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Embraer CEO tries to clear the air on subsidies Add to ...

Government subsidies run rampant in the aerospace industry, and the bitter and costly trade dispute between Canada and Brazil barely begins to address the issue, says Mauricio Botelho, the chief executive officer of Brazilian jet maker Embraer SA.

Brazilian subsidies to Embraer are easy to catch because they are obvious and set out plainly in official government publications, Mr. Botelho said in an interview from London last week during the Farnborough air show.

But Canada and others hide their export subsidies, making them difficult to control even though international trade agreements prohibit them, he said.

"It's very difficult to handle, because on one part, our practices are absolutely clear. There is no possibility that the government of Brazil develops any action without it being publicized in the official press. This is the law," Mr. Botelho said. "On the contrary, we see the Canadian mechanisms, all of them, set in gray areas. It's not accessible, and protected by so-called 'state secrets.' "

Embraer's chief rival, Montreal-based Bombardier Inc., contests this, and says that Brazil has hidden subsidies too. The accusations of hidden subsidies are growing louder as the dispute between Canada and Brazil remains unresolved.

The World Trade Organization has told the Brazilian government to restructure the way it finances regional jets made by Embraer, saying that Pro-ex, the cut-rate financing program, broke international trade rules. Brazil so far has only agreed in principle to change the program, and has refused to remove Pro-ex financing from deals Embraer has already signed.

Instead, Brazil is offering to compensate the Canadian economy for damages done to Bombardier and the Canadian aerospace sector.

"Canada deserves a compensation," Mr. Botelho agreed.

The two countries cannot agree, however, on the details of the compensation, nor on how Brazil should change the Pro-ex financing regime. So Canada is threatening to hit Brazil with $5-billion in trade sanctions as soon as the middle of September.

"I don't see that retaliation is useful to anybody. I think it will hurt Brazil as well as it will hurt Canadian society," Mr. Botelho said. "Furthermore, it will not represent for the 'offended party' [Bombardier]any benefit at all."

The WTO also told Canada to change its subsidies provided to the aerospace sector through Industry Canada's Technology Partnerships investment fund and through Canada Account. Canada has made the required changes, although both programs still exist.

But the WTO rejected Brazil's challenge of Canadian financing through Export Development Corp., a Crown corporation that lends money to clients of Canadian exporters.

Brazil argued that EDC loans were in fact illegal export subsidies since EDC was lending money at below-market rates. But the WTO rejected the claim, saying Brazil had no proof. The WTO could not force EDC to provide information on its financing terms.

The WTO decision, Mr. Botelho said, backs up his argument that export subsidies are very hard to monitor and likely lurk everywhere in the aerospace industry.

"There will always be a support. Every country has a support. What is asked is that this support be adapted in relation to the rules set by the WTO," he said.

During the past few months of negotiations between Canadian and Brazilian officials, Canada has insisted on setting up a bilateral monitoring mechanism that would make sure Brazil is not changing Pro-ex while replacing it with some other subsidy. Canadian officials see a third-party organization that would examine jet transactions to make sure financing is granted to Embraer clients at internationally acceptable rates.

Brazilian officials have been reluctant to accept the idea, because they doubt Canada would be willing to subject its own programs to such scrutiny, Mr. Botelho said. If Canada would not share EDC information with the WTO, why would it change its attitude for a third party, he asks.

Plus, he said, there's a third company nipping at the heels of Embraer and Bombardier in the growing world market for regional jets: Fairchild Dornier,based in Germany. Bombardier and Embraer each control about 40 per cent of the regional jet market, and Fairchild Dornier controls about 15 per cent.

Already, Fairchild Dornier has been supported by a generous government financing program, Mr. Botelho said.

"Eventually this may be a problem," he said, since Fairchild Dornier would not be included in any bilateral monitoring mechanism set up between Canada and Brazil.

And besides, he added, the monitors are going to have a very difficult time defining what is fair and what is an illegal export subsidy if companies and governments continue to disguise their funding.

He mentioned investment incentives and regional development funding provided by the Quebec government to the province's industry.

"We see the sort of highly professional way they provide support for industries located in Quebec," Mr. Botelho said. "So I ask, is this is a subsidy? Is this the kind of thing that qualifies as a subsidy or not? This is the sort of thing that concerns me. Because when we talk about subsidies, it becomes a grey area where we don't know exactly what it means. The form may vary substantially, and at the very end, it is a subsidy."

Since talks between Canada and Brazil broke down 10 days ago in Montreal, Canadian trade officials have refused to comment publicly about the dispute and the bilateral monitoring mechanism.

But Bombardier says it's not worried about Fairchild Dornier or other companies receiving subsidies. Canada and Brazil will have spawned so much litigation at the WTO in aerospace that other countries will have easy recourse if they spot unfair subsidies elsewhere, the Montreal-based company argues.

Indeed, aerospace giants Airbus and Boeing are watching the Embraer-Bombardier dispute with great interest to see whether they can apply the rulings to each other in their battle for market share.

Trade negotiators from Brazil and Canada will meet again at the end of August in an attempt to resolve their differences and avoid Canada's retaliation measures.

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