The PROEX and the Brazilian “Victories” on WTO

Text of the lecture given at the Foreign Commerce Week, sponsored by the Universidade UNIBERO, in São Paulo, on 10 October 2001.

The Brazilian macro-economic outlook imposes the challenge of producing approximately US$ 57 billion, only this year, so as to meet the losses in relation to checking accounts and also in relation to various amortisation. Once the expected direct investments of approximately US$ 18 billion is discounted, the country will have to look either for loans or financing to the order of US$ 39 billion in the international financial market. As Brazil is quite vulnerable, the international interests applicable to this country and its commercial enterprises are many times higher than those applicable to other countries and their businesses. This discrepancy is tremendous, reaching 10% a year and representing an enormous disadvantage to Brazilian export companies within the international competition scene, in the financing of both the production sector and of external sales. As a whole, the situation is common to all developing countries, especially to those who adopted the exchange controls clause of the International Monetary Fund (IMF) Treaty.

The IMF Treaty acknowledged there being a special treatment in relation to countries facing such a condition, already ratified by General Agreement on Tariffs and Trade 1947 (GATT 1947) but also accepted by Marraqueche Treaty, 1993, creating the World Trade Organisation (WTO) “inter alia”. Thereby, Brazil like all other industrialised economies, established in 1991 a rather modest but extremely necessary Financing Export Program (PROEX). This Program’s objective is to make it possible for Brazilian exporters to have access to better financing rates, according to the international market. The PROEX was elaborated to assist exporters in two ways: with both financing and equalisation.

Returning to PROEX, it is clear that the equalisation is the manner to finance exports with the purpose of neutralising the so called “Brazil risk”, which are the interest rates which international banks charge Brazilian companies, which are much higher than the rates which they charge competing companies from developed countries. Therefore, if a foreign company could finance the acquisition of its manufacturer within 15 years at an interest rate of 2 percent per year, a Brazilian company would not be able to compete effectively by offering financing of 6 years at an interest rate of 13% per year, for example, even if the quality of its product were the same and the price relatively less.

PROEX, which was created in 1991, PROEX 1, allowed a finance term of 15 years, 10 for aeroplanes, and an amount of which 100% of the value of the operation could be financed. The amount available for financing, approximately 3,8 per year (sic), was even reduced, and insufficient, in the presence of the huge difficulties which faced Brazilian companies trying to gain access to voluntary international financial markets, although it did minimise the disadvantages of domestic companies in the face of international competition. It so happened that a few Brazilian companies, about 133 in 19971, started to make use of PROEX and to upset the international competitors. Among these companies was Embraer, which competes directly with the Canadian company Bombardier, in the area of jet aeroplanes for regional transport.

Canada is a country which is not alien to subsidies and insidious actions in external commerce. A neighbour of the USA, it depends on this country for about 90% of its external trade, and about 35% of its Gross Internal Product results from this specific trade. This dependency is already several decades old and Canada, like no other country, has accustomed itself to disputes of international commerce, as resulted from its vast experience with the USA, a country which does not only have a vast arsenal of unilateral legislation concerning international commerce, but also special courts for issues relating to international commerce. And being so accustomed to it international commercial fights, and its dirty tricks, Canada has even being the creator of the concept of “anti-dumping”, which it adopted in it domestic legislation at about 1912, that is an infamous tool that has been used for decades as an effective weapon for commercial protectionism.

BOMBARDIER contacted the Canadian government to request a commercial action against Brazil at the WTO, with the intention of eliminating the financing of PROEX, in order to gain bigger competitive advantages. Canada did not hesitate to support the action despite the fact that Bombardier is a company which several subsidies, some of which are illegal. The country is used to promote the international commercial interests as being of national interest and has at its disposal highly qualified staff, both in the Canadian government, which does not use diplomats for such issues, and in private enterprise. The preliminary consultations held with Brazil, did not achieve any results and, as a result, in 1997 Canada and Brazil requested an arbitration panel to be opened within the dispute resolution system of the WTO. Each country attacked the subsidy programmes of the other.

