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Brazil’s WTO complaint over Canada’s Bombardier loan threatens bilateral relations

Shareholders line up to view Bombardier's CS300 aircraft following their annual general meeting in Mirabel, Que., on April 29, 2016.

Christinne Muschi/Reuters

A Brazilian diplomat says the country hopes the conflict over Canadian government aid to Bombardier Inc. will not poison bilateral relations, which only recently fully recovered from the impact of a similar fight 15 years ago.

On Wednesday, Brazil complained to the World Trade Organization about a $372.5-million federal cash infusion for Bombardier, setting the stage for a lengthy dispute that could see Canada launch a counter complaint. If Brazil wins this fight it could be awarded the right to hit Canada with retaliatory tariffs.

At the height of the previous dispute, the Canadian government threatened to use hundreds of millions of dollars of trade sanctions against Brazil for its use of cut-rate loans to Embraer SA, which is Bombardier's direct competitor in the global aerospace market.

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This time, Brazil would like to keep things cordial. "Disagreements are a natural part of human relations," said Marcelo Ramos Araujo, head of the economic affairs section of the Brazilian embassy in Canada.

"It is the same with countries. Countries with strong relations will differ in some aspects and agree and co-operate in many others. We should not ignore disagreements, but bilateral relations should not in any circumstance be contaminated by those disagreements."

But the last dispute between Bombardier and Embraer clouded those relations for years. "We are probably going back to a situation that is lose-lose for everybody," said Henrique Rzezinski, a former vice-president of external relations for Embraer who led the firm through its last round of international trade disputes. "This is a big step back no matter who wins … [we had] a level playing field on financial conditions and on no subsidies – we made competition dependent only on price, delivery and quality."

The Canadian government on Tuesday announced the financial aid to the Montreal-based company, in the form of a repayable contribution that will be disbursed over four years. Repayments will be structured as royalties, with Ottawa receiving funds based on aircraft deliveries. This is on top of a $1-billion (U.S.) equity stake the Quebec government took in Bombardier in 2016 and a $1.5-billion investment by the province's largest pension fund manager – Caisse de dépôt et placement du Québec – in Bombardier's rail unit.

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Ottawa appears to have structured the Bombardier bailout as a "repayable contribution" in the hope that a WTO panel will not view it as a straight-up subsidy. Trade Minister François-Philippe Champagne said the loans comply with WTO rules and the government will defend itself against litigation.

But in Brazil, industry watchers say the government must be confident it stands a good chance of winning this complaint.

"I don't think Brazil would get into a dispute like that without having at least some evidence that [it will win], otherwise it's just spending time and money, and it's not cheap," Mr. Rzezinski said.

"[The last dispute] was a very costly process, not only in money but also politically for Brazil and Canada – it was a very painful process that had dramatic implications, that made problems in the relationship … and it spread over many other areas."

The last fight over aircraft coincided with Canada's much-criticized decision to temporarily ban Brazilian beef; protesters in Brazil threw Canadian Brome Lake ducks in the trash and poured out Canadian liquor to demonstrate their frustration.

Mr. Araujo noted that relations are since much improved – to the degree that Embraer now buys Canadian parts for its planes, and Air Canada flies Embraer jets. "In the last three years, Embraer has imported from Canada approximately $300 million (U.S.) in parts and components," Mr. Araujo said. "There are currently 50 Embraer commercial aircraft operating in Canada."

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Yet there is still considerable scope for trade expansion: Canada and Brazil did just $7.1-billion in trade last year, according to Brazil's Ministry of Foreign Affairs, although Brazil is Latin America's largest country and still the world's eighth-largest economy, despite its economic woes.

Three years ago, Canadian firms and investors were flooding into Brazil; there were delegations from the energy sector courting Rio state's offshore oil business, plus agribusiness and mining firms seeking deals, arriving here almost every week.

But the country's continuing political turmoil and simultaneous economic collapse stifled the optimism and the new ties. Brazil is in its worst recession in almost a century, with unemployment at nearly 12 per cent, inflation at 11 per cent and GDP expected to grow just 0.4 per cent this year despite frantic government efforts at recovery.

