:UAL - news) affiliate Air Wisconsin.
Lafer told reporters he wanted to wait until a World Trade Organization panel rules on Brazil's complaint that Ottawa's $1.5 billion guarantee to Bombardier broke international rules on export subsidies.
``For the moment, it's very clear that we will wait for the WTO panel's response,'' Lafer said after meeting Canada's International Trade Minister Pierre Pettigrew.
The Brazilian complaint is the latest chapter in a four-year dispute between the two nations over subsidies to Bombardier and Brazil's aircraft maker Embraer .
``We met with the Canadians and as far as our contentious issues regarding Embraer and Bombardier (are concerned) we have decided to wait until the WTO rules on this issue,'' Lafer said.
The WTO set up a panel on March 12 after Brazil complained that Canada's financing offer to Air Wisconsin, through Bombardier, amounted to a $2 million discount per aircraft.
``I have said to Brazil I was ready now, that I don't feel we should wait for the WTO panel to rule on Air Wisconsin, Pettigrew said. ''Minister Lafer indicated he would consider my offer 'when the time was ripe.'"
Two WTO panels already have upheld Canadian complaints that Brazilian export subsidies for Embraer aircraft are illegal.
The WTO's Dispute Settlement Body has authorized Canada to impose sanctions on Brazilian imports worth $233.5 million a year over five to six years.
``The Brazilians didn't appreciate our financing of Air Wisconsin ... but I reassured them there is room for two players in this segment of the market but that it's important we respect our multilateral commitments,'' Pettigrew added.
Brazil contends Canadian officials have failed to provide significant information about the financing for export sales of Bombardier planes.
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Symbol WT/DS222/2
Case DS222: “Canada — Export credits and loans guarantees for regional aircraft”.
Brazil requested the establishment of a panel to examine the WTO compatibility of Canada's new aircraft financing system. This was Brazil's first request but only one request is necessary for a panel to be established in cases of claimed forbidden subsidies. The DSB agreed to establish a panel. The European Communities, India and the United States reserved third-party rights to participate in the Panel's proceeding.
wto.org
Request for the Establishment of a Panel by Brazil
The following communication, dated 1 March 2001, from the Permanent Mission of Brazil to the Chairman of the Dispute Settlement
Body, is circulated pursuant to Article 6.2 of the DSU.
docsonline.wto.org
ARTICLE16
Canadian CRJ subsidies reignite trade disputes
by Gregory Polek
Aviation International News
February 2001
The long standing trade dispute between Canada and Brazil over government subsidies of regional aircraft intensified yet again last month. As Brazil's Embraer blasted the Canadian government for offering low-cost loans for the sale of Bombardier's regional jets to United Express carrier Air Wisconsin. Canadian Industry Minister Brian Tobin acknowledged that the country would offer the loans though its Export Development Corporation at interest rates comparable to those offered by Brazil via its controversial ProEx program, adding that the loans would cover 75 percent of the total orders. "These facts only confirm what Embraer has been saying all along [about] illegal support practices by the Canadian Government," said Embraer in a written statement. "Embraer will support...measures deemed applicable in the face of this new and reiterated evidence of arrogance and nonconformity with international trade rules." Although at press time Bombardier and Air Wisconsin had yet to complete the deal, the airline's executive vice president of operations, Pat Thompson confirmed to Aviation International News that the contract calls for a firm order for 75 Canadair Regional Jets, along with options for another 75. He also acknowledged that the Canadian government has pledged support equal to that offered by Brazil under ProEx. "We haven't had a chance to announce the contract because there is a couple of things not yet done," said Thompson. "When the government of Canada talked to the press it unfortunately caused us to get a little ahead of ourselves. If you read into it, I think it would be fair to say that [Bombardier] has a leg up."
Although Thompson said he was not prepared to disclose specifics regarding the deal's inclusion of 40-and 44-seat variants similar to those endorsed by Delta Connection last year and more recently by fellow United Express carrier Sky West, he acknowledged that the composition of the contract would resemble that negotiated by the St. George, Utah based airline. "Its reasonable to assume that it will look and smell a lot like [the Sky West contract], said Thompson. On January 15 Sky West announced they agreed on a firm order for 29 of the Canadian jets worth a total of $1.3 billion. Although the companies did not reveal the specifics of the seat-capacity breakdown, Bombardier Aerospace president and CEO Michael Graff said the contract includes a "small number" of 40 and 44-seaters. Bargaining leverage
Meanwhile, the government of Canada appears to have succeeded in using the subsidies to Air Wisconsin as a bargaining leverage in its negotiations with Brazil, as the sides once again agreed to meet to discuss a resolution to the deepening trade dispute. In December the World Trade Organization granted Canada permission to levy sanctions against Brazil after the South American country failed to withdraw its use of ProEx bonds to support the sale of Embraer regional jets. Although Canada had requested authority to impose sanctions worth $3.2 billion over seven years, the WTO awarded only $1.36 billion over six years. Bombardier estimates Brazil has guaranteed foreign airlines more than 44.5 billion worth of ProEx interest rate rebates, costing the Canadian company $7.5 billion in lost sales. Nevertheless Embraer cried foul when Canada announced the subsidies for the Air Wisconsin deal. "The Canadian government is attempting to justify its attitude based on unfounded suppositions of illegal conditions offered by Embraer on its sales bids," the Brazilian manufacturer said. "Embraer vehemently rejects this affirmation and publicly reiterates to the international community that its bids are entirely based in the Brazilian legislation that was recently altered to conform to international rules." Calling Brazil's practices "predatory and illegal," Bombardier president and CEO Robert Brown said the subsidy to Air Wisconsin does not necessarily signal a trend, and that not all future CRJ customers will enjoy similar treatment. "There may be specific customers to whom, because of their capital structure, because of a whole series of factors, it may be necessary to offer comparable financial support, said Brown. "We said that [the Air Wisconsin transaction] was a specific case and I think that the deal with Sky West very clearly indicates that this is the truth. We do not want, nor do we support, extraordinary financing of that kind, but we thought it was necessary to make sure we could compete on the Air Wisconsin transaction."
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