Brazil files WTO complaint against Canada following Bombardier loans

Brazil argues Canadian subsidies 'artificially affect the international competitiveness of the sector' in a way that is inconsistent with Canada's WTO obligations

Bombardier's CS100 assembly line is seen at the company's plant Friday, December 18, 2015 in Mirabel, Que. After years of delays and cost overruns, Bombardier's CSeries commercial aircraft has been certified by Canada's transportation regulator. THE CANADIAN PRESS/Ryan Remiorz

Bombardier’s CS100 assembly line is seen at the company’s plant Friday, December 18, 2015 in Mirabel, Que. After years of delays and cost overruns, Bombardier’s CSeries commercial aircraft has been certified by Canada’s transportation regulator. THE CANADIAN PRESS/Ryan Remiorz

MONTREAL — The federal government all but dared any country to launch a trade challenge over its aid to Bombardier, and Brazil responded in short order Wednesday, accusing Ottawa of violating its commitments under the World Trade Organization.

The Brazilian government launched a formal complaint with the WTO, triggering a new trade battle between two countries that have previously sparred over subsidies to their respective aerospace industries.

Bombardier received at least US$2.5 billion in government support last year and additional contributions may hurt the country’s interests by further distorting the aerospace sector, Brazil said.

“We are very much convinced that those programs are subsidies and that some of them are prohibited subsidies,” Carlos Cozendey, undersecretary general for economic affairs at Brazil’s Foreign Ministry, said in an interview.

RELATED: Government to provide Bombardier with $372 million in loans

Last year, Bombardier (TSX:BBD.B) received a US$1 billion investment from the Quebec government in exchange for a 49.5 per cent stake in the CSeries passenger jet program. The company also sold a 30 per cent stake in its railway division to pension fund manager Caisse de depot for US$1.5 billion.

On Tuesday evening, Ottawa announced it will provide $372.5 million in new loans to Bombardier to be paid in instalments over four years to support the Global 7000 and CSeries aircraft projects. Although the loans are interest-free, the government said it expects to earn a return, as it has done with past loans, through royalties for planes sold.

Under such an arrangement, Bombardier has so far paid $741 million into Ottawa’s coffers on $586 million in federal loans in the 1980s and 1990s, according to the company. Bombardier is expected to begin paying royalties to the federal government in April for selling seven CSeries last year after the company received $350 million in loans in 2008 in support of the aircraft.

Though the WTO complaint came hours after the federal loans were announced, Cozendey said it had been in the works for a while after Brazil examined more than 30 government programs, from local tax exemptions to research grants.

Government support “made viable a company that was having serious financial problems,” thereby giving Bombardier an unfair advantage when competing for business, he said.

Federal Innovation Minister Navdeep Bains brushed aside concerns that the government’s assistance to Bombardier may contravene WTO rules.

“This is very consistent with our international trade obligations,” Bains said in Ottawa.

Sao Paolo-based Embraer, a fierce rival of Bombardier’s, said it supports its government’s complaint. CEO Paulo Cesar Silva said the subsidies given to Bombardier allowed the Montreal company to sell the CSeries at artificially low prices to airlines such as Delta.

“It is essential to restore a level playing field to the commercial aircraft market and ensure that competition is between companies, not governments,” he said in a statement.

Prior to Brazil’s announcement it was filing a WTO complaint, Canadian International Trade Minister Francois-Philippe Champagne said the government would stand its ground.

“I am very much prepared to fight for what we are doing,” he said Tuesday.

Bombardier CEO Alain Bellemare was similarly defiant.

“This is the best plane in its class, so people are finding ways to come after us,” he said.

RELATED: The inside story behind the bungled Bombardier C Series

All countries, including Brazil, help their aerospace sectors through tax breaks, royalties and research and development, Bombardier said Wednesday. It pointed to Brazil’s US$588 million in assistance to Embraer in 2014 through the Brazilian Development Bank for the development of its Legacy 500 business jet and another US$1.5 billion for development costs of the KC390 aircraft.

Cozendey said funding to Embraer abides by WTO rules.

Brazil’s WTO filing could prompt Canada to retaliate with a similar complaint of its own, as was the case when the two countries battled over aircraft subsidies for several years starting in the mid-1990s, said trade lawyer Lawrence Herman.

“I fervently hope that this doesn’t result in a trade war but these are major cases,” he said. He added that, in his opinion, Brazil has a difficult case to make because Canada’s support is in the form of loans, which he believes are WTO-compliant.

“This is all about commercial self-interest. It’s all about making sure that your company doesn’t get an edge on you in commercial markets, doesn’t take sales and market share away from one country’s exports over another.”

Cozendey said he doesn’t believe the dispute will hurt relations between the two countries, which are working on exploratory discussions about a regional free trade agreement.

During the last dispute nearly 20 years ago, both countries were found to have contravened WTO rules governing subsidies. They eventually changed their support programs.