"One of the key political moves of the [Michel] Temer government is to try to boost economic recovery through trade – by increasing Brazil's competitiveness in exports," said Francisco Niclos Negrao, director of the Brazilian Institute of Studies on Competition, Consumer Affairs and International Trade in Sao Paulo.

That context helps to explain Brasilia's willingness to go to the WTO over aerospace subsidies, he added: Embraer is a flagship company for Brazil, so the central government is keen to prevent it from being squeezed out of the market by subsidies to competitors. The fact that Bombardier recently won a large order for aircraft from Delta Airlines may have spurred this complaint, added Mr. Negrao, who also practices international trade law.

"Bombardier may have offered a very, very low price due to these financial contributions," he said. And Bombardier's financial troubles before the Quebec cash infusion were widely known, he added.

If Embraer is getting shut out, Mr. Negrao said, "I do not think Brazil would simply sit and wait – I imagine Embraer and Brazil would strive within WTO rules to try to boost its competitiveness."

Carlos Marcio Cozendey, vice-minister for economic and financial affairs at Brazil's Ministry of Foreign Affairs, told reporters in Brasilia on Wednesday that the multiple levels of government support for Bombardier's C Series jets make a mockery of the idea that the Montreal-based firm is a private company. "Today, the C Series is an aircraft that belongs more to the Canadian government than to Bombardier," he said.

Embraer chief executive officer Paulo Cesar Silva said in a statement that the continuing subsidies "have not only been fundamental in the development and survival of the C Series program, but have also allowed Bombardier to offer its aircraft at artificially low prices." Competition must be "between companies, not governments," he said.

However, Mr. Cozendey also said that diplomatic relations between Canada and Brazil will not be affected by this complaint and that discussions about Canada providing favourable trade status to products from Mercosur, the Southern Common Market, would continue.

Aerospace is traditionally a capital-intensive industry, with a need for significant research-and-development investment, and with just a few players who have outsize weight in their native countries, Mr. Negrao observed.

Bombardier's defenders were quick on Wednesday to point out that Embraer also gets support from Brazil's government, and indeed that government assistance of one kind or another is a feature in every country with an aerospace industry. Embraer, for example, has a guaranteed line of low-interest credit for "innovation research" from the government's National Bank for Social and Economic Development, or BNDES.

Mr. Rzezinski, who is a trustee of the Brazilian Center for International Relations, said that Embraer's support from government cannot be compared with that now being given to Bombardier, and that the Brazilian firm has been careful to keep within WTO rules.

"The rationale for Brazil not to do this is stronger than any other country because Brazil is the least developed country in the market and has the weakest capacity to subsidize," he said. "Brazil would not voluntarily break the rules – this would damage Brazil on the competition field."

He said that Embraer's ability to compete will be badly undermined if the WTO complaint is not successful and Bombardier has unfettered access to bailout cash.

"This is a deal-breaker, absolutely; it creates a very important asymmetry that makes competition unfair – it can make all the difference," he said. "Brazil will certainly try to protect one of its most important industries."

The two countries now have up to 60 days to try to settle the dispute, or else the WTO convenes a panel of experts to rule on the case. The last such dispute over aerospace began in the mid-1990s and did not produce a final ruling until 2002.

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About the Authors
Parliamentary reporter

Steven Chase has covered federal politics in Ottawa for The Globe since mid-2001, arriving there a few months before 9/11. He previously worked in the paper's Vancouver and Calgary bureaus. Prior to that, he reported on Alberta politics for the Calgary Herald and the Calgary Sun, and on national issues for Alberta Report. More

Latin America Bureau Chief

Stephanie Nolen is the Latin America correspondent for The Globe and Mail.After years as a roving correspondent that included coverage of the wars in Iraq and Afghanistan, Stephanie moved to Johannesburg in 2003 to open a new bureau for The Globe, to report on what she believed was the world's biggest uncovered story, Africa's AIDS pandemic. More


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