In the dispute resolution system of the WTO, private parties do not have the right to take action there, this is reserved for the present 142 members of the organisation.2 Brazil was represented by its accredited diplomats at the Brazilian mission in Geneva who, in addition to being totally unprepared to represent commercial interests, due to their professional qualifications and lack of vocation, are absolutely inept in legal matters, generally, and in litigation in particular. The Brazilian government hired a Canadian lawyer for such an important case, without authorisation, a partner at a North American law firm. The same lawyer has also represented Brazil before in other disputes at the WTO. Again without authorisation.

The decision of the panels, which was confirmed on appeal, recognised the allegations and entered judgement in favour of Canada in the case which it brought against Brazil, and denied the allegations which Brazil made in the case which it brought against Canada. Brazil therefore lost twice! Moreover, in the case which Canada instituted against Brazil, Brazil was ordered to the pay biggest commercial compensation in the history of the WTO, in the amount of US$ 232 million per year, for a period of 6 years, which turns it into a sanction of US$ 1,4 billion. This gigantic defeat is the only one in the history of the country, and has resulted in two strategic repercussions of major importance. The first of these condemned the programme of export financing which has turned Brazil into the only into the only of the eight largest economies of the world which does not have such a programme, despite the multilateral legal order, even though it is the smallest of them. The second repercussion pertains to the derogation of basic rights conferred by the IMF Treaty, which granted certain preferential treatment to developing countries. The dangerous legal precedent for Brazil as well as other developing countries, lies in the omission to allege, in its defence, the conflict between international treaties and, as a consequence, to mention the incompetence of the forum of the WTO to judge such questions.

It is curious to observe that the precedent used against Brazil was established in a case brought against India by the USA, in respect of quantitative restrictions for the imports of certain agricultural, textile and industrial products, in which the panel held, without original competency and “contra legem” that there was no conflict between the aforementioned treaties. The president of the panel which delivered this unfortunate decision was a Brazilian, Ambassador Celso Lafer. This utterly unfair arbitration decision, which was accused in India of having been totally or substantially written by the legal department of the WTO Secretariat, has served the interests of the major economic powers by characterising some of the biggest of those countries as developing economies. And one is also reminded of the fact that, at the time, a Canadian woman was a director of the legal division of the Secretariat of the WTO.

As a result, Brazil lost the opportunity to equalise the interest rates to the average of the difference existing between the rates effectively paid by its own companies and those rates applicable to competitors in developing countries. The Brazilian equalisation was restricted to the limits for interest rates created by the Organisation for Co-operation and Economic Development (OCED), a club of developed nations to which we are not a member. The financial corollary of this decision was that, for the purposes of equalisation, it has to be assumed that Brazilian companies pay the same interest rates as companies from countries the OCED, and not the rates which they effectively pay. This means that the effective equalisation by Brazil has been prohibited by the multilateral legal order of the WTO.

The bruising defeat was presented to the public, which is still not very accustomed to litigious questions within the ambit of the WTO, by Itamaraty as a victory for the country. This pretence attempted to protect the uselessness of the diplomatic corps in respect of their function as official custodians of the international commercial interests of Brazil and its own political situation from the federal public administration and of the Brazilian government.

Disagreement between Brazil and Canada in respect of the interpretation of the awards, as well as its implementation, resulted in two new disputes between the countries. One of them, instituted by Brazil, and still not decided, attacks Canadian subsidies. The other one, instituted by Canada, questioned the changes effected by Brazil at PROEX in November 2000, which has come to be called PROEX 3. This tribunal confirmed the limit of the equalisation of interest rates by OCED; it reduced the amount of financing to 85% of the amount of the operation; and prohibited financing for periods exceeding 10 years, which happened in certain cases in PROEX 1, and was a possibility for the aeronautic industry. Neither Brazil, nor Canada appealed the decision. Once again, the award was healed by the Brazilian government as a great victory.3

Nevertheless, this sophisticated exercise did not stand up to analysis, however superficial it may be, of the results of these panels, therefore let us look. In addition to the verdict against Brazil of the tariff concession of US$ 1,4 billion, emanating from the first panel, the second panel resulted in the confirmation of the impossibility of the effective equalisation; in the reduction of the amount which may be financed by 15%; as well as the reduction in the term of the financing from 15 years to 10 years. The effect of these measures is devastating and will bring about a reduction of the advantages of PROEX 3 of around 70% of that of PROEX 1. As a result, the financial conditions available to support Brazilian exports are greatly inferior to those available to foreign companies. As a result, a Brazilian exporter will have much better conditions had it been commercially established in, and obtained export finance … from Canada!

