December 19, 2016 / 3:28 PM / 8 months ago

UPDATE 5-Brazil to challenge Canada at WTO over Bombardier funding

(Adds comment from Quebec pension fund manager spokesman)

By Brad Haynes and Allison Lampert

SAO PAULO/MONTREAL, Dec 19 (Reuters) - Brazil unveiled a probable challenge against Canadian regional and government funding for Bombardier Inc at the World Trade Organization, reviving a bitter trade feud between the Canadian jetmaker and Brazilian rival Embraer SA.

Brazil's foreign ministry said on Monday its trade chamber had authorized WTO proceedings against Canada over $2.5 billion in support for Bombardier from the province of Quebec.

Bombardier and Embraer have battled for decades over the regional jet market and traded accusations of unfair subsidies in the late 1990s that their countries hashed out at the WTO.

The latest case stems from support for Bombardier's roughly $5.4 billion CSeries jetliner program, which competes with some Embraer jets as well as the smallest products of plane giants Boeing Co and Airbus Group SE.

Bombardier, which considered bankruptcy protection last year after simultaneous airplane developments caused a cash crunch, confirmed a $1 billion injection in the CSeries from the Quebec government in June.

It also sold a 30 percent stake in its rail division to public and private pension fund manager Caisse de depot et placement du Quebec for $1.5 billion. Now, negotiations are underway for a $1 billion federal cash injection.

Brazil is upset about the move, which has also drawn criticism from Boeing in the United States.

"There are indications that Canada's federal government soon intends to make another significant capital injection in (Bombardier) to ensure the viability of the new CSeries and its placement in the market at artificially reduced prices," the Brazilian foreign ministry said in a statement.

Montreal-based Bombardier said all investments in the company comply with trade rules and, as so often happens in spats involving the WTO, hit back with a counter-accusation.

"It is a bit ironic given the level of government subsidies and support Embraer has received," said Olivier Marcil, a company spokesman.

But Embraer insisted its rival was damaging the market.

"Canada's subsidies have created serious distortions in the market," said Embraer Chief Executive Paulo Cesar Silva.

CONSULTATIONS

It is the fourth time the two countries have clashed on aircraft support at the WTO after a series of cases focusing on export financing at the end of the 1990s and early 2000s.

Under WTO procedure, Brazil must ask for consultations which can take 30 days before filing a lawsuit, which could then take years for the overloaded Geneva body to resolve.

If it goes ahead, Brazil may aim to repeat a successful complaint about state capital injections into Europe's Airbus brought by the United States.

That is part of a much larger set of transatlantic aircraft subsidy cases that make up the world's largest trade dispute, still not entirely resolved after 12 years.

Quebec defended its transactions with Bombardier and a federal spokesman said Canada would continue to meet all its trade obligations.

A spokesman for Quebec's Caisse, which is expected to be targeted as part of Brazil's challenge, said the fund's investment in Bombardier Transportation was based on "commercial principles" and made independently.

"To associate it with (Quebec's) investment in the company's aerospace business is completely false," spokesman Maxime Chagnon said in an email.

Foreign Minister Jose Serra told Reuters in July that Brazil was mulling a WTO challenge involving Bombardier, but his remarks were quickly brushed off by Canadian Prime Minister Justin Trudeau.

Last week, Trudeau said Canada was working "very productively" with Bombardier and he hoped to make announcements in coming months.

Toronto trade lawyer Mark Warner said it was not surprising that Brazil would react publicly to Trudeau's recent remarks about Bombardier, but the country would probably only file an action once Canada announces an additional investment.

Additional reporting by Alonso Soto and Lisandra Paraguassu in Brasilia, Andrea Hopkins in Ottawa and Tim Hepher in Paris; Editing by Bill Trott and Tom Brown

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