However, Canada's decision comes after a four-year dispute over aerospace subsidies during which Brazil had plenty of time to defend its case before WTO arbitrators it agreed to. Brazil's argument that WTO export subsidy rules did not apply to it because it is a developing country were rejected by the WTO. The differential treatment Brazil claimed only applies temporarily to developing countries that have agreed to stop increasing and established a time-table to phase out their export subsidies. Brazil was denied such treatment because it had, in fact, increased the level of its export subsidies above the level prevailing in 1994 when it ratified the WTO Agreement.
The WTO Dispute Settlement Body ruled twice that Brazilian "Proex" program payments made to Embraer constituted prohibited export subsidies. On August 20, 2000, the WTO gave Brazil ninety days to withdraw the prohibited export subsidies. Brazil has failed to do so and, despite Canada's efforts, has persistently refused to abide by WTO rulings.
Among other things, Brazil refused any export subsidy monitoring system, and has officially decided on December 6, 2000 to continue to provide Embraer's clients preferential interest rate loans on 15 year terms. These preferential loans cover 100 % of Embraer's aircraft sales contracts, and do not contemplate additional financing fees. WTO rules limit preferential interest rate loans to a maximum term of ten years covering 85 % of the contract and require the borrower to pay financing fees. In brief, Brazil wants to keep on granting status quo illegal subsidies and help Embraer benefit from an unfair trade advantage over its global competitors. This is all the more anomalous when one notes that Embraer's ERJ-145 regional jet bears only 15% Brazilian content.
Is Canada left with many options? I believe not. To stop now, bury the hatchet and leave the WTO decision un-enforced would be detrimental to the whole WTO trading system. It could constitute a dangerous precedent and risk putting aside the achievements and integrity of the WTO ruled-base trading system. Prompt and complete compliance with WTO rulings is essential to ensure effective resolution of disputes and to protect the rights of all WTO members. Failure to do so, would engender a system which, in the long run, favours countries that have considerable political and economic strength irrespective of the merits of the dispute.
Apart from predominant legal reasons, trade policies and measures that depart from international trade rules and dispute settlement mechanisms that have been agreed upon in negotiations not only are infractions of the rules, but also generally have negative long-term economic implications. They reduce the predictability and transparency of international trade and distort the international flow of goods and services, thereby exerting a substantially detrimental influence on the economic welfare of Member countries.
Canada is bound by the world trading system to ensure that the WTO Embraer decision be enforced. No other country or institution has that responsibility. There are no international police that enforce WTO decisions. Neither is the UN Security Council or other such authority competent to take collective measures against recalcitrant countries. When countries reach agreement in international negotiations and commit to the fulfilment of mutual obligations, they should cite and seek remedies for the breach of those obligations. Such an approach is both justified and necessary to secure the effectiveness of agreements.
On May 10 2000, Canada had to move beyond bilateral negotiations with Brazil. It requested authorisation from the WTO to take countermeasures on Brazilian imports of $700 millions per year. WTO arbitrators authorised Canadian countermeasures in the amount of $344.2 millions per year until such time as Brazil applied the WTO decision. Brazil's reaction to such decision was to pretend that such amount was too high and to threaten Canada that it would retaliate should Canada take the WTO authorised countermeasures.
On December 12, 2000, the WTO Dispute Settlement Body granted Canada the authority to impose such economic countermeasures against Brazil.
Brazil is not the first country to find it difficult to respect WTO obligations. Canada cannot bend to Brazil's threats. Many Canadian jobs in the aerospace industry are at stake. Rather, Canada has to keep on increasing the pressure on Brazil to bring it in compliance with the WTO decisions.
By imposing up to 100 % customs surtax on some Brazilian imports and suspending imports of some textiles and clothing, Canada would force Brazil to decide between, on one side, safeguarding the interests of its exporters to Canada and, on the other side, acting illegally and protecting Embraer's interests. Hopefully, the former will prevail over the latter and that the WTO trading system, which has continuously benefited Brazil, will be respected. .
| 19 June 1996 | Canada requested consultation with Brazil within the framework of the WTO and claimed that subsidies granted to foreign purchasers of Embraer are inconsistent with WTO Subsidies Agreement |
| 23 July 1998 | Establishment of a WTO Dispute Settlement Panel |
| 3 May 1999 | Brazil appealed certain aspects of WTO Panel decision |
| 2 August 1999 | WTO Appellate Body upheld all the findings of the Panel with slight exceptions |
| 20 August 1999 | WTO Dispute Settlement Body (DSB) adopted the Appellate Body and the Panel report and gave Brazil 90 days to withdraw its measures at issue |
| 19 November 1999 | Brazil announced it had withdrawn its measures and implemented the recommendations and rulings of the DSB |
| 23 November 1999 | Canada requested the establishment of a Panel claiming that Brazil had not complied fully with the rulings of the DSB |
| 9 May 2000 | Panel found that Brazil failed to implement the rulings of the DSB which was confirmed by the Appellate Body on 9 May 2000 and adopted by DSB on 4 August 2000 |
| 10 May 2000 | Canada requested authorisation of DSB to impose sanctions on Brazil imports in an amount of $700 millions per year |
| 28 August 2000 | Arbitrators found that appropriate countermeasures amounted to $344.2 millions per year |
| 12 December 2000 | WTO Dispute Settlement Body granted Canada authority to impose economic countermeasures against Brazil |
