WT/DS267/R/Add.2 
Page I-170  
 
ANNEX I-5 
  
ANSWERS OF BRAZIL TO QUESTIONS 
POSED BY THE PANEL FO LLOWING THE RESUMED 
FIRST SUBSTANTIVE ME ETING OF THE PANEL 
 
27 October 2003 
  
TABLE OF CONTENTS 
 
Page  
A. REQUEST FOR PRELIMINARY RULINGS .................................................................174 
B. EXEMPTION FROM ACTIONS ...................................................................................175 
C. IDENTIFICATION OF THE SUBSIDIZED PRODUCT .................................................175 
F. PROHIBITED SUBSIDIES ...........................................................................................188 
G. SPECIFICITY/CROP INSURANCE ..............................................................................190 
H. EXPORT CREDIT GUARANTEES ...............................................................................195 
I. ACTIONABLE SUBSIDIES ..........................................................................................203 
J. CAUSATION ...............................................................................................................213 
K. ARTICLE XVI OF GATT 1994 .....................................................................................226 
L. CLARIFICATIONS ......................................................................................................234 
 
 WT/DS267/R/Add.2 
Page I-171 
 
 
Table of Cases 
 
  
Short Title Full Case and Citation 
EC – Sugar Exports II 
(Brazil) GATT Panel Report, European Communities – Refunds on Exports of 
Sugar Complaint by Brazil, L/5011 – 27S/69, adopted 
10 November, 1980 . 
EEC – Wheat Flour GATT Panel Report, European Economic Community – Subsidies on  
Export of Wheat Flour , SCM/42, circulated 21 March 1983. 
EC - Hormones Appellate Body Report, EC Measures Concerning Meat and Meat 
Products (Hormones),  WT/DS26/AB/R, adopted 13 February 1998. 
EC- Bananas Appellate Body Report, European Communities – Regime for the 
Importation, Sale and Distribution of Bananas , WT/DS27/AB/R, adopted 
25 September 1997. 
Argentina – Textiles 
and Apparel Panel Report, Argentina – Measures affec ting Imports of Footwear, 
Textiles, Apparel and Other Items , WT/DS56/R, adopted 22 April 1998. 
Canada - Aircraft Appellate Body Report, Canada – Measures Affecting the Export of 
Civilian Aircraft,  WT/DS70/AB/R, adopted 20 August 1999. 
India – Quantitative 
Restrictions Panel Report, India – Quantitative Restrictions on Imports of 
Agricultural, Textile and Industrial Products , WT/DS90/R, adopted 
22 September 1999. 
Korea – Dairy 
Safeguards Appellate Body Report, Korea  – Definitive Safeguard Measure on 
Imports of Certain Dairy Pr oducts, WT/DS98/AB/R, adopted 
12 January 2000. 
US - FSC Appellate Body Report, United States – Tax Treatment for “Foreign 
Sales Corporation”, WT/DS108/AB/R, adopted 20 March 2000. 
US – FSC (21.5) Appellate Body Report, United States – Tax Treatment for “Foreign 
Sales Corporation.” Recourse to Article 21.5 of the DSU by the 
European Communities.  WT/DS108/AB/R, adopted 29 January 2002. 
Argentina – Footwear 
Safeguards Appellate Body Report, Argentina – Safeguard Measures on Imports of 
Footwear , WT/DS121/AB/R, adopted 12 January 2000. 
US – Section 301 Panel Report, United States – Sections 301-310 of the Trade Act of 1974 , 
WT/DS152/R, adopted 27 January 2000. 
EC - Sardines Appellat e Body Report , European Communities – Trade Descriptions of 
Sardines , WT/DS231/AB/R, adopted 23 October 2002. 
 WT/DS267/R/Add.2 
Page I-172  
 
List of Exhibits 
 
“Production and Trade Policies Affecting the Cotton Industry,” ICAC, 
September 2003 Exhibit Bra- 284 
“Agriculture Fact Book 2001-2002,” Chapte r 3 – American Farms. Exhibit Bra- 285 
Direct and Counter-Cyclical Programme Contract, Form CCC-509, 
USDA, Commodity Credit Corporation Exhibit Bra- 286 
Market Revenue and US Government  Payments to US Upland Cotton 
Producers.   Exhibit Bra- 287 
“NASS to Update Acreage If Necessary,” National Agricultural 
Statistics Service, USDA, 29 September 2003. Exhibit Bra- 288 
7 CFR 1412.606;  7 CFR 718.102, 2003 Edition Exhibit Bra- 289 
“Farmers Must File Acreage to Re ceive 2002 Payments,” Kansan Online 
Ag Briefs;  AFBIS Inc. Crop Watch, June 2003 Exhibit Bra- 290 
“Direct and Counter-Cyclical Payment Programme”, Farm Service 
Agency, USDA, April 2003. Exhibit Bra- 291 
7 CFR 718.102, 2002 Edition Exhibit Bra- 292 
Data for Acreage Chart Exhibit Bra- 293 
“The World Fact Book – Benin,” CIA. Exhibit Bra- 294 2004 US Budget, Federal Credit Supplement, Introduction and Table 2 Exhibit Bra- 295 “USDA Announces $2.8 Billion in Export Credit Guarantees,” FAS 
Press Release, 30 September 2003 Exhibit Bra- 296 
7 U.S.C § 5641(b)(1); 7 U.S.C. § 5622(a), (b) Exhibit Bra- 297 
“USDA Amends Commodity Elig ibility under Credit Guarantee 
Programmes”, FAS Press Release, 24 September 2002. Exhibit Bra- 298 
“Summary of FY 2003 Export Credit Guarantee Programme Activity”, 
USDA, Covering GSM-102, GSM 103 and SCGP Exhibit Bra- 299 
Calculation on US Rice Exports Benefiting from GSM-102, GSM-103 
and SCGP.  Exhibit Bra- 300 
Additional Results from Professor Sumner’s Model. Exhibit Bra- 301 
Revised and Extended Data on Article 6.3(d) Claim.  Exhibit Bra- 302 WT/DS267/R/Add.2 
Page I-173 
 
 
 
John C. Beghin and Holger Matth ey. “Modelling World Peanut Product 
Markets: A Tool for Agricultural Tr ade Policy Analysis”. Center for 
Agricultural and Rural Development (CARD), May 2003. Exhibit Bra- 303 
John C. Beghin, Barbara El Osta, Jay R. Cherlow, and Samarendu 
Mohanty. “The Cost of the US Suga r Programme Revisited”, Centre for 
Agricultural and Rural Devel opment (CARD), March 2001. Exhibit Bra- 304 
Larry Salathe, J. Michael Price and David Banker. “An Analysis of the 
Farmer Owned Reserve Programme  1977-82. American Journal of 
Agricultural Economics, February 1984. Exhibit Bra- 305 
“Supply Response under the 1996 Farm Ac t and Implications for the US 
Field Crops Sector,” Lin et al., USDA, July 2000. Exhibit Bra- 306 
Change in US and World Exports in Per cent.  Exhibit Bra- 307 
“Decoupled Payments: Household In come Transfers in Contemporary 
US Agriculture,” ERS, Agriculture Economic Report N° 822. Exhibit Bra- 308 
Barnard C., Nehring, R., Ryan, J., Collender, R. “Higher Cropland 
Values from Farm Programme Pa yments: Who Gains?” Economic 
Research Service. USDA, Agricultural Outlook November 2001. Exhibit Bra- 309 
“The Incidence of Government Pa yments on Agricultural Land Rents: 
The Challenges of Identification,” Roberts, Kirwan and Hopkins, August 2003, American Journal of Agricultural Economics. Exhibit Bra- 310 
Side by Side Chart of the Weekly US Adjusted World Price, the A-
Index, the nearby New York Futures Price, the Average US Spot Market 
Price and Prices Received by US Producers from January 1996 to the present. Exhibit Bra- 311 
Cotton Outlook Reports dated 7 June 2002, 27 September 2002 and 
4 October 2002.  Exhibit Bra- 312 
 WT/DS267/R/Add.2 
Page I-174  
 
A. REQUEST FOR PRELIMINARY RULINGS 
 
122. Does Brazil allege that cottonseed payments , interest subsidies and storage payments are 
included in the subsidies that cause serious pr ejudice?  Do they appear in the economic 
calculations?  BRA 
 
Brazil’s Answer:  
 1. Cottonseed payments, interest subsidies and storage payments are included in the set of 
subsidies that Brazil alleges cause serious prejudice to its interests within the meaning of Articles 5(c) 
and 6.3 of the SCM Agreement and Article XVI of GATT 1994.  The amounts of cottonseed payments and interest subsidies/storage payments range from $50 million to $216 million per year.
1  
To appreciate the size of these subsidies, the annual amount of each of them separately far exceeds the 
total amount of Brazilian assistance to its upland cotton farmers of $10 million in MY 2001 by a 
factor of 4 to 21.2  Indeed, the annual, individual amount of US cottonseed payments, interest 
subsidies and storage payments also by far exceed s the amounts of subsidies paid by most other 
cotton-producing countries.    2. The United States has notified cottonseed paymen ts as trade-distorting amber box subsidies to 
the WTO.
3  Thus, these payments are presumed to be trad e-distortive.  Interest subsidies and storage 
payments appear to be part of the operation of the marketing loan programme that has also been 
notified to the WTO as a trade-distortive amber box subsidy, and is therefore presumed to be trade-distortive.  The United States has not notified them separately to the WTO.
4 
 3. The economic calculations provided by Brazil on the effect of US subsidies in filling the cost 
revenue gap include cottonseed payments a nd interest subsidies/storage payments.
5  They are also 
included as part of the overall level of US subsidiza tion provided.  However, they are not part of the 
econometric model developed by Professor Daniel Sumner.6 
 
123. Does Brazil’s request for th e establishment of the Panel name the statute authorizing 
cottonseed payments for the 1999 crop?  BRA 
 Brazil’s Answer
: 
 4. To the extent that cottonseed payments fo r the MY 1999 crop were authorized by Section 
204(e) of the Agricultural Risk Protection Act of 2000, Brazil’s request for the establishment of the 
Panel names the statute authorizing these payments.
7  This act authorized the payment of $100 million 
in cottonseed payments.  However, Brazil did not explicitly identify in its request for establishment 
P.L. 106-113, which serves as the legal basis for a further $79 million in cottonseed payments for the 
MY 1999 cottonseed payments.  
                                                     
 
 1 Brazil’s 9 September Further Submission, Table 1, p. 4. 
 2 Exhibit Bra-284 (“Production and Trade Po licies Affecting the Cotton Industry,” ICAC, 
September 2003, p. 6). 
 3 Exhibit Bra-47 (G/AG/N/USA/43, p. 20). 
 4 Exhibit Bra-47 (G/AG/N/USA/43, p. 20). 
 5 Brazil’s 22 August Rebuttal Submission, para. 30 and 40. 
 6 To the extent that interest subsidies and storage payments operate to compensate for any cost incurred 
by US upland cotton producers from the participation in the marketing loan program (for instance, for the 
storage cost resulting from storing physical upland cotton as collateral for the marketing loan), these subsidies 
have been considered in Professor Sumner’s model.  Howe ver, those costs do not occur, if a producer decides to 
opt for a loan deficiency payment rath er then taking out a marketing loan. 
 7 WT/DS267/7, p. 2. WT/DS267/R/Add.2 
Page I-175 
 
 
5. Brazil emphasizes that it is not challenging the underlying statutes authorizing the payment of cottonseed payments in MY 1999, 2000 and 2002, i.e., Brazil does not challenge those payments 
per se .  Brazil challenges as “measures” the payments of those subsidies as causing adverse effects to 
its interests.  The United States and Braz il have consulted about those payments.
8  Brazil properly 
included reference to all “payments” for upland co tton in its request for the establishment of the 
Panel.9  This is sufficient to properly identify cott onseed payments as measures for the purposes of 
Brazil’s request for the establishment of the Panel.  
B. EXEMPTION FROM ACTIONS 
 
6. According to its revised timetable, the Pane l will issue its report to the parties after the 
end of the 2003 calendar year.  Does this have any impact on “exempt[ion] from actions” under 
Article 13(b)(ii) and 13(c)(ii) of the Agreement on Agriculture ?  BRA, US 
 
Brazil’s Answer : 
 
6. No.  Brazil’s claims relate to prohibite d and actionable subsidi es provided during MY 1999-
2002 when the United States had no peace clause protection.  Brazil’s threat of serious prejudice claims relate to the present threat of serious prejudice caused by subsidies provided during MY 1999-
2002, as well as the threat caused by  subsidies that are required to be provided through the end of 
MY 2007 by the 2002 FSRI Act and the 2000 ARP Ac t.  The fact that the Panel will issue its 
determination regarding these subsidies after the termination of the “peace clause” in 2004 has no 
impact on the analysis of these claims.  
C. IDENTIFICATION OF THE SUBSIDIZED PRODUCT  
 
125.  
 (2) Brazil has submitted that "The record suggests that historic producers are current 
producers."  It points to factors including th e specialization of upland cotton producers, the 
need to recoup expensive investments in cotto n-specific equipment, and the geographic focus 
and climatic requirements of upland cotton producti on in the "cotton belt".  (Brazil's rebuttal 
submission, footnote 98, on page 24)  (a) Regarding the specialization of upland cotton producers and the geographic focus of 
upland cotton production, how does Brazil take  account of the fact that cotton is 
produced in 17 of the 50 states of the Unit ed States and that average cotton area is 
approximately 38% of a cotton farm's acres? (This information is taken from the US's 
response to question 67 bis, footnote 35).  BRA 
 
                                                     
 
 8 Exhibit Bra-101 (Questions for the Purpos es of the Consultations, Questions 14.1 et seq ., p. 13).   
 9 The “measures” identified include (1) “domestic support subsidies provided to the US upland cotton 
industry during marketing years 1999-2001”, (2) “domestic support subsidies that are mandated to be provided 
to the US upland cotton industry during marketing ye ars 2002-2007”, (3) “all subsidies benefiting upland cotton 
that have trade distorting effects or  effects on production by the US upland cotton industry”, (4) “domestic 
support, and all other subsidies provided under regulations, administrative procedures . . . for the production, use 
and/or export of US upland cotton and upland cotton products”.  WT/DS267/7, pages 1, 2, 3.   WT/DS267/R/Add.2 
Page I-176  
 
Brazil’s Answer
: 
 7. In contrast to the information cited in th e Panel’s question, more relevant information 
concerning specialization of cotton producers in cott on farms is set out in Exhibit Bra-16, which is a 
2001 USDA report on the cost of production of cotton farms.  That report contains the following 
figure:
10   
 
 
 
8. This evidence shows that farms with 500 or more acres of upland cotton are heavily 
specialized in the production of cotton.  While these farms represented 33 per cent of US farms 
producing upland cotton, they produced 75  per cent of total US upland cotton in MY 1997.11  Thus, 
the great majority of US production of upland cotton takes place on farms that largely specialize in the production of upland cotton.   
  