It is understood that Canada did not appeal against the decision. But the failure of Brazil to appeal was purely political, determined to sacrifice the commercial interests of the country on the international markets, in order to keep up the myth of the competence of the government in such issues. In fact, today PROEX, with a budget of US$ 740 million for 20014, is just a shadow of what used to be in 1997 when it distributed about US$3 billion. Thus, there has been a reduction of about 75% of the amount available to support Brazilian exports, and a reduction of 70% of the advantages. With another one or two similar stirring and bruising “victories”, Brazil will be rid of any international commerce.

Brazil has been the unequivocal champion of defeats in the multilateral dispute resolution system since 1994, having lost 3 cases against Canada in the aeronautical industry; two against the European Union (EU), in the case of milk and dairy products, and in the case of chicken; an one against the USA, EU and Japan, in the case of the automobile sector. Against such defeats of stunning proportions and grave implications, Brazil has had two victories, one which was only subsidiary, in the case brought by Venezuela against the USA, in the question of environmental standards for gasoline; and the other one against the Philippines, in the case of coconut milk, of which the country is an importer.

In the pertinent cases of milk and chicken, Brazil was defeated in formal issues, totally ignoring the fact that the merits of the issue was eminently clear and straightforward. In the case of the automobile industry, Brazil succumbed in the official consultations which gave credibility to the spurious declarations by Mrs Charlene Barshefsky, the then commercial representative of the USA. In all the cases, Brazil was represented by the same American law firm and its Canadian partner. However, the disgrace to establish such a precedent of defeats, befitted a Brazilian.

The weakness shown by Brazil in the defence of its interests in the dispute resolution system in the multilateral forum of commerce has, in addition, brought about other collateral implications which cannot be ignored, like the encouragement to other countries to take unilateral, arbitrary and illegal measures against Brazil as Canada did recently, in the case of meat, Argentina in the fundamental field of the Common External Tariffs (CET) of Mercosul, the USA in the cases of soy and steel. One cannot forget that, inspired by the USA, developed countries, as shown by Canada, understand very well that unilateral action is a very important catalyst in international commerce. Moreover, the performance by the Brazilian commercial diplomats, which was as comical as it was devastating, discouraged any recourse to contentious measures to defend national interests, in the same way as it encouraged even developing countries to take measures which are highly prejudicial for the interests of Brazil, like Chile did in the sugar case.

The strategic defeat by Brazil in the aeronautical dispute, which decisively compromised the ability of developing countries to support their exports, caused India and Pakistan the issue as part of their agendas for the launch of an eventual round of negotiations in the multilateral system of commerce, to be debated at Ministerial Meeting of the WTO in Doha, Qatar, during November 2001. Nevertheless, Brazil remained silent. Even worse, while the country was trampled after the defeat, our diplomats commented like this on the functioning of the system: “Everything indicates that (the dispute resolutions system of the WTO) is a huge success story, and maybe not only one of the highlights of the implementation of the Uruguay round, but also one of the big examples of a contribution to international co-existence, which can be given by Public International Law by means of legal measures.”5

This monumental ignorance accentuates the price which Brazil has to pay as a result of the way in which international commercial disputes are handled by a government which has showed itself to be lacking any direction to make strategic formulations, without an inkling to understand the process of the deviation of the objectives of the multilateral commercial system, and incapable of comprehend how such deviations seriously compromise national interests, and without the honesty, in admission of the weaknesses, to reformulate their action in such a way as to confirm the conditions which would allow the Brazilian economic agents equal competitiveness in the international markets.