Graham Warwick/WASHINGTON DC
Brazil and Canada have been brought to the brink of a trade war by a dispute between Bombardier and Embraer over alleged Government subsidies for regional-jet development and sales. Now, representatives of the two countries have until the end of February to resolve the dispute, which threatens a wider trade agreement between Canada and the Mercosur economic bloc, which includes Argentina and Brazil.
The dispute concerns allegations by Bombardier that state-backed export financing provided to Embraer constitutes an illegal subsidy. The Canadian company is pressing its Government to file a complaint with the World Trade Organisation (WTO). Embraer, meanwhile, has protested about Canadian funding for regional-aircraft development at Bombardier.
At the heart of the dispute is the PROEX programme, established by the Brazilian Congress in 1991 and operated by state-owned Banco do Brasil. According to Embraer, PROEX is an interest-rate equalisation system set up to help Brazilian manufacturers arrange competitive financing for exports. According to Bombardier, PROEX is an illegal subsidy.
Embraer vice-president Fred Curado says that PROEX was set up to counteract the higher interest rates charged by banks when financing exports by developing countries such as Brazil. Interest rates are higher, he says, because banks perceive the risk of financing Brazilian exports to be greater than that of financing exports by a developed country, such as Canada.
PROEX provides buyers with an interest-rate rebate. The rebate. Curado says, offsets the difference between the LIBOR international rate and the interest rate charged to buyers of Brazilian exports. Bombardier argues that the rebate, which is paid direct to the buyer, is a Government subsidy which reduces the cost of Embraer's aircraft.
Bombardier says that PROEX provides an interest-rate rebate of up to 3.8% over 15 years, on 85% of the purchase price. This reduces the cost of the Embraer RJ-145 by $2.5-3 million, the company calculates, based on a "typical" price of $13-15 million. The equivalent typical price of the Canadair Regional Jet (CRJ) is $17-19 million, says Bombardier, which says that it can "-live with a $4 million difference, but no more".
The firm believes that PROEX becomes more of an issue with Embraer's new ERJ-135 in competition with other 30-seat regional jets and turboprops "for $10 million versus a real $12 million".
Embraer refutes allegations that PROEX is an illegal subsidy. "It does not make Brazilian exports cheaper in the market or allow them to be sold below the price of goods produced elsewhere," the company says. Curado says that, despite the CRJ's higher price, Bombardier can offer lease rates "about the same" as those available on the ERJ-145. "Otherwise we would have 100% of the market," he says. "We each have about 50% market share and almost the same backlog. We can live with that."
Bombardier has been pressing the Canadian Government to file a WTO complaint "-as quickly as possible, before Embraer sells any more aircraft". Bilateral discussions have taken place between the two countries, but were "inconclusive", says Canada's Department of Foreign Affairs and International Trade, which "-believes PROEX violates WTO rules and provides an unfair advantage to Embraer".
Matters came to a head during the January visit of a Canadian trade delegation to Brazil. Events leading up to this included large sales of ERJ-145s to American Eagle and Continental Express, and Bombardier's decision to drop Embraer from its NATO Flying Training in Canada (NFTC) programme. With a framework agreement to streamline trade between Canada and the Mercosur nations at risk, Canadian prime minister Jean Chretien and Brazilian president Fernando Henrique Cardoso consented to last-ditch negotiations.
Each agreed to nominate a trade representative, expected to have been appointed by the end of January, to look into the dispute and report back in 30 days. They will examine Canadian claims about PROEX and Embraer's concerns about the cancelled NFTC contract and Technology Partnerships Canada (TPC) programme, which provides Government support for the development of regional aircraft.
Bombardier acknowledges that the TPC programme is providing 25% of the development funding for the stretched CRJ-700, in the form of a loan repayable with royalties, but says that this is within the internationally agreed limit of 30% on Government support for civil-aircraft development.
The Canadian firm also says that its decision to switch from the Embraer EMB-314 turboprop trainer to the Raytheon T-6 for the 24-aircraft NFTC contract was unrelated to its dispute with Embraer, but was made because of concerns about Embraer's ability to meet the timescale for delivery of aircraft to the Bombardier-run NFTC programme.
Curado describes the NFTC decision as "unjustifiable retaliation by Bombardier" after it lost the American Eagle 50-seat regional-jet order to Embraer.
Bombardier believes that Canada will pursue a WTO complaint if this latest round of negotiations fails, although the Government declines to confirm this. Curado says that Embraer has no plans to take its concerns to the WTO. "This is not a country issue, it is a company issue," he argues.
Source: Flight International