9. Other data regarding specialization is found in a 1998 USDA report indicating that most 
smaller farms – defined as farms with income below $250,000 and which account for 92 per cent of 
all US farms – tend to produce only one or at most two crops.
12  This is illustrated in the chart below:   
 
                                                      
 10 Exhibit Bra-16 (“Characteristics and Production Costs of US Cotton Farms”, USDA, October 2001, 
p. 9). 
 11 Exhibit Bra-16 (“Characteristics and Production Costs of US Cotton Farms”. USDA, October 2001, 
p. 7). 
 12 Exhibit Bra-285 (“Agriculture Fact Book 2001-2002”, Chapter 3 - American Farms, p. 32).   
 WT/DS267/R/Add.2 
Page I-177 
 
 
 
 
10. Approximately 55 per cent of upland co tton is produced on such smaller farms.13  Thus, even 
for those smaller farms producing upland cotton, the evidence suggests that over 50 per cent produce 
mainly upland cotton and the rest produce at most one additional crop.  This evidence is consistent 
with Brazil’s argument concerning cotton specialization.    11. With respect to the Panel’s question, the 38 pe r cent figure cited by the United States refers to 
“planted cotton acreage” as a percentage of “total acreage operated”.
14  The United States provides no 
information on what “total acreage operated ” means.  Nor does the United States provide the Panel 
with the amount of “planted cotton acreage” as a pe rcentage of “total PFC/DP base acreage”.  It may 
be that the cotton acreage accounts for most of a fa rm’s “base acreage”.  Thus, the “total acreage 
operated” is not the appropriate basis to calculate  a percentage of base acreage for farms producing 
upland cotton.  The best evidence of specializati on is the actual payments made to upland cotton 
producers discussed in Brazil’s Answer to Question 125 (5).  The next best evidence is the USDA 
data on specialization of cotton farms cited above.   
 12. Moreover, Brazil’s arguments are not dependent  on proof that the majority of cotton farms 
produce only upland cotton.  The evidence suggests that larg er farms tend to grow at least some other 
crops and, therefore, may have more than one type of PFC/market loss assistance or direct and 
counter-cyclical payment “base acreage”.
15  As Christopher Ward testified, farmers rotate the 
production of several different crops, planting one cr op on a certain portion of the farmland, and then 
                                                      
 13 Exhibit Bra-16 (“Characteristics and Production Costs of US Cotton Farms,” USDA, October 2001, 
Table 7) tabulating farms with value of production less than $250,000. 
 14 Exhibit Bra-16 (“Characteristics and Production Costs of US Cotton Farms,” USDA, October 2001, 
Table 3).    
15 This is also demonstrated by Exhibit Bra-286 (D irect and Counter-cyclical Program Contract, Form 
CCC-509, USDA, Commodity Credit Corporation), which prov ides for the possibility to establish base acres for 
different crops. WT/DS267/R/Add.2 
Page I-178  
 
moving the production of that same crop  to another portion of the farmland.
16  But the fact that crops 
are rotated or that some farmers have multiple t ypes of “base acres” and produce more than one crop 
on their farm does not mean that farmers do not continue to plant upland cotton and use cotton-
specific machinery and ginning facilities.  This is confirmed by the fact that between MY 1999-2002, 
there were no wide swings in planted upland cotton acreage.17   
 
13. Finally, while the United States is correct in stating that upland cotton is produced in 17 states, 66 per cent of upland cotton is produced in only 5 states, and 90 per cent is produced in only 
10 out of the 50 US states.
18  In addition, even within each of these 10 states, upland cotton tends to be 
grown in relatively distinct geographical re gions.  This is shown in the graph below:19  
 
 
 
(c) Regarding the high cost of upland cotton production, can Brazil show that farms who 
planted upland cotton could only have cov ered their costs by receiving upland cotton, 
rice or peanut payments in every year from 1999 through 2002?  BRA 
 
Brazil’s Answer:  
 14. Between MY 2000-2002, US upl and cotton producers could not make a profit, unless they 
grew upland cotton on upland cotton or rice (or p eanut in MY 2002) base acreage.  Brazil provides 
data below for each of the four marketing years c overing the period of inv estigation (MY 1999-2002).  
This evidence is consistent with a conclusion that the great majority of upland cotton was produced on 
upland cotton base acreage.  In responding to this  question from the Panel, Brazil took into account 
                                                     
 
 16 Exhibit Bra-283 (Statement of Christopher Ward – 7 October 2003, para. 2)  
 17 See Brazil’s Answer to Question 125(6). 
 18 Exhibit Bra-107 (US and State Farm Income Data, Farm Cash Receipts, ERS, USDA, June 2003).   
 19 http://usda.mannlib.cornell.edu/reports/nassr/field/planting/uph97.pdf , Usual Planting and 
Harvesting Dates for US Field Crops, National Agricultu ral Statistics Service, USDA, December 1997, p. 7.  WT/DS267/R/Add.2 
Page I-179 
 
 
Dr. Glauber’s comment that Step 2 payments are not received by US upland cotton producers but rather by exporters and domestic users.
20  Brazil generally agrees with this statement.  Therefore, 
Brazil has excluded Step 2 payments from the pool of revenue received by US upland cotton 
producers.21  It presents data on the total amount of market revenue for upland cotton lint and seed, 
marketing loan benefits, crop insurance payments, cottonseed payments, so-called “other payments”22 
and PFC, market loss assistance, direct and counter-cyclical payments. 
 15. The following chart shows revenues of upland cotton producers in MY 1999:
23 
 
Market Revenue and Government Support in M Y
1999
0102030405060708090100
ce
ntsperpo
unMLA Payments
PFC Payments
Other Payments
Cottonseed Payments
Crop Insurance
Marketing Loan
Cottonseed Revenue Received by U.S.Farmers
Cotton Lint Price Received by U.S. Farmers
 
 
16. The chart shows that US upland cotton prod ucers received total revenue of 91.54 cents per 
pound of upland cotton produced.  At the same time , the average cost of production was 82.03 cents 
per pound in MY 199924 and prices received by producers were 45 cents per pound.25  It follows that 
US producers could not produce upland cotton without th e financial assistance of the US Government 
in the form of large amounts of subsidies.  US producers needed 4.46 cents per pound from the total 
combined upland cotton PFC and market loss assistance payment of 13.97 cents per pound to recover 
their costs.26   
 
                                                      
 20 Exhibit US-24, p. 3 fifth and sixth paragraph. 
 21 This does not affect Brazil’s view that Step 2 payments are properly incl uded in the peace clause 
analysis under Article 13(b)(ii) of the Agreement on Ag riculture as “support to upland cotton”.  While Step 2 
payments may not directly benefit domestic producers of up land cotton, they do so indirectly.  As they increase 
demand for US upland cotton, they increase prices received by US producers and are, therefore, properly 
described as “support to upland cotton”. 
 22 Interest subsidies and storage payments. 
 23 See Exhibit Bra-287 (Market Revenue and US Government Payment to US Upland Cotton 
Producers). 
 24 Exhibit Bra-205 (Costs and Revenues of US Upland Cotton Producers). 
 25 Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 5). 
 26 Thus, they could have produced upland cotton on wheat, corn, grain sorghum, cotton and rice base 
acreage without suffering a loss. 
 Cents per pound WT/DS267/R/Add.2 
Page I-180  
 
17. In MY 2000, the financial situ ation of US upland cotton produ cers worsened.  While the price 
they received for upland cotton lint increased to 49.8 cents per pound
27, their total revenue fell to 
84.74 cents per pound28, only slightly above their average cost of production of 82.69 cents per pound. 
 
Market Revenue and Government Support MY 2000
0102030405060708090
cen
ts
per
po
un
dMLA Payments
PFC Payments
Other Payments
Cottonseed Payments
Crop Insurance
Marketing Loan
Cottonseed Revenue Received by U.S. Farmers
Cotton Lint Price Received by U.S. Farmers
 
18. Again, large amounts of US subsidies were in strumental in closing the gap between the US 
cost of production and the market returns of producers.  For MY 2000, the 13.86 cents per pound in 
upland cotton PFC and market loss assi stance payments as well as all ot her subsidies were needed to 
close the gap between the cost of production and the market returns.29  Average US upland cotton 
producers could also have covered their total costs had they planted upland cotton on rice base acres.  
But they would have suffered a marginal  loss on corn or other crop base acres. 
 19. The results for MY 2001 show a similar result: 
 
                                                     
 
 27 Exhibit Bra-4 (“Fact Sheet: Upland Cotton”, USDA, January 2003, p. 5). 
 28 See Exhibit Bra-287 (Market Revenue and US Government Payment to US Upland Cotton 
Producers). 
 29 See Exhibit Bra-287 (Market Revenue and US Government Payment to US Upland Cotton 
Producers). 
 Cents per pound WT/DS267/R/Add.2 
Page I-181 
 
 
Market Revenue and Government Support in MY 2001
0102030405060708090
1cents per poundMLA Payments
PFC Payments
Other Payments
Crop Insurance
Marketing Loan
Cottonseed Revenue Received by U.S. Farmers
Cotton Lint Price Received by U.S. Farmers
 
20. US producers received a total revenue of 79.41 cents per pound,30 only 29.8 cents per pound 
of which was market revenue for upland cotton lint.  At the same time, they faced an average cost of 
production of 76.44 cents per pound.31  Thus, the average US produ cer of upland cotton needed an 
upland cotton or rice PFC and market loss assistan ce payment to break even, while upland cotton 
production on corn or any other crop base acreage would have generated a loss. 
 
21. For MY 2002, average US producers even suffered a loss from upland cotton production on upland cotton base acres
32, let alone corn or other crop base acres, except for rice and peanuts.33  The 
average US upland cotton producer receive d total revenues of 82.96 cents per pound34, while their 
average total cost for MY 2002 was 83.59 cents per pound.35 
 
                                                      
 30 See Exhibit Bra-287 (Market Revenue and US Government Payment to US Upland Cotton 
Producers).  
31 Exhibit Bra-205 (Costs and Revenues of US Upland Cotton Producers). 
 32 Brazil notes that it is not in a position to quantify the effect of the yield update for purposes of the 
counter-cyclical payments and,  thus, likely underestimated the amount of those payments ( See Brazil’s Answer 
to Questions 125 (8)).  With slightly higher counter-cyclical payments than assumed by Brazil, US producers of 
upland cotton might have made a small profit in MY 2002.  
 33 Brazil notes that while evidently some former corn producers had shifted to upland cotton 
production, the fact that they were allowed to update thei r base acres to upland cotton base acres meant that they 
could now receive upland cotton payments ( See Brazil’s Answer to Question 125 (7)).  
 34 See Exhibit Bra-287 (Market Revenue and US Government Payment to US Upland Cotton 
Producers). 
 35 Exhibit Bra-205 (Costs and Revenues of US Upland Cotton Producers). WT/DS267/R/Add.2 
Page I-182  
 
Market Revenue and Government Support in MY 2002
0102030405060708090
1cents per poundCCP Payments
Direct Payments
Other Payments
Cottonseed Payments
Crop Insurance
Marketing Loan
Cottonseed Revenue Received by U.S. Farmers
Cotton Lint Price Received by U.S. Farmers
 
22. The overall conclusion of this analysis is that , on average over the period of investigation, US 
upland cotton producers needed and received upland cotton or rice programme payments to cover (or 
almost cover) their total cost of production.  At the same time, as total reve nue decreased relative to 
the cost of production, US upland cotton acreage increased between MY 1999-2001.36  Because 
upland cotton producers with non-upland cotton or rice base acreage would have lost money (even 
with the subsidies), they would have been forced  to switch out of upland cotton production.  This 
means that the only producers that could remain were  those with upland cotton or rice base.  The fact 
that upland cotton acreage increased through MY 20 01 suggests that only a small portion of upland 
cotton in the United States could have b een grown on non-upland cotton base acres.   
 23. Similarly, in MY 2002, the option to update  the base acreage (and yield for the CCP payment 
programme) allowed those producers that produ ced on non-upland cotton base acres in MY 1998-
2001 to receive the considerably higher upland co tton payments under the 2002 FSRI Act.  Because it 
is not economically sustainable to grow upland cotton on non-upland cotton (-rice or -peanut) base, 
the ability to update suggests that by MY 2002 nearly all US producers grew on upland cotton base.   
 
