TRADE: WTO Authorises Canadian Sanctions against Brazil

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Aug 29 2000 (IPS) - The World Trade Organisation (WTO) has given Canada the green light to impose trade sanctions against Brazil of up to 1.4 billion dollars – the largest compensation package the international body has ever authorised in response to trade protectionism.

The ruling, officially communicated Monday to all members of the multilateral trade forum, is the final response to a complaint filed by Canada for the financial losses caused to its Bombardier aviation company resulting from the subsidies Brazil granted its Embraer aircraft manufacturer.

The two governments are to sit down to talks Tuesday in Sao Paulo to decide the best way to comply with the WTO decision, which allows Canada to suspend tariff concessions or to take other actions against Brazilian exports for up to 233.5 million dollars annually, over the next six years.

Agricultural and some industrial products, which Brazil exports to Canada under a preferential trade programme, could be affected by the trade reprisals.

The hope is, however, that they will reach an accord that compensates Canada through increased sales to Brazil or that Canadian firms would see more business in Brazilian government purchases, whether through lower tariffs or other measures.

This would drive up bilateral trade, though with the balance tilted in Canada’s favour, instead of cutting trade through retaliatory measures. The Bombardier company itself may benefit from the export to Brazil of specialised aircraft and railroad equipment.

Brazil’s foreign minister, Luiz Felipe Lampreia, lamented the WTO decision, stressing that he considered the government’s incentives for Embraer to be a valid policy. It allowed the nation to consolidate a high-technology company as a competitor on the extremely competitive global market for aeronautics, he said.

Embraer, which was suffering a full-blown financial crisis when it was privatised in December 1994, is now ranked fourth among the major aircraft manufacturers in the world.

The company today has orders for 1,200 aircraft, for some 10.3 billion dollars in sales. The sum could double if the clients add on further options, according to Embraer president Mauricio Botelho.

The motive behind the punishment was the company’s sales favoured by the Brazilian government’s Export Financing Programme (PROEX), which the WTO sees as an unwarranted form of subsidy.

Brazil’s economic authorities affirmed that all purchase agreements signed prior to November 1999 that include this financial support would be honoured, encompassing some 800 aircraft, Botelho said.

The punishment the WTO has meted out, though less than the 3.28 billion dollars Canada had requested, is by far the heftiest compensation ordered by the trade body. In second place is the ruling against the European Union for illegal trade barriers erected against Ecuadorian bananas.

Celso Amorim, Brazilian ambassador to the WTO, stressed that the Embraer case is also unique because it reflects the difficulties developing countries have in competing on the international market in the high-tech industries.

Brazil had long maintained that the benefits provided by PROEX simply seek to balance the interest rates paid by Brazilian exporters with those existing in financially stronger nations.

Embraer and Bombardier compete on the world market of regional passenger jets with a capacity of up to 50 people. The WTO dispute process stretched over four years and also involved Brazilian charges against the Canada Technology Association for its subsidies to that country’s defence and aerospace sectors.

The WTO had recommended changes in the incentives applied by both countries. After evaluating the two, its officials said in July that the adjustments of PROEX had not been sufficient and its financial support continued to violate the rules of international trade, but the Canadian programme had achieved compliance.

In addition to obstructing Brazilian exports to Canada, or increasing Canadian imports in the case an agreement is reached, the ERJ-135 and ERJ-145 jets, of 37 and 50 passengers, respectively, will see their final price tags rise due to the loss of government financing.

But Embraer will maintain its competitive edge worldwide, even in wealthy countries, despite the price adjustment, according to Botelho, confident his company will feel just a “slight impact” in business.

In addition to the regional passenger aircraft, Embraer has also conquered important markets with previous models, including the Bandeirante (18 passengers) and the Tucán (military training), and smaller planes for agricultural use.