24. Moreover, the data above indicates that even with subsidies, the average US producers did not 
earn any or, at most, a small profit during MY 1999- 2002.  As Christopher Ward testified, there is a 
strong need to generate profits to stay in the upland cotton business.
37  These profits pay for 
investments in new machinery and technologies, as  well as for losses incurred in years with low 
prices.  But even with large subsidies, US producer s only met their costs.  Without subsidies, they 
were not even able to meet their variable cost in MY 2001. 
 
25. In sum, during most of the period of investigation, US producers of upland cotton needed the high upland cotton payments from the PFC, market loss assistance, direct and counter-cyclical payment programmes to generate sustainable returns (MY 1999), simply break even (MY 2000-
                                                     
 
 36 Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4).  See also Brazil’s Answer 
to Question 125 (6). 
 37 Exhibit Bra-283 (Statement of Christopher Ward – 7 October 2003, para. 10). WT/DS267/R/Add.2 
Page I-183 
 
 
2001), or almost meet their total costs (MY 2002).  It is, therefore, reasonable to assume that the great 
majority of US upland cotton was grown on upland cotton base acres.  
(3)  In calculating the amount of PFC, MLA, direct and counter-cyclical payments that went 
on upland cotton, Brazil made an adjustment for the ratio of current acreage to base acreage 
(see its answer to question 67, footnotes 2, 3, 4 an d 5).  Is this an appropriate adjustment for the 
particular factors referred to abov e?  Why or why not? BRA, US 
 
Brazil’s Answer:
 
 
26. Brazil refers the Panel to its answers to Qu estion 125 (8), Question 125(2)(a), and to Question 
125(2)(c) for Brazil’s arguments why its methodology is reasonable to use in the absence of direct 
evidence collected and controlled exclusively by the United States concerning the amount of those 
payments to upland cotton producers.38  In the absence of such direct  evidence, Brazil has set forth39 
extensive circumstantial evidence that US produ cers of upland cotton received such payments.40   
 
(4)   Dr. Glauber has alleged that there are st atistical problems in comparing planted acres 
to programme acres because of abandonment of crops and also because planted acres are only 
survey estimates, not reported figures (See Exhibi t US-24, the first full paragraph in P2).  
Would it be more appropriate to divide harvest ed acreage by base acreage?  What margin of 
error is there between the survey estim ates and reported figures? BRA, US 
 Brazil’s Answer:
 
 27. The appropriate figures to use for farmers’ decisions on upland cotton acreage are the official 
USDA figures for acres planted to upland cotton.  Dr. Glauber discussed certain programme and 
statistical issues that may have applied in the ear ly 1990s, but which – with the termination of the 
deficiency payment programme from MY 1996 on – are no longer relevant.
41   
 28. The planted acre figures used by Brazil are th e only official USDA data for planted acres of 
crops.  These data are reported by the Farm Service Agency (FSA) in its Fact Sheet on Upland Cotton.
42  Planted acres reflect the choice by farmer s to commit land to upland cotton production by 
cultivating, fertilizing, seeding and applying other in puts during the pre-planting and planting period.  
In some parts of the United States, variable weathe r and other conditions mean that some land that has 
been planted to upland cotton, or to some other crops , is not harvested.  But, there is no question that 
this land was committed at the time of planting to upland cotton production.  Further, once the planting takes place, that decision generally pr ecludes further upland cotton production (or other 
crops) for that marketing year.   
 29. According to USDA’s National Agricultural Statistics Service (NASS), the procedure for 
measuring and reporting planted acres for upland cotton and other crops starts with a June survey of 
planted acres for each crop, which is well after planting commitments for upland cotton have been 
made early in spring.  The June planted acre figures are updated in NASS files each month as 
additional data becomes available.  Revisions in the figures on planted acres are determined in 
December and reported in the Crop Production report each year.  These data include revisions based 
                                                     
 
 38 See also Brazil’s 9 October Closing Statement, para. 2. 
 39 Inferences drawn from this ev idence satisfy Brazil’s burden of proof in the absence of direct 
evidence.  See Panel Report, Argentina – Textiles and Apparel , WT/DS56/R, para. 6.39. 
 40 See Brazil’s 9 October Closing Statement, Annex I for a summary of the evidence and further 
references.  
41 Brazil notes that Dr. Glauber’s assertions were ma de in the context of the acreage reduction and set 
aside requirements under the US deficiency payment programme. 
 42 Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4). WT/DS267/R/Add.2 
Page I-184  
 
on FSA’s certified acreage information.  As Exhibit Bra-288 makes clear, NASS reported the 2003 revisions using FSA information in the Octobe r Crop Production report, rather than waiting until 
December.
43  
 
(5)   Do the acreage reports under section 1105(c) of the FSRI Act of 2002 indicate or assist 
in determining the number or proportion of acres of upland cotton planted on upland cotton 
base acres?  Was there an acreage reporting requirement for upland cotton during MY1996 
through 2002? BRA, US 
 
Brazil’s Answer:  
 
30. The short answer to both of the Panel’s questi ons is “yes”.  Regrettably, the United States has 
refused to provide Brazil or the Panel with the num ber or proportion of acres of upland cotton planted 
on upland cotton base acres for MY 1999-2002, despite  Brazil’s repeated efforts to obtain this 
information over the past year and despite the Pa nel’s Question 67bis, in which the United States 
claimed incorrectly that it did not have access to this information.44   
 31. As implemented, Section 1105(c) of the 2002 FSRI Act requires any recipient of direct and 
counter-cyclical payments to submit, as a conditi on of eligibility of receiving the payments, “annual 
acreage reports with respect to all cropland on the farm”.
45  This means that the precise acreage for 
each crop grown on the farm must be tabulated and identified in an annual report.  Depending on the 
state and the county, these acreage reports are ge nerally due by the middle of each calendar year.46  
 32. In addition to the annual acreage reports, th e 2002 FSRI Act required all farms eligible for 
direct and counter-cyclical payments to file app lication forms establishing and proving their historic 
production of the 10 programme crops.
47  The required information includes the types, amount, and 
yields of all direct and counter-cyclical paym ent base acreages during the period 1998-2001 or 
reference to the earlier PFC base acreage.  All of th ese applications were due no later than 1 June each 
year.48  USDA reported in July 2003 that 99.6 per cent of eligible farms had completed the required 
applications and signed up for the di rect and counter-cyclical programme.49  Farms submitting both 
the annual programme acreage reports and the historic  base-acreage application form were required to 
provide a specific farm identification number.  Th is farm “ID” would appear to permit USDA to 
determine for each reporting farm the annual acreage mix of crops and the amount of direct and 
counter-cyclical base acreage for each one of those crops.  33. With respect to the period 1996-2001, the re gulations under the 1996 FAIR Act required any 
recipient of PFC payments and marketing loans (o r loan deficiency payment) to submit annual 
acreage reports for each of the commodities plan ted for harvest on a farm enrolled in such a 
programme.
50  This reporting requirement was a mandator y condition to receive payment.  It would 
                                                      
 43 Exhibit Bra-288 (“NASS To Update Acreage If Nece ssary,” National Agricultural Statistics Service, 
USDA, 29 September 2003). 
 44 See US 27 August Comments on Brazil’s Rebu ttal Submission and Answer to Question 67bis, 
para. 21 (The United States admitted that it “tracked to tal expenditures,” but denied that it collected or could 
derive the information requested by the Panel).  
 45 Exhibit Bra-29 (Section 1105 of the 2002 FSRI Act) and Exhibit Bra-289 (7 CFR 1412.606) and 
Exhibit Bra-289 (7 CFR 718.102, 2003 edition).  
 46 Exhibit Bra-290 (“Farmers must file acreage to receive 2002 payments,” Kansan Online Ag Briefs, 
second paragraph);  Exhibit Bra-290 (AFBIS Inc. Crop Watch, June 2003).   
47 Exhibit Bra-286 (Direct and Counter-cycli cal Program Contract, Form CCC-509, USDA, 
Commodity Credit Corporation) 
 48 Exhibit Bra-291 (“Direct and Counter-Cyclical Payment Program,” Farm Service Agency, USDA, 
April 2003).  
 49 Annex 2 to Exhibit Bra-105 (National Enrollment Report, USDA, 17 July 2003, last attachment). 
 50 Exhibit Bra-292 (7 CFR 718.102, 2002 edition) WT/DS267/R/Add.2 
Page I-185 
 
 
appear that the United States has collected precise acreage and payment information on (1) farms with 
PFC cotton base acreage, and (2) farms that pro duced upland cotton and r eceived PFC and marketing 
loan payments.  Combined with the specific farm  identification number, this information would 
clearly permit the matching of information on a farm’s crop base acreage and current planting and, thus, the collection of the amount and type of PFC (and market loss assistance) payments made to 
producers of upland cotton between MY 1999-2001.   
 34. In sum, the United States has exclusive cont rol of the information that would provide the 
amount and type of PFC, market loss assistance, direct and counter-cyclical payments made by the US 
Government to US cotton producers during MY 1999- 2002.  The United States also has not provided 
information regarding the amount of updated upla nd cotton direct and counter-cyclical payment base 
acreage, the average yields applying to that (update d) base acreage, or the total amount of direct and 
counter-cyclical payment funds pa id to holders of upland base acr eage for MY 2002.  All of this 
information is exclusively in the control of the United States and was first requested by Brazil over a 
year ago.
51  The Panel first requested this information in August 2003.52  If the United States 
continues to refuse to provide this information, then  Brazil submits that the Panel must either (1) draw 
adverse inferences that the information retained by  the United States reflects greater payments than 
those estimated by Brazil,53 or alternatively, (2) rely on Brazil’s estimate that the payments equal total 
upland cotton base acreage payments times the ratio of upland cotton planted acreage to upland cotton 
base acreage. 
 
(6)  Please prepare a chart showing upla nd cotton base acreage, planted acreage and 
harvested acreage for MY1996 through 2002.  Does the planted acreage fluctuate within a broad 
band?  If not, does this indicate any stability in decisions to plant the same acres to upland 
cotton?  BRA, US  
Brazil’s Answer
: 
 35. Brazil has prepared the requested chart s howing the developments of upland cotton base 
acreage, planted acreage and harvest ed acreage between MY 1996-2002.
54  The chart below shows 
that planted acreage does not fluctuate within a broad band.  Instead, planted acreage fluctuates 
between a low of 13.1 million acres in MY 1998 and a high of 15.5 million acres in MY 2001.55   
 
                                                      
 51 Exhibit Bra-49 (Brazil’s Questions for the Purposes of Annex V Procedure, March 2003) and Exhibit 
Bra-101 (Brazil’s Questions for the Purposes of the Consultations, 22 November 2002)  
52 Question 67bis. 
 53 The Appellate Body in Canada – Aircraft  addressed the issue of drawing adverse inferences from a 
party’s refusal to provide information requested by a panel.  It stated that “a panel has the legal authority and the discretion to draw inferences from the facts before it.”  Moreover, it stated that a panel should examine very 
closely whether the full ensemble  of the facts on the record reasonably permits the inference urged by one of the 
parties to be drawn, because a party’s refusal to collabo rate has the potential to undermine the functioning of the 
dispute settlement system.  Furthermore, the Appellate Body noted that if it had been “deciding the issue that 
confronted the Panel, we might well have concluded that the facts of record did warrant the inference that the information Canada withheld . . . included information prejudicial to Canada’s denial that the EDC had 
conferred a benefit and granted a prohibited export subsidy.”  (Appellate Body Report, Canada – Aircraft , 
WT/DS70/AB/R, para. 205).  
54 Brazil again notes that it is not in a position to provide the updated MY 2002 base acreage, but uses 
the upland cotton PFC base  acreage for that year. 
 55 Exhibit Bra-293 (Dat a for Acreage Chart). WT/DS267/R/Add.2 
Page I-186  
 
Upland Cotton Base, Planted and Harvested Acreage
024681012141618
1996 1997 1998 1999 2000 2001 2002
Marketing YearMil. AcresBase
Planted
Harvested
 
36. Indeed, aggregate producers’ decisions to pl ant upland cotton are fairly stable.  Despite 
drastic changes in upland cotton prices, the amount of planted acres only varies within a narrow range, confirming that US producers are largely isol ated from upland cotton market price incentives.  
The data shown in this chart is also consistent  with Brazil’s argument that most upland cotton was 
planted on upland cotton base acreage.  The amount  of acreage planted to upland cotton always 
remains below  the amount of upland cotton base acreage – a fact that supports Brazil’s assumption 
that upland cotton producers receive pa yments related to upland cotton base.
56   
 (7)  Brazil states that one third of all US farm s with eligible acreage decided to update their 
base acreage under the direct payments and count er-cyclical payments programmes using their 
MY1998-2001 acreage.  What is the proportion  of the current base acreage for upland cotton 
resulting from such updating?  Is the observed updating of base acreage consistent with Brazil's argument that it is only profitable to grow upland cotton on base acreage (and peanut and rice 
base acreage)?  BRA 
 Brazil’s Answer
: 
 37. Regarding the first question, Brazil does not  know the proportion of current base acreage for 
upland cotton resulting from the 2002 updating of the base acreage.  This information is exclusively 
collected and maintained by the United States.  As indicated in answer to Question 125(5), USDA 
required all eligible farms to f ile applications by 1 June 2002 establishing and updating their base 
acreage.  Brazil notes that the United States was quickly able to report that overall 99.6 per cent of 
eligible farms enrolled in the programme.  This suggests that the United States is in possession of 
farm-specific information regarding the percentage of (1) the total amount of upland cotton direct and 
counter-cyclical payment base acreage, and (2) the nu mber of farms growing upland cotton that chose 
to update their base acreage.  Brazil reiterates its request to the United States for this information.
57 
 
                                                      
 56 Brazil has discussed the validity of this assumpti on in its answers to Questions 125 (3) and (8). 
 57 Exhibit Bra-49 (Brazil’s Questions for the Purposes of Annex V Procedure, March 2003) and Exhibit 
Bra-101 (Brazil’s Questions for the Purposes of the Consultations, 22 November 2002) WT/DS267/R/Add.2 
Page I-187 
 
 
38. The answer to the second question is yes.  As indicated in Brazil’ s Answer to Question 
125(2)(c), upland cotton producers would lose money in  MY 2000-2001 (even with the subsidies) if 
they grew upland cotton on anything other than upland cotton or rice base acreage.  The record 
indicates that PFC per acre payments were $30.84 fo r upland cotton and $23.48 per acre for corn in 
MY 2001.58  There were no PFC or market loss payments for peanut base under the 1996 FAIR Act.59  
Testimony from NCC representatives indicated that a number of producers in the south-eastern part of 
the United States grew upland cotton on  corn base acreage during MY 1999-2001.60  NCC 
representatives argued that it would only be “fair” for producers with corn base acreage that had 
switched into upland cotton production to be ab le to update their base acreage to receive upland 
cotton direct and counter-cyclical payments.61  NCC’s efforts were successful, as reflected in the fact 
that under the 2002 FSRI Act, maximum total direct  and counter-cyclical pe r acre payments for 
upland cotton base acreage is $109.50, while for corn it is $54.10 per acre.  This large increase in per 
acre payment for cotton relative to  corn in the 2002 FSRI Act reflects the much higher cost of 
producing upland cotton – and the expectation that historic cotton producers receiving such high 
payments will continue to grow high-cost upland cotton.   
 
39. Given the much higher per acre payments in MY 2002 for upland cotton base acreage, any producer who could gain more upland cotton base acr eage would certainly take advantage of the 
chance to update.  Thus, any increases in the updated upland cotton base in MY 2002 reflect the 
economic incentive to obtain significantly greater additional revenue by switching to upland cotton 
acreage than in staying with historical corn, wheat, oats, barley sorghum and barley acreage.  Finally, 
the higher per acre payments for upland cotton also reflect the squeeze in profits for those cotton 
producers that grew upland cotton in MY 1999-2001 on corn base acreage, as testified to by NCC 
representatives, discussed above.   
(8)  How could one take account of uplan d cotton producers who receive PFC, MLA, direct 
and counter-cyclical payments for other c overed commodity base acreage?  BRA, US 
 
Brazil’s Answer
: 
 40. The best information to use would be th e actual data collected by the United States 
concerning the amount of PFC, MLA, DP, and CCP payments to US upland cotton producers.  In the 
absence of this information, Brazil’s methodology assumes that US producers of upland cotton grew 
upland cotton on upland cotton base acreage.  This is  a reasonable proxy, because there will be some 
upland cotton that is grown on rice (and peanut) base receiving higher payments, and some upland 
cotton that is grown on, e.g., corn base receiving somewhat lower payments.  On average, Brazil’s 
approach would roughly cancel out the over-counting of rice and peanut payments and the under -
counting of corn and any other lowe r-paying programme crop payments.   
                                                     
 
 58 Brazil’s 9 October Closing Statement, Annex 1, para. 31, citing Brazil’s 22 August Rebuttal 
Submission, paras 32-34.    
59 Brazil’s 24 June First Submission, para. 45; Brazil’s 22 August Rebuttal Submission, para. 24 
 60 See NCC testimony quoted in Brazil’s 24 June 2003 First Submission, para. 53 citing Exhibit Bra-41 
(Congressional Hearing, “The Future of Federal Farm Commodity Programs (Cotton),” House of Representatives, 15 February 2001, p.32).   
 
61 “[W]hat has happened is, under Freedom to Farm . . . in the Southeast we moved from corn, like I 
have done, to cotton.  So the last few years we have increased our cotton acreage in Georgia, for instance, to 
about a million and a half acres; we are getti ng [PFC] payments on about 900,000 acres .  [W]e have a 
tremendous production in the Southeast that is not getting a [Market Loss] payment or a regular [PFC] payment.  
So we are recommending . . . to this  committee that a farmer have a choi ce with remaining with his existing 
acreage and yield, or he has an option to move to a modified acreage and yield on his farm or acreage on his 
farm, and this would make this, we think, fair . . . And this happened . . . outside the Southeast, but it is been 
more pronounced in the Southeast than any other section of the Country.” (emphasis added) Exhibit Bra-41 
(“The Future of Federal Farm Commodity Programs (Cotton),” Hearing before the House of Representatives 
Committee on Agriculture, 15 February 2001, p. 32).  Brazil’s 24 June First Submission, para. 53. WT/DS267/R/Add.2 
Page I-188  
 
 
F. PROHIBITED SUBSIDIES 
 
128. Could the US respond to Brazil's assertions relating to the meaning and effect of the 
introductory phrase of Article 3 (“Except as provided in the Agreement on Agriculture ....”)?  
Would the meaning/effect change if Article 13 of the Agreement on Agriculture  did not exist? 
BRA, US  
Brazil’s Answer
: 
 
41. In commenting on the first question direct ed to the United States, Brazil notes that the 
United States argues that the phrase “except as provi ded in the Agreement on Agriculture” necessarily 
means that negotiators intended to carve out bot h domestic local content and export subsidies for 
agricultural products from the disciplines of Article 3 of SCM Agreement.62  But the United States’ 
argument twists the meaning of the phrase “ except as provided”.  The word “except” does not imply 
that there must be something in the Agreement on Agricultu re that carves out the disciplines on local 
content subsidies in the SCM Agre ement.  The phrase only means that if the Agreement on 
Agriculture clearly and unambiguously (i) exempts such agricultural subsidies from the SCM Agreement, or (ii) changes the ob ligations contained in the SCM Agreement, then the provisions of 
the Agreement on Agriculture that conflict with those of the SCM Agreement will prevail.  The 
Appellate Body’s jurisprudence  teaches that it is only where the text clearly and unambiguously 
provides for modified obligations does the “ex cept as provided” language become operational.
63   
 42. In essence, what the United States seeks fro m the Panel is an interpretation that the 
prohibition on local content subsidies does not apply to agricultural goods.  Yet, nothing in the 
Agreement on Agriculture or the SCM Agreemen t provides the carve-out the United States now 
seeks.    43. Brazil agrees that the Agreement on Agriculture constitutes lex specialis as opposed to the lex 
generalis  of the SCM Agreement.  The Agreement on Agriculture applies to a subset of goods 
covered by the SCM Agreement and, in case of c onflicting provisions, the rights and obligations 
contained therein should prevail over those of the SCM Agreement.  Brazil agrees that the 
introductory phrase of Article 3 of the SCM Agreement makes explicit the lex specialis nature of the 
Agreement on Agriculture.    44. However, the US argument goes further than the principle of lex specialis derogat generalis 
as it is normally applied.  The United States wants th e Panel to apply this principle in a way that 
effectively derogates explicit and specific provisi ons of the SCM Agreement whenever the Agreement 
on Agriculture is silent about such provisions .  This is an absurd application of the lex specialis  
principle.  The lex specialis  is to be read together with the lex generalis .  In fact, every effort must be 
made to read the two provisions in a harmonious manner.  The derogation of the lex generalis is 
called for only in situations when an irreconcilabl e conflict between the two texts arises.  It is a 
fundamental tenet of law that absolute contradictions  between laws cannot be presumed;  they must be 
established by a systematic analysis of the texts invo lved to identify any unequivocal incompatibility.  
Such conflict or incompatibility does not exist with re gard to Article 3.1(b) of the SCM Agreement.  
The Agreement on Agriculture specifies no right or obligation that would, by necessity , derogate the 
obligation contained in Article 3.1(b) of the SCM Agreement.  The Appellate  Body and panels have 
                                                     
 
 62 US 30 September Further Submission, para. 171.   
 63 Appellate Body Report, EC – Hormones , WT/DS26/AB/R, para. 128;  Appellate Body Report, EC – 
Bananas , WT/DS27/AB/R, paras. 157-158;  Appellate Body Report, EC – Sardines , WT/DS231/AB/R, 
paras. 201, 208.   WT/DS267/R/Add.2 
Page I-189 
 
 
rightly cautioned against interpretations that woul d exempt disciplines from entire sections of WTO 
agreements in the absence of a clear and una mbiguous carve-out of rights and obligations.64   
 45. Furthermore, the United States’ interpreta tion, which would (permanently) carve out all 
agricultural products from the prohibition of Article 3. 1(b), is contrary to the object and purpose of 
Article 3 of the SCM Agreement.  Negotiators expressed  their intent that local content subsidies are a 
special class of trade-distorting subsidies.  Becau se of their particularly trade-distortive nature, 
negotiators dispensed with the requirement of show ing any adverse effects and made them prohibited 
subsidies.  Given the special prohibited nature of such subsidies – coupled with the ability of 
negotiators to carve such subsidies out explicitly  from the operation of the SCM Agreement – it 
would be expected that any exception from the disciplines would be clear and unambiguous.   
 46. The answer to the second question is “no”.  As Brazil’s earlier submissions have articulated, 
Article 13(b) is not the only basis for Brazil’s argument that the Agreement on Agriculture does not 
carve out agricultural local content subsidies from the Article 3.1(b) prohibition of local content 
subsidies.
65  As Brazil has argued, there is no inherent  conflict between requiring the notification and 
scheduling of payments to processors of agri cultural goods benefiting domestic producers under 
Annex 3, paragraph 7 of the Agreement on Agricult ure and the prohibition on payments to processors 
of agricultural goods that are contingent upon the use of domestic over imported goods.66  
Nevertheless, the absence of any reference to Article  3 of the SCM Agreement in Article 13(b) of the 
Agreement on Agriculture (while a similar reference exists for export subsidies) is consistent with 
Brazil’s other arguments that local content subsidi es for agricultural goods are prohibited subsidies. 
 47. The US interpretation elimin ating any prohibitions on agricultural local content subsidies 
creates a sharp distinction in the way that the ot her group of normally prohibited subsidies – subsidies 
contingent upon export – are treated under the Agreement on Agriculture.  The Agreement on 
Agriculture provides many instances in which expor t subsidies for an individual agricultural product 
may be challenged as prohibited subsidies under the Agreement on Agriculture.  These include 
prohibitions on export subsidies for unscheduled pro ducts, prohibitions on subs idies given to products 
where support is beyond the scheduled reduction co mmitments, and prohibitions on subsidies that 
lead to circumvention of export subsidy reduc tion commitments.  By contrast, under the US 
interpretation of local content subsidies, there will never be an instance in which local content 
subsidies for an individual agricultura l product would ever be prohibited.  
 48. It would be expected that such radically di fferent treatment of local content subsidies would 
be spelled out clearly in the Agreement on Agriculture .  Yet, the only link the United States can find 
to justify its total exclusion of local content prohibited subsidies is the provision in Annex 3, 
paragraph 7 to include local content subsidies – along with the multitude of other types of domestic 
subsidies that are not prohibited subsidies – in the support to be counted for total AMS.  All that 
Annex 3, paragraph 7 stipulates is that AMS calcu lations shall include measures that “benefit the 
producers of the basic agricultural pr oducts”.  Such language contains  nothing that conflicts with the 
obligation established in Article 3.1(b) of the SCM Agreement.  Brazil notes that measures that 
“benefit the producers of the basic agricultural produ cts” may or may not be “contingent upon the use 
of domestic over imported good”.  In both situations these subsidies must be included in AMS 
calculations.  However, when challenged under the DS U, those subsidies that require local content 
                                                     
 
 64 Appellate Body Report, EC – Hormones , WT/DS26/AB/R, para. 128;  Appellate Body Report, EC – 
Bananas , WT/DS27/AB/R, paras. 157-158;  Appellate Body Report, EC – Sardines , WT/DS231/AB/R, paras. 
201, 208;  Panel Report, India – Quantitative Restrictions , WT/DS90/R, para. 5.103. 
 65 Brazil’s 22 July Oral Statement, paras. 84-86;  Brazil’s 11 August Answers to Questions, paras. 215-
217;  Brazil’s 22 August Rebuttal Submission, paras. 131-144.   
 66 Brazil’s 22 August Rebuttal Submission, paras. 137-140 (setting out examples where no such 
conflict would exist).   WT/DS267/R/Add.2 
Page I-190  
 
will be found to violate Article 3.1(b) of the SC M Agreement, and the subsidizing Member will be 
urged to withdraw such measures.    
G. SPECIFICITY/CROP INSURANCE 
 
129. In the event that the Panel does not consid er that the alleged prohibited subsidies fall 
within the provisions of Article 3 and are theref ore, pursuant to Article 2.3, "deemed to be 
specific", are there any other grounds on which Br azil would rely in order to support the view 
that such measures are "specific" within the meaning of Article 2 of the SCM Agreement (see, 
for example, fn 16 of Brazil's further submission)? BRA 
 
Brazil’s Answer : 
 49. Brazil brought prohibited subsidy claims agains t the Step 2 export and domestic payments, as 
well as against the CCC export credit guarantee programmes GSM 102, GSM 103 and SCGP.  
Concerning the latter, only GSM 102 is relevant for Brazil’s serious prejudice claims and, thus, the 
questions of specificity within the meaning of Article 2 of the SCM Agreement only needs to be 
addressed for that subsidy.  50. Step 2 export and domestic payments are de jure specific subsidies because they are only 
available for exporters and dom estic users of upland cotton.
67  Exporters or domestic users of extra-
long staple cotton, any ot her crop or any other produc t are not eligible to receive Step 2 payments.  
Consequently, the United States has notified Step 2 payments as cotton-specific non-green box domestic support.
68  Thus, Step 2 payments are specific with in the meaning of Article 2.1 of the SCM 
Agreement in much the same way as marketi ng loan payments or cottonseed payments. 
 
51. Brazil notes that the Panel’s question raises a hypothetical situation that is highly unlikely 
given the clear export contingency of the GSM 102 export credit guarantee programme.  Unlike the crop insurance programme, GSM 102 export credit guar antees are available for exports of most US 
agricultural commodities.
69  However, GSM 102 support is provided only to enterprises exporting 
agricultural products and, thus, for the reasons set forth in Brazil’s answer to Question 131(a), these 
subsidies are both de jure and de facto specific. 70 
 
130. Does Brazil agree that the US insurance premium subsidy is available in respect of all 
agricultural products?  Please cite relevant portions of the record.  BRA  
 Brazil’s Answer
: 
 
52. Brazil does not agree that the US crop insurance premium subsidy is available in respect of all 
agricultural products.  At the outset, Brazil woul d like to clarify that the US crop insurance 
programme encompasses two different types of subs idies.  First, the US Federal Crop Insurance 
Corporation pays farmers  a portion of the premiums that they have to pay for obtaining crop 
insurance.71  Second, the Federal Crop Insurance Cor poration covers losses under crop insurance 
                                                      
 67 Exhibit Bra-29 (Section 1207(a) of the 2002 FSRI Act) and Exhibit Bra-28 (Section 136(a) of the 
1996 FAIR Act). 
 68 See e.g.  Exhibit Bra-47 (G/AG/N/USA/43, p. 20).  Braz il disagrees with the cl assification of Step 2 
export payments as “domestic support.”  Brazil also considers Step 2 domestic payments to be prohibited local 
content subsidies within the meaning of Article 3.1(b) of the SCM Agreement and Article III:4 of GATT 1994. 
 69 See Brazil’s Comment to Question 142. 
 70 See Brazil’s Answer to Question 131. 
 71 Exhibit Bra-30 (Section 508(e) and Section 508(h)(5)(A) of the Federal Crop Insurance Act).  
Exhibit Bra-59 (“Briefing Room: Farm and Commod ity Policy: Crop Yield and Revenue Insurance”). WT/DS267/R/Add.2 
Page I-191 
 
 
policies that exceed the amount of premiums collected, thus providing free reinsurance for private 
insurance  companies  offering crop insurance.72 
 53. Brazil has demonstrated that crop insurance po licies that are eligible for subsidy payments – 
both premium and reinsurance subsidies – are not availa ble in respect of all agricultural products.  The 
United States claims that crop insurance subsidies ar e and will in the future be available to livestock 
and dairy producers.
73  This assertion is incorrect.  First, it is entirely irrelevant if crop insurance will 
be available to livestock and dairy producers in th e future.  The question that faces the Panel is 
whether the US crop insurance subsidies in MY 1999-2002 are specific, not whether they may at 
some point in the future become less specific.  Br azil demonstrated that except for a very narrow pilot 
programme that began in MY 2002, there were no livestock “crop” insurance policies during MY 
1999-2002.    54. Second, Brazil has demonstrated that crop insurance is currently – in MY 2003 – only available to livestock producers in a limited number of US states and counties.
74  The Adjusted Gross 
Revenue policy cited by the United States75 covers only “incidental amounts of income from animals 
and animal products and aquaculture reared in a controlled environment,” which must not exceed 
“35 per cent of expected allowable income”.76  In addition, this policy is only available for producers 
in a limited number of counties in 18 US states.77  Even making the entirely unrealistic assumption 
that all US livestock in those pilot counties would be eligible for adjusted gross revenue coverage, 
that production78 would only represent 7.58 per cent of the value of total US livestock production.79  
In addition, Brazil has demonstrated that the total value of US livestock and dairy production 
represents 52 per cent of the value of total US agriculture.80  Thus, even taking into account the pilot 
counties for the adjusted gross revenue coverage, at l east 48 per cent of the value of US agriculture is 
excluded from crop insurance subsidy benefits.  
55. Third, the 2000 ARP Act itself e xplicitly limits its application to, inter alia , US crops, and 
does not cover insurance for the production of dairy, beef, poultry, pork and other livestock.
81 
 56. In sum, the US crop insurance subsidies are not available to all US agricultural production. 
 
                                                     
 
 72 Exhibit Bra-30 (Section 508(k) of the Federal Cr op Insurance Act).  For the reinsurance agreement 
standards see Exhibit Bra-39 (7 CFR 400.161 et seq.). 
 73 US 30 September Further Submission, para. 15. 
 74 Brazil’s 7 October Oral  Statement, para. 7. 
 75 Brazil notes that this policy is the only one that is cited by the United States in support of its 
allegation that crop insurance would be available to a ll US agricultural products.  Brazil is not aware of any 
other policy that would enable and in particular enabled US dairy or livestock producers during MY 1999-2002 
to benefit from crop insurance subsidies.  
 76 Exhibit Bra-272 (“Fact Sheet: Adjusted Gross Revenue,” Risk Management Agency, USDA, 
February 2003, p. 1). 
 77 Exhibit Bra-272 (“Fact Sheet: Adjusted Gross Revenue,” Risk Management Agency, USDA, 
February 2003, p. 1,3).  
78 The record shows that most farms are small, and th at many small farms specialize in beef production.  
See Bra-285 (“Agriculture Fact Book 2001-2002, Chapter 3 – American Farms, Figures 3.1 and 3.8).  Therefore, 
these farms could not be eligible under the pilot progra mme because more than 35 pe r cent of their revenue is 
generated from the production of livestock. This suggests that even the figure of 7.58 per cent of total US 
livestock production is a significant overestimate.    
79 Exhibit Bra-271 (Analysis of the Market Value of Livestock in Adjusted Gross Revenue Insurance 
Pilot States and Counties). 
 80 Brazil’s 22 August Rebuttal Submission, para. 59 and Exhibit Bra-177 (“ERS Briefing Room: Farm 
Income and Costs: Farm Income Forecasts”). 
 81 Exhibit Bra-30 (Section 518 of the Federal Crop Insurance Act) contains a list of the “agricultural 
commodities” covered by insurance policies that are subsidized under the Federal Crop Insurance Act. WT/DS267/R/Add.2 
Page I-192  
 
131. How should the concept of specificity – and,  in particular, the concept of specificity to 
"an enterprise or industry or group of enterprises or industries" -- in Article 2 of the SCM 
Agreement  apply to subsidies in respect of agr icultural commodities? Please answer the 
following questions, citing the principles in Article 2 of the SCM Agreement :  BRA, US 
 
(a) is a subsidy in respect of all agricultural, but not other, products specific? 
 (b) is a subsidy in respect of all agricultural crops (i.e. but not to other agricultural 
commodities, such as livestock) specific? 
 
 (c) is a subsidy in respect of certain identified agricultural products specific? 
  (d) is a subsidy in respect of upland cotton, but not other products, specific?   (e) is a subsidy in respect of a certain proportion of the value of total US 
commodities (or total US agric ultural commodities) specific? 
  (f) is a subsidy in respect of a certain proportion of total US farmland specific?  
Brazil’s Answer
: 
 
57. The short answer to Questions 131(a) – (f) is “yes.” 
 58. Brazil’s Further Submission sets forth a deta iled analysis of the legal requirements for de 
facto and de jure specificity (paras. 34-40), demonstrating th e broad agreement between the official 
US interpretation of Article 2 of the SCM Agre ement in the Statement of Administrative Action 
(“SAA”) and the position of Brazil.  Brazil also pr ovided a detailed applicati on of those requirements 
for each of the relevant subsidies (paras. 41-70).  Brazil offers the following additional comments 
below:   59. With respect to Question 131(a), a US subsidy th at is made available to  all enterprises  in the 
industry producing agricultural commodities is specifi c.  As Brazil and the United States agree, the 
purpose of the specificity requirements is to “f unction as an initial screening mechanism to winnow 
out only those foreign subsidies which truly are broadly available and widely used throughout an 
economy ”.
82  The United States’ SAA notes that “all governments, including the United States, 
intervene in their economies to one extent or anot her, and to regard all such interventions as 
countervailable would produce absurd results”.   Among such “absurd results” would be 
countervailing “public highways and bridges, as well as a tax credit for expenditures on capital 
investment even if available to all industries and sectors”.83  After providing these examples, the SAA 
states that “the specificity test was not in tended to function as a loophole through which narrowly 
focused subsidies provided to or used by discret e segments of an economy could escape the purview 
of the CVD law”.84   
 
60. The US subsidies at issue in this  case – including crop insurance – are de jure limited under 
Article 2.1(a) because they “explicitly limit acc ess to a subsidy to certain enterprises”, i.e., those 
producing, using, or exporting either  crops, certain crops, or one crop.85  The US subsidies are also 
de facto specific under Article 2.1(c) because they are u sed by a limited number of enterprises in 
relation to all enterprises and industries making up the US economy.  Only the group of enterprises 
                                                      
 82 Exhibit Bra-148 (“Statement of Administrative Action,” p. 929).  
 83 Exhibit Bra-148 (“Statement of Administrative Action,” p. 929-30).  
 84 Exhibit Bra-148 (“Statement of Administrative Action,” p. 930).  
 85 Brazil’s 9 September Further Submission, paras. 34-70. WT/DS267/R/Add.2 
Page I-193 
 
 
producing agricultural crops is entitled to receive or actually use these subsidies.  All other enterprises 
and all other industries are excluded from the right to r eceive and, in fact, do not use such subsidies.   
 61. The broad diversification of the US economy is a relevant fact for the Panel to consider for 
de facto specificity under Article 2.1(c) (“account shall be taken of the extent of diversification of 
economic activities within the jurisdiction of the gran ting authority”.).  The US SAA indicates that the 
US Department of Commerce should take “account of the number of industries in the economy in 
question” in “determining whether the number of industries using a subsidy is small or large”.
86  The 
US industry growing and producing agricultural produc ts, or even the sub-industry of US producers 
who grow crops, are in the words of the US SAA, “a discrete segment” of the US economy.  The 
value of all US agricultural production of all commodities is only 0.8 per cent of total US GDP.87  
Article 2.1(c) requires a Panel to undertake a “cas e by case” approach to diversification, and Brazil 
believes the approach presented here and endorsed by the US SAA is an appropriate application of the 
provision.  In the case of the United States, there is a multitude of US industries that do not use the US subsidies at issue in this case.  By contrast, in the case of Benin, the agricultural industry represents 
38 per cent of its GDP.
88  For a country like Benin, subsidies to the entire agriculture sector would 
most likely not be considered to be specific because  they are widely available to a large portion of the 
producers within the economy.  No such facts exist fo r the cotton subsidies at issue in this dispute.  
  62. Brazil sees no basis in the text of Article 2 of the SCM Agreement for a different specificity test to be applied to subsidies for the purpose of Part V (countervailing measures) and Part III 
(actionable subsidies) of the SCM Agreement.  Nor does Brazil see any basis to apply a different test 
of specificity for agricultural and other types of g oods and industries – no such distinction exists in 
Article 2 of the SCM Agreement.  For example, wo uld a subsidy provided only to the US automotive 
parts industry (which includes thousands of ente rprises) be specific while a subsidy provided to 
thousands of enterprises producing agricultural crops not be specific?  There cannot be much doubt 
that the US automotive parts industry is a discr ete segment of the US economy, and a discrete 
“industry”.  Brazil (and the US SAA) is of the view that in both these instances, the subsidy would be 
specific.  All of the US subsidies challenged by Brazil are narrowly focused on, at most, a portion of 
the industry producing agricultural products.    63. With respect to Question 131(b), a subsidy that is provided to enterprises producing all 
agricultural crops is specific.  Because the applicable indus try is the one producing all agricultural 
commodities, a subsidy to only enterprises pr oducing crops but not to enterprises producing other 
agricultural commodities is specific.  Brazil notes th e entirely different approach the United States 
now asserts in this case, regarding crop insurance, and the official interpretation offered in the SAA.
89  
While the Panel, of course, is not bound by the unilateral interpretation of  the United States in the 
SAA, Brazil believes that the SAA, in this instance, correctly describ ed the intent of the drafters 
regarding specificity.  The producers of US crops ar e discrete enterprises within a US industry.  None 
of these subsidies is provided to enterprises produci ng other types of agricultural products that make 
up approximately 50 per cent of the value of the US agricultural commodities.90  In the case of crop 
insurance, it is useful to recall that many of the small US farming enterprises – representing 92 per 
cent of US farms – produce livestock, including beef.91   
                                                      
 86 Exhibit Bra-148 (“Statement of Administrative Action,” p. 931).  
 87 Exhibit Bra-269 (“Gross Domestic Product by I ndustry for MY 1999-2001,” Robert J. McCahill and 
Brian C. Moyer, November 2002, p. 36).   
 88 Exhibit Bra-294 (“The World Fact Book – Benin,” CIA, p.6) 
 89 The “SAA thus contains the view of the Administration, submitted by the President to Congress and 
receiving its imprimatur, concerning  both interpretation and applicatio n and containing co mmitments, to be 
followed by future Administration, on which domestic as  well as international actors can rely.” Panel Report, 
US – Section 301 , WT/DS152/R, para. 7.111. 
 90 See Brazil’s Answer to Question 130.  
 91 Exhibit Bra-285 (Agriculture Fact Book 2001-2002, Chapter 3 – American Farms, Figures 3.1 and 
3.8).   WT/DS267/R/Add.2 
Page I-194  
 
 64. In deciding the question, the Panel should also  take into account the significant implications 
of accepting the US arguments that any subsidy pr ovided to all agricultural producers of all 
agricultural commodities would be non-specific.  This interpretation would create a new class of 
trade-distorting agricultural subsidies that are non- actionable.  The United States has always notified 
its crop insurance subsidies as amber box subsidies, i.e., presumptively trade distorting.  And USDA 
economists have found that even lower subsidi es provided by the pre-2000 ARP Act increased US 
upland cotton acreage by 1.2 per cent and US upland cotton exports by 2 per cent.
92  Professor 
Sumner found that the higher subsidies provided by the 2002 ARP Act increased US upland cotton 
acreage by 3.3 per cent, US exports by 3.8 per cent, and decreased world A-Index prices by 1.3 per 
cent on average for each year between MY 2000-2002.93   
 65. The US specificity interpretation would permit,  for example, a Member to provide a revenue 
guarantee to every enterprise producing any agricultu ral commodity to pay for the total cost of 
production plus a reasonable profit margin of 10 pe r cent.  The US interpretation would permit 
Members to make direct payments to every farming enterprise that are tied to a constructed average 
price index for all agricultural products (not individu al prices such as the CCP) and a farmer’s current 
total production.  A Member could also provide free inputs for the production of all agricultural commodities to every enterprise producing any ag ricultural product without that subsidy being 
actionable under Articles 5 and 6 of the SCM Agreem ent.  In short, if the criteria is, as the 
United States argues, that the subsidy only need  be provided to all farming enterprises, then any type 
of trade distorting non-green box domestic subsidy m eeting that universal application criteria would 
escape discipline under the SCM Agreement.    66. The USinterpretation would create a gaping hole in the disciplines of the Agreement on Agriculture and the SCM Agreement.  Such an inte rpretation is clearly inconsistent with the object 
and purpose of the Agreement on Agriculture, which is  to “correct[] and prevent[] restrictions and 
distortions in world agricultural markets”.  It is  inconsistent with the SCM Agreement’s object and 
purpose of disciplining trade-distorting actionable subs idies.  And it is completely inconsistent with 
the interpretation including in  the United States’ SAA.   
 67. With respect to Questions 131(c) and (d), for the reasons set forth above and in Brazil’s 
earlier submissions, a subsidy that is mandated to be provided to only certain enterprises in respect of 
a handful of identified agricultural products (suc h as the 10 “programme” crops of the direct and 
counter-cyclical payment programme) but not pr ovided to most other enterprises within the 
agricultural industry producing crops or agricultura l commodities, is specific under Article 2.1(a) of 
the SCM Agreement.  Similarly, there is de facto specificity because these same subsidies covered by 
the Panel’s questions (c) and (d) are only used by certain enterprises of the overall industry producing 
agricultural commodities (which is the case for a ll the US subsidies except crop insurance and GSM 
102).
94   
 68. Regarding Question 131(e), if  a subsidy is paid only to enterprises that produce or 
manufacture products representing a certain portion of the value of the products of a single industry 
(such as the US industry producing agricultural comm odities), then the subsidy would be specific.  
Evaluating specificity based on the “value” of produc ts produced by a single industry is a useful tool 
for measuring the extent to which the subsidy is provi ded to discrete enterprises within an industry, or 
within an economy.  When many enterprises in th e most highly revenue generating segments of an 
industry do not receive a subsidy – such as  the ab sence of crop insurance for livestock including beef, 
poultry and pork, among others – then the subsidy is  specific because it is only used by a certain 
number of enterprises within the industry.   
                                                     
 
 92 Brazil’s 22 August Rebuttal Submission, paras. 63-64. 
 93 Brazil’s 9 September Further Submission, Annex I, Table 1.5d.   
 94 Brazil’s 9 September Further Submission, paras. 41-61.   WT/DS267/R/Add.2 
Page I-195 
 
 
 69. Finally, with respect to Qu estion 131(f), another tool for evaluating the specificity of a 
subsidy is the amount of total US farmland that receives the subsidy.  The use of “farmland” is a 
rough proxy for the number of enterprises producing agricultural products within the meaning of 
Article 2.1.  For example, only 38 per cent of US farmland is used for the growing of crops (including 
hay) that are eligible for the payment of crop insurance.
95  By contrast, 62 per cent of US farmland is 
used for the production of livestock that, with onl y a few exceptions, is not covered by US crop 
insurance.  When used in conjunc tion with the “value” data discu ssed in Question 131(e) above, this 
acreage data confirms the fact that a number of enterprises within the industry producing agricultural 
commodities do not receive the crop insurance subsidy.  Braz il notes that the United States has not 
contested the use of similar acreage data to dem onstrate the specificity of other US subsidies.96   
 
H. EXPORT CREDIT GUARANTEES 
 
137. Please elaborate the meaning of "net losses" as is used in paragraph 70 of Brazil's 7 
October oral statement. BRA   
Brazil’s Answer
: 
 
70. The term “net losses” was, in the context of an oral  statement, merely a shorthand reference to 
the elements of item (j) – the provision of th e CCC guarantee programmes at “premium rates which 
are inadequate to cover the long-term opera ting costs and losses of the programmes”.   
 71. To prove that the CCC guarantee programmes suffered “net losses” (or in other words meet 
the elements of item (j)), Brazil referred, in pa ragraph 70, to the comparison of cohort-specific 
subsidy figures from the “guaranteed loan subsid y” line of the US budget with cohort-specific 
reestimates from Table 8 of the Federal Credit Supplement
97, summed over the period 1992-2002 to 
determine the performance of the CCC programmes over the long term.  72. Whether starting with the cohort-specific subs idy figure from the budget year column of the 
US budget or with the cohort-specific subsidy figure from the prior year column of the US budget, the 
result of this exercise is a positive subsidy number.
98  The CCC arrives at the very same result in its 
2002 financial statements.  Specifically, the 2002 financial statements provide a cumulative subsidy 
figure for all post-1991 CCC guarantees, taking account of all adjustments for defaults, fees and 
reestimates undertaken for all cohorts in all years through 2002.  This exercise results in a cumulative 
                                                      
 95 Exhibit Bra-143 (Agricultural Statistics 2003, Natio nal Agricultural Statistics Service, USDA.  Table 
IX-6;  See also  Summary of Business Application, Risk Ma nagement Agency.  USDA.  Accessed 21/10/03, 
http://www3.rma.usda.gov/apps/sob/   Based on the 1997 census (the most recent year), the total land in farms is 
968,338,000 acres; the total cropland used for crops was 348,701,000 acres; idle cropland and grassland pasture 
was 580,165,000 acres;  the number of acres insured on rangeland, forage seed, forage production, alfalfa seed 
(i.e., crops that could be grown on grassland pasture) was 12,575,000 acres.  If cropland not used for crops was 
included, then the total amount of acr eage not producing insured commoditie s would be 58.61 per cent and the 
total amount of acreage used to produce insured (or potentially insured) commodities under the 2002 ARP Act 
would be 41.39 per cent.  Brazil notes that this does not include any reference to the recent pilot programs 
discussed elsewhere. However, the percentages would not change to any great extent if such acreage were 
included, given the 35 per cent limit on livestock imposed by the crop insurance program.     
96 See Brazil’s 9 September Further Submission, paras. 43-61 (discussion of specificity regarding PFC, 
MLA, DP, and CCP subsidies).   
 97 Table 8 of the 2004 Federal Credit Supplement is included at Exhibit Bra-182. 
 98 Brazil has offered calculations using the cohort -specific subsidy estimat e from the budget year 
column of the US budget (para. 115  of Brazil’s 22 August Rebuttal Submission), and using the cohort-specific 
subsidy estimate from the prior year colu mn of the US budget (Exhibit Bra-193). WT/DS267/R/Add.2 
Page I-196  
 
positive subsidy figure of $411 m illion for the period 1992-2002.
99  The Panel will recall that under 
the Federal Credit Reform Act, when “payments from” the government exceed “payments to” the 
government on a net present value basis, a positive subsidy results, meaning that CCC is “los[ing] 
money”.100 
 
73. Brazil has explained that the FCRA cost form ula is one way to determine the performance of 
the CCC export credit guarantee programmes relative to th e elements of item (j).  Application of the 
formula demonstrates that over the period 199 2-2002, CCC guarantees under the GSM 102, GSM 103 
and SCGP programmes were provided “at premium rat es which are inadequate to cover the long-term 
operating costs and losses of the programmes.”   
 
74. The United States objects to the appropriate ness of the FCRA formula as a proxy for the 
analysis required by item (j).101  The United States’ objection is b ased on the fact that re-estimates are 
still being undertaken for all CCC guarantee co horts during the period 1992-2002.  Brazil has 
therefore also offered a number of other methods to confirm that operating costs and losses for the 
CCC guarantee programmes outpace premiums collected during the period 1992-2002102, or in other 
words, that the CCC guarantee programmes suffer ed “net losses” over that long-term period. 
 
138. Please comment on Brazil’s views stated in paragraph 70 of its 7 October oral statement. 
US  
Brazil’s Comment
: 
 75. Brazil notes an inadvertent error in paragraph 70 of its 7 October Oral Statement.  Exhibit 
Bra-193 does indeed compare cohort-specific reestim ates to cohort-specific subsidy figures from the 
prior year column of the US budget.  However, the comparison of cohort-specific reestimates to 
cohort-specific subsidy figures from the budget year co lumn of the US budget is reflected in the table 
at paragraph 115 of Brazil’s 22 August Rebuttal Submission, rather than in Exhibit Bra-192. 
 76. In Exhibit Bra-192, Brazil subtracted downward reestimates from and added upward 
reestimates to the original subsidy figure included in the budget year column of the “guaranteed loan 
subsidy” line of the annual US budget. 
 
139. In the context of export credit guarantees,  is the Panel correct in understanding that 
Brazil's claims of inconsistency with the Agriculture Agreement  involve GSM 102, GSM 103 and 
SCGP, but that it limits its "serious prejudice" allegations in respect of export credit guarantee programmes to the GSM 102 programme, and does not challenge GSM 103 and SCGP in this 
respect?  If so,  
 (a) could Brazil please explain why it did so, a nd confirm that all the data relied upon in its 
further submissions (e.g. in Table 13) relat e to the GSM 102 programme rather than to 
GSM 102, GSM 103 and SCGP (and, if the data n eeds to be adjusted to take account of 
a narrower "serious prejudice" focus, supply GSM-102-relevant data)?  BRA 
 
                                                     
 
 99 Exhibit Bra-158 (US Department of Agriculture, Office of Inspector General, Financial and IT 
Operations, Audit Report, “Commodity Credit Corporation’s Financial Statements for Fiscal Year 2002”, Audit 
Report No. 06401-15-FM (December 2002), Notes to the Financial Statements, p. 19).  
100 Exhibit Bra-121 (US General Accounting Office, Report to Congressional Committees, “Credit 
Reform:  US Needs Better Method for Estimating Cost of Foreign Loans and Guarantees,” GAO/NSIAD/GGD-
95-31, December 1994, p. 20)).   For the FCRA formula, see Exhibit Bra-117 (2 U.S.C. § 661a(5)(c)). 
 101 US 22 August Rebuttal Submission, para. 162. 
 102 Brazil’s 11 August Answers to Panel Questions , paras. 163-168; Brazil’s 22 August Rebuttal 
Submission, para. 109. WT/DS267/R/Add.2 
Page I-197 
 
 
77. The Panel is correct in understanding that Br azil’s serious prejudice claims involve only GSM 
102.  All tables and figures that make reference to export credit guarantees in the context of Brazil’s 
serious prejudice claims represent data on GSM 102 only.  The reason that Brazil’s serious prejudice claims do not cover GSM 103 and SCGP is that ei ther no cotton allocations were made under the 
programme (GSM 103 for most of the marketing years covered by the period of investigation) or that 
only negligible amounts of cotton were exported un der the programme (SCGP and – if exports took 
place – GSM 103).
103  Almost all US upland cotton exports that benefited from a CCC export credit 
guarantee were covered by the GSM 102 programm e.  Thus, the only CCC export credit guarantee 
programme that significantly contributed to the upland cotton-related serious prejudice suffered by 
Brazil was the GSM 102 programme.  Consequently, Brazil has excluded GSM 103 and SCGP from 
its serious prejudice claims. 
 78. However, Brazil has included GSM 102, GSM 103 and SCGP in its export subsidy claims 
under the Agreement on Agriculture and the SCM Ag reement.  All three CCC export credit guarantee 
programmes constitute export subsidies within the meaning of Articles 10.1, 8 and 1(e) of the 
Agreement on Agriculture and Articles 1 and 3.1(a) of the SCM Agreement, and fulfil the criteria of 
item (j) of the Illustrative List of Export Subsid ies attached as Annex I to the SCM Agreement. 
 
(b) for the purposes of Article 13(c)(ii) of the Agreement on Agriculture , is it necessary for 
the Panel to examine only GSM 102 or should the Panel's examination include also GSM 103 and SCGP? Why or why not?  BRA 
 79. The Panel needs to examine all three progra mmes under Article 13(c)(ii) of the Agreement on 
Agriculture.  This provision exempts export subsidies from actions based on Article XVI of GATT 1994 and Articles 3, 5 and 6 of the SCM Agreement.  Brazil has brought claims under Article XVI of 
GATT and Articles 5 and 6 of the SCM Agreemen t against CCC’s GSM 102 export credit guarantee 
programme.  Thus, to properly address these claims , the Panel needs to determine whether the GSM 
102 programme fully conforms to the provisions of Part V of the Agreement on Agriculture, within 
the meaning of Article 13(c)(ii) of that Agreement.  80. In addition, Brazil has brought claims under Article 3.1(a) of the SCM Agreement against 
CCC’s GSM 102, GSM 103 and SCGP export credit gu arantee programmes.  To properly address 
these claims, the Panel needs to determine wh ether the GSM 102, GSM 103 and SCGP programmes 
fully conform to the provisions of Part V of th e Agreement on Agriculture, within the meaning of 
Article 13(c)(ii) of that agreement.  81. To demonstrate that CCC’s GSM 102,  GSM 103 and SCGP programmes do not fully 
conform to the provisions of Part V of the Agreem ent on Agriculture, Brazil has established that GSM 
102, GSM 103 and SCGP constitute export subsidies and violate Artic les 10.1 and 8 of the Agreement 
on Agriculture by circumventing or threatenin g to circumvent US export subsidy reduction 
commitments.  The programmes, thus, do not conform fully to the provisions of Part V of the Agreement on Agriculture.  
 
140. Could Brazil explain how, if at all, it has treated export cred it guarantees for the 
purpose of Table 1 of its further submission? BRA   
82. Brazil has not included GSM 102 for the purpose of Table 1 of its Further Submission.  While Brazil has demonstrated that GSM 102 export credit guarantees constitute export subsidies within the 
meaning of the Agreement on Agriculture and the SCM Agreement
104, Brazil is not in a position to 
quantify the benefit to the recipients  that has arisen from the application of the GSM 102 export credit 
                                                      
 103 Exhibit Bra-73 (Summary of Export Credit Guarantee Programs FY 1999-2003). 
 104 Brazil’s 22 August Rebuttal Submission, para. 102-110 WT/DS267/R/Add.2 
Page I-198  
 
guarantee programme to exports of US upland co tton between MY 1999-2002.  Brazil has no data – 
nor has the United States provided any – that would en able it to calculate the benefit involved in the 
GSM 102 transactions.
105 
 83. However, the National Cotton Council, whic h represents the industry benefiting from the 
GSM 102 programme, has provided what appears to be  a reasonable estimate of the benefits to US 
upland cotton producers, users and exporters.  The se benefits are significant enough to generate an 
additional 500,000 bales of US upl and cotton exports per year and to raise domestic US prices by 
3 cents per pound.
106   
 
84. Having proven the export subsidy characte r of the GSM 102 programme, as well as having 
proven the production and export- enhancing as well as A-Index-suppressing effects of the 
programme107, Brazil has met its burden of proof under Articles 5 and 6.3 of the SCM Agreement and 
GATT Article XVI to establish that the GSM 102 pr ogramme causes serious prejudice to the interests 
of Brazil. 
 
141. The Panel notes the US argument, inter alia  in its further submission, that the export 
credit guarantee programmes are "self-sustaining".  Recalling that item (j) of the Illustrative 
List of Export Subsidies in Annex I of the SCM Agreement  refers to "premium rates", could the 
US expand upon how it takes into account the premium rates for the export credit guarantee 
programmes in its analysis.  US 
 
Brazil’s Comment:  
 85. As Brazil has argued elsewhere, the Unite d States cannot make a showing that the CCC 
guarantee programmes do not constitute e xport subsidies by appealing to an a contrario interpretation 
of item (j), since item (j) does not admit of an a contrario  defense.
108   
 86. Even if item (j) does admit of an a contrario defense, proving that  the CCC programmes are 
“self-sustaining” is not enough.  Were an a contrario defense possible, it would require the 
United States to demonstrate that over a period constituting the long term, “premium rates” are adequate to cover operating costs a nd losses, which include but are not lim ited to “claims or defaults”.  
In contrast, the United States has argued that it is sufficient to show that “claims or defaults” do not 
exceed “revenue from whatever source it may be derived”.
109  “Revenue from whatever source it may 
be derived” gives credit to the United States for re venue that is not recognized as relevant for the 
purposes of item (j), and “claims or defaults” ignor es “operating costs and losses” that are relevant for 
the purposes of item (j).110 
  
87. As a factual matter, Brazil quite evidently do es not agree that the premium rates for the CCC 
programmes meet their long-term operating cost s and losses.  Brazil has presented voluminous 
quantitative data demonstrating that long-term operating costs and losses incurred by the CCC 
programmes outpace premiums collected.  Brazil has also provided statements from the USDA 
Inspector General111  and the US General Accounting Office112 establishing that CCC’s failure to 
                                                      
 105 However, Brazil has established that GSM 102 guarantees confer benefits per se , since there is no 
comparable commercial instrument available in the marketplace.   
 106 See also Brazil’s Answer to Question 143. 
 107 Brazil’s 9 September Further Submission, paras. 184-192. 
 108 Brazil’s 11 August Answers to Panel Questions, paras. 143-149. 
 109 US 11 August Answers to Panel Questions, para. 145. 
 110 See Brazil’s 11 August Answers to Panel Questions, para. 162; Brazil’s 22 July Oral Statement, 
paras. 122-123.  
111 Exhibit Bra-153 (US Department of Agriculture Office of Inspector General Financial and IT 
Operations Audit Report of the Commodity Credit Corporation’s Financial Statements for Fiscal Year 2000, 
Audit Report No. 06401-14-FM (June 2001), p. 31 (“ [T]he fees CCC charges for its GSM-102 and GSM-103 WT/DS267/R/Add.2 
Page I-199 
 
 
account for country risk or the credit rating of th e borrower in setting guarantee fees means that CCC 
is charging “premium rates” that do not allow it to  cover its operating costs and losses over the long-
term.  
142. The US has pointed out that there are ma ny limitations on granting export credit 
guarantees and that there is no requirement to issue any particular guarantee (US further 
submission, paras 153-156).  Can the Commodity C redit Corporation declin e to grant an export 
credit guarantee even in cases where the programme conditions are met?  US 
 
Brazil’s Comment
: 
 
88. No, the CCC cannot decline to grant an e xport credit guarantee even in cases where the 
programme conditions are met.  The CCC cannot “stem [], or otherwise control[], the flow of” CCC 
export credit guarantees.113  The CCC export credit guarantee progr ammes therefore threaten to lead 
to (and in fact have led to) circumvention of the United States’ export subsidy reduction 
commitments, within the meaning of Arti cle 10.1 of the Agreement on Agriculture. 
 89. Under the Budget Enforcement Act of 1990 , the US Office of Management and Budget 
classifies the CCC export credit guarantee programmes as “mandatory”.
114  Mandatory programmes 
like the CCC export credit guarantee programmes are exempt from the requirement in US law that a 
programme receive new Congressional budget author ity before it undertakes new loan guarantee 
commitments.115  As the Congressional Budget Office has noted, support via mandatory programmes 
like the CCC export credit guarantee programmes “mus t be available to all eligible borrowers”, 
without regard to appropriations limits.116  The Congressional Research Service has similarly stated 
that “[e]ligibility for mandatory programmes is written into law, and any individual or entity that 
meets the eligibility requirements is entitled to a payment as authorized by the law ”.117   
 
90. The fact that the CCC can de ny guarantees to individuals who do not meet the eligibility 
criteria does not, of course, affect the conclusion th at CCC cannot “stem[], or otherwise control[], the 
flow of” CCC export credit guarantees.118  The United States’ FSC measure had eligibility criteria, but 
                                                                                                                                                                     
export credit guarantee programmes have not been changed in 7 years and may not be reflecting current costs”.).  
Exhibit Bra-154 (US Department of Agriculture Office of Inspector General Great Plains Region Audit Report of the Commodity Credit Corporation’s Financial Statemen ts for Fiscal Year 2001, Audit Report No. 06401-4-
KC (February 2002), p. 49 (“[T]he fees CCC charge d for its GSM-102 and GSM- 103 export credit guarantee 
programmes have not been changed for many years and may not be reflecting current costs”.).  
112 Exhibit Bra-181 (US General Accounting Office, Report to the Ranking Minority Member, 
Committee on Agriculture, Nutrition, and Forestry, US Senate, “Former Soviet Union: Creditworthiness of 
Successor States and US Export Credit Guarantees,” GAO/GGD-95-60 (February 19 95), p. 135-136).  At 
paragraph 110 of its 22 August Comments on US Answers, Brazil included an extract from this General 
Accounting Office study demonstrating that CCC’s low premium rates do not allow it to cover its costs and 
losses, and that the CCC programmes do not meet non-market , let alone market , benchmarks. 
 113 Appellate Body Report, US – FSC , WT/DS108/AB/R, para. 149. 
 114 Exhibit Bra-295 (2004 US Budget, Federal Cr edit Supplement, Introduction and Table 2 (CCC 
Export Loan Guarantee Programme classified as “Manda tory” in Table 2, and in the “Introduction”, the Office 
of Management and Budget states that Table 2 provides  “the programme’s BEA classification under the Budget 
Enforcement Act (BEA) of 1990 as discretionary or mandatory”). 
 115 See Exhibit Bra-117 (2 U.S.C. § 661(c)(2)). 
 116 Exhibit Bra-185 (Congressional Budget Office Staff Memorandum, “An Explanation of the 
Budgetary Changes under Credit Reform”, April 1991, p. 7).  See also  Id., Table 2, which verifies that the CCC 
export credit guarantee programmes are “mandatory” programs.  Braz il notes that this does not mean that the 
CCC programmes do not receive appropriations.  The United States ack nowledges in its 11 August Answer to 
Question 11 that the CCC progra mmes receive appropriations. 
 117 Exhibit Bra-186 (Congressional Re search Service Issue Brief for Congress, “Agriculture and the 
Budget”, IB95031 (16 February 1996), p. 3 (emphasis added)). 
 118 Appellate Body Report, US – FSC , WT/DS108/AB/R, para. 149. WT/DS267/R/Add.2 
Page I-200  
 
the Appellate Body still concluded that nothing in the measure “stem[ ed], or otherwise control[led], 
the flow of” FSC benefits, leading to a threat of  circumvention of the United States’ export subsidy 
reduction commitments.
119 
 91. The entitlement that qualified applicants ha ve to CCC guarantees is not curtailed by the 
requirement in US law that CCC not make availabl e guarantees to countries that cannot adequately 
service debt.
120  That CCC has the authority to deny guaran tees on this basis is not relevant, for at 
least three reasons.  92. First, under the United States’ FSC measure, US authorities were permitted to undertake a 
factual enquiry into whether the foreign-source in come of the foreign corporation was “effectively 
connected with the conduct of a trad e or business within the United States”.
121  This authority, and the 
possibility that the factual enquiry could limit the amount of income that would qualify for the FSC 
exemption, did not prevent the Appellate Body from concluding that nothing in the FSC measure 
“stem[ed], or otherwise control[led], the flow of” FS C benefits, leading to a threat of circumvention 
of the United States’ export s ubsidy reduction commitments.122  Similarly, the authority that CCC has 
to undertake an enquiry into whether particular count ries are creditworthy, and the possibility that this 
enquiry could end up reducing the amount of CCC guarantees, does not prevent a conclusion that 
nothing “stem[s], or otherwise control[s], the flow of” CCC guarantees.  (Brazil notes that, in any event, a conclusion by CCC that a particular country  is not creditworthy would not necessarily reduce 
the threat of circumvention, since nothing prevents CCC from simply reassigning the country’s 
allocation to a country that is creditworthy.) 
 93. Second, as Brazil has previously noted,  the US General Accounting Office (“GAO”) 
concluded that the requirement that CCC not ma ke available guarantees to countries that cannot 
adequately service debt does not remotely curtail CC C’s extension of its guarantees.  According to the 
GAO, “the statute does not place any limit on the amount of guarantees that can be provided each year 
to high-risk countries in aggregate or individually”.
123  Thus, the theoretical possibility to halt support 
to non-creditworthy countries does not “stem[], or otherwise control[],” the flow of CCC guarantees.
124  
 94. Third, CCC is not concerned enough about creditworthiness to vary its fees based on the 
country risk involved.
125  Nor does US law require the CCC to take account of the creditworthiness of 
individual guarantee recipients  in the fee charged.  In fact, CCC fees expressly do not take account of 
the credit rating of an individual borrower.126  Thus, even if CCC finds a country to be creditworthy, it 
is not compensated for particularly poor individual credit risks.  
95. Nor is the entitlement that qualified appli cants have to CCC guarantees curtailed by CCC’s 
ability to adopt product- and country-specific alloca tions for its export credit guarantee programmes.  
Although CCC adopts initial allocations at the outset of a fiscal year, it generously increases those 
allocations as needed.  In its announcement of in itial allocations for fiscal year 2004, for example, 
which extends $2.8 billion in allocations fo r CCC guarantees, USDA st ated that CCC will 
subsequently make additional allo cations throughout the year that will bring total 2004 allocations to 
                                                     
 
 119 Appellate Body Report, US – FSC , WT/DS108/AB/R, para. 12. 
 120 See US 30 September Further Submission, para. 154. 
 121 Appellate Body Report, US – FSC , WT/DS108/AB/R, para. 16. 
 122 Appellate Body Report, US – FSC , WT/DS108/AB/R, para. 149. 
 123 Exhibit Bra-181 (US General Accounting Office, Report to the Ranking Minority Member, 
Committee on Agriculture, Nutrition and Forestry, US Senate, “Former Soviet Union: Creditworthiness of 
Successor States and US Export Credit Guarant ees,” GAO/GGD-95-60 (F ebruary 1995), p. 7). 
 124 Appellate Body Report, US – FSC , WT/DS108/AB/R, para. 149. 
 125 Brazil’s 22 August Comments on US Answers, paras. 109, 112. 
 126 Brazil’s 22 August Comments on US Answers, paras. 109, 112. WT/DS267/R/Add.2 
Page I-201 
 
 
more than $6 billion.127  Browsing the archived list of USDA press releases announcing supplemental 
allocations extended throughout fiscal year 2003,128 for example, demonstrates that this is exactly 
what CCC does – it increases allocations as needed.  As  noted above, CCC is not required to receive 
new Congressional budget authority before it underta kes these additional allocations.  In fact, 
Congress requires CCC to make available at least  $5.5 billion in guarantees – it does not put a ceiling 
on the amount to be granted.129  The allocation process does not “stem[], or otherwise control[]”, the 
flow of CCC export credit guarantees.130  In fact, it enables CCC to increase the guarantees it can 
provide.  96. Nor does CCC’s ability to adopt product-specifi c allocations for its export credit guarantee 
programmes mitigate the significant threat, under Artic le 10.1 of the Agreement on Agriculture, that 
the United States will surpass its agricultural export subsidy reduction commitments by virtue of the CCC export credit guarantee programmes.  This thr eat implicates both unscheduled and scheduled 
agricultural commodities.  
97. For unscheduled products, the ability to adopt  allocations is irrelevant.  Since CCC export 
credit guarantees are available  for unscheduled products
131, the threat of circumvention of the US 
reduction commitments is tangible, a nd the United States is in violation of Article 10.1.  As Brazil has 
previously noted, the Appellate Body held that for unscheduled products, it is inconsistent with 
Article 10.1 to provide any export subsidies.132  Moreover, the record dem onstrates that the threat has 
materialized, since CCC gu arantees have been extended to unsch eduled products during, for example, 
1999-2003.133 
 98. For scheduled products, the process of adop ting product-specific allocations for CCC export 
credit guarantee programmes does not mitigate the threat of circumvention – or does not “stem[], or otherwise control[]”, the flow of CCC export credit guarantees – for at least three reasons.
134 
 
99. First, as the list of allocations included in the programme activity report for fiscal year 2003 
demonstrates135, most allocations are only made on a c ountry-specific basis, and not on a product-
specific basis.  In fact, less than 8 per cent of the allocations listed on the 2003 programme activity 
                                                      
 127 Exhibit Bra-296 (“USDA Announces $2.8 Billion in  Export Credit Guarantees,” FAS Press Release, 
30 September 2003). 
 128 See http://www.fas.usda.gov/ex credits/exp-cred-guar.asp .   
 129 Exhibit Bra-297 (7 U.S.C. § 5641(b)(1); 7 U.S.C. § 5622(a), (b)). 
 130 Appellate Body Report, US – FSC , WT/DS108/AB/R, para. 149. 
 131 Exhibit Bra-298 ( “USDA Ame nds Commodity Eligibility under Credit Guarantee Programmes”, 
FAS Press Release, 24 September 2002).  Exports of unsc heduled agricultural products that are eligible for CCC 
export credit guarantee coverage  include:  barley malt a nd barley extract, corn products, cotton (including cotton 
yarn, cotton fabric, cotton products, including cotton linters), fish and shellfish, fresh and dried fruits (including apples, apricots, avocados, blueberries , cherries, clementines, dates, figs, grapefruits, grapes, kiwi, watermelons, 
cantaloupe, honeydrew, nectarin es, oranges, peaches, pears, plums, prune s, raisins, raspberries, strawberries, 
tangerines and mixtures thereof), fruit and vegetable concentrates, 100 per cent fruit juices, hay, hides and skins, honey, soybean protein products, vegetables (including asparagus, beans, broccoli, carrots, cauliflower, celery, 
garlic, lettuce, mushrooms, onions, peas, peppers, potatoes, spinach, squash, sweet corn, tomatoes, and mixtures 
thereof), wood products (including lumber etc.), wool (including wool fabrics, wool yarn and mohair), worms. 
 
132 Appellate Body Report, US – FSC , WT/DS108/AB/R, para. 150. 
 133 Exhibit Bra-299 (“Summary of FY 2003 Export Credit Guarantee Programme Activity”, USDA, 
covering GSM-102, GSM-103 and SCGP).  For 1999-2002, s ee also Exhibit Bra-73 (“Summary of Export 
Credit Guarantee Programme Activity”, USDA, covering GSM 102, GSM 103 and SCGP for US fiscal years 
1999-2003).  
134 See also Brazil’s 24 June First Submission, paras. 300-301. 
 135 Exhibit Bra-299 (“Summary of FY 2003 Export Credit Guarantee Programme Activity”, USDA, 
covering GSM-102, GSM-103 and SCGP). WT/DS267/R/Add.2 
Page I-202  
 
report are product-specific.
136  The press release announcing initia l allocations for 2004 contains no 
product-specific allocations.  These allocations do not “stem[], or otherwise control[], the flow of” 
CCC export credit guarantees in a way that would curb th e threat that they will be used to surpass the 
United States’ export subsidy reduction commitments for scheduled products.137 
 
100. Second, the allocations are made on a monetary  basis, which provides virtually no assurance 
that the United States will not surpass its quantitative  export subsidy reduction commitments.  This 
might not happen for all scheduled products in all year s, but the threat that it will happen is tangible.  
Rice provides a good example.  Based on the monetary  amounts of exporter applications received for 
the CCC programmes, US export data, and averag e world prices, CCC guarantees to support US rice 
exports caused the United States to surpass its qua ntity export subsidy reduction commitments in 
fiscal years 2001, 2002 and 2003.138  (Even if monetary allocations were relevant, nothing limits the 
amount of funds that can be allocated.  The CCC pr ogrammes operate without the constraints of the 
appropriations process, and Congress requires that CCC make available a minimum  of $5.5 billion in 
export credit guarantees.) 
 
101. Third, the United States’ schedule demonstrat es that the CCC export cr edit guarantees are not 
the only subsidies available to support exports  of scheduled commodities.  Combining CCC 
guarantees with these other export subsidies augments the threat that the United States will exceed its 
export subsidy reduction commitments.  
102. In summary, the CCC cannot “stem[], or otherwise control[], the flow of” CCC export credit 
guarantees.
139  None of the factors mentioned by the United States stem the flow of those guarantees, 
which CCC cannot decline to grant in cases where the programme conditions are met.  The CCC 
export credit guarantee programmes therefore threat en to lead to (and in fact have led to) 
circumvention of the United Stat es’ export subsidy commitments, within the meaning of Article 10.1 
of the Agriculture Agreement. 
 103. With respect to its claims under the SCM Ag reement, Brazil notes that  even if the CCC had 
the discretion not to grant export credit guarantees in cases where the programme conditions are met, it would not affect Brazil’s claim that the guarantees confer benefits per se .  As Brazil has discussed 
elsewhere, since CCC export credit guarantees from the GSM 102, GSM 103 and SCGP programmes 
are unique financial instruments for agricultural co mmodity transactions that are not available on the 
commercial market (certainly not for terms longe r than the marketing cycles of the eligible 
commodities), each time they are granted, they confer benefits within the meaning of Article 1.1(b) of 
the SCM Agreement.  143. Brazil agrees with National Cotton Counc il estimates of the effects of the GSM 102 
programmes (Brazil's further submission, para. 190) but it also cites a different conclusion by Prof. Sumner (paragraph 192).  Brazil cites other estimates by Prof. Sumner throughout its further submission.  Does Brazil adopt Prof. Sumn er's conclusions and estimates as part of its 
submission?  BRA  
104. Brazil considers both the National Cotton Counc il’s and Professor Sumner’s estimates as 
independent parts of the record that demonstrate the serious prejudice caused by the GSM 102 programme to the interests of Brazil.  The NCC has a staff of expert economists (including the former 
                                                     
 
 136 Exhibit Bra-299 (“Summary of FY 2003 Export Credit Guarantee Programme Activity”, USDA, 
covering GSM 102, GSM 103 and SCGP (Total GSM 102, GSM 103 and SCGP allocations for fiscal year 2003 
are listed as $6.025 billion, with product-specific alloca tions as follows:  $370 million of GSM 102 guarantees 
to Korea; $85 million of GSM 102 guarantees to Pakist an; and, $10 million of GSM 102 guarantees to Tunisia). 
 137 Appellate Body Report, US – FSC , WT/DS108/AB/R, para. 149. 
 138 Exhibit Bra-300 (Calculation on US Rice Exports Benefiting from GSM 102, GSM 103 and SCGP). 
 139 Appellate Body Report, US – FSC , WT/DS108/AB/R, para. 149. WT/DS267/R/Add.2 
Page I-203 
 
 
director of the FAPRI cotton model) and has tes tified to Congress that the effects of the GSM 102 
programme increase annual US cotton exports by 500,000 bales and have a 3-cent per pound price 
effect.140  Brazil has no reason to doubt the accuracy and reliability of the sworn NCC testimony to the 
US Congress.  
105. Professor Sumner has based his analysis of the effects of the GSM 102 export credit 
guarantee programme on the earlier work by the National Cotton Council.  Professor Sumner has modelled the impact of the GSM 102 export credit guarantee programme as a shift out of the demand 
curve for US upland cotton by 500,000 bales.
141  Brazil believes that the resulting lower estimates of 
the effects of the GSM 102 programme offered by Professor Sumner are yet another illustration of the 
conservative (and reasonable) nature of his model. 
 106. In response to the Panel’s Question, Prof essor Sumner has rerun the model analyzing the 
results of a fixed 500,000 bales export effect rather  than a shift out of the demand curve by that 
amount.  His original results showed an average annual 305,000 bales export-increasing effect for MY 
1999-2002.
142  But the assumption of a fixed 500,000 bale export-increasing effect from the GSM 102 
programme results in an average world price e ffect between MY 1999-2002 of 0.928 cents per pound 
(or 1.80 per cent) compared to 0.57 cents per pound (or 1.12 per cent) estimated under the previous 
assumption.143  For the period MY 2003-2007 the average world price effect would be 1.07 cents per 
pound or 1.93 per cent compared to the 0.53 cents per pound or the 0.96 per cent estimated previously.
144   
 
107. Brazil has submitted the analysis of Pr ofessor Sumner along with results from other 
economists and other evidence throughout its submi ssions.  The Panel should consider the complete 
record in analysing the collective effects of the US subsidies.  Both  the NCC’s as well as Professor 
Sumner’s studies are positive evidence of the expor t-enhancing and price-suppressing effects of the 
GSM 102 export credit guarantee programme.  Both the NCC’s testimony as well as Professor 
Sumner’s original as well as revised analysis est ablishes that GSM 102 causes serious prejudice to the 
interests of Brazil, within the meaning of Articles 5(c), 6.3(c) and 6.3(d) of the SCM Agreement, and 
within the meaning of Articles XVI:1 and 3 of GATT 1994.  
I. ACTIONABLE SUBSIDIES 
 
145. The Panel notes that different remedies a re available in respect of prohibited and 
actionable subsidies under Articles 4.7 and 7.8 of the SCM Agreement .  If the Panel were to 
conclude that a subsidy was prohibited and we re to make a recommendation under Article 4.7 
of the SCM Agreement  to withdraw the subsidy without delay, can the Panel: 
 (a) also conclude that the same subsidy had resu lted in adverse effects to the interests of 
another Member?  If so, what would be the value of such a conclusion in terms of the settlement of the matter before the Panel?  BRA, US 
                                                     
 
 140 Exhibit Bra-41 (“The Future of Federal Farm Commodity Programmes (Cotton)”, Hearing before 
the House of Representatives Committee on Agriculture, 15 February 2001, p. 12).  
141 Brazil’s 9 September Further Submission, Annex I, para. 59.  For reasons internal to the FAPRI 
model, Professor Sumner did not include the 3 cents per pound price effect estimated by the NCC in the shift out 
of the demand curve, thus generating more conservative results.  In addition, the implicit supply and demand 
elasticities used by the NCC imply la rger price impacts than those in the FAPRI model used by Professor 
Sumner, again leading to mo re conservative results.  
 142 See Exhibit Bra-301 (Additional Results from Professo r Sumner’s Model, Table “Impact of removal 
of Export Credit (fixed exports)”). 
 143 Exhibit Bra-301 (Additional Results from Professor Sumner’s Model, Table “Impact of removal of 
Export Credit (fixed exports)). 
 144 Exhibit Bra-301 (Additional Results from Professor Sumner’s Model, Table “Impact of removal of 
Export Credit (fixed exports)). WT/DS267/R/Add.2 
Page I-204  
 
 Brazil’s Answer
: 
 108. Regarding the first question, the Panel can conc lude that prohibited subsidies have resulted in 
adverse effects to the interests of another Member.  Article 5(c) of the SCM Agreement provides that 
no Member should cause serious prejudice through the use of any subsidy.  That includes subsidies 
that are prohibited under Article 3.  Nothing in th e text of Articles 4.7 and 7.8 of the SCM Agreement 
suggests that a complaining party must make a choice between prohibited and actionable subsidy 
remedies.  Brazil has a right to remedies provided by both provisions if the Panel makes the underlying findings that a prohibited subsidy such as Step 2 and export credit guarantees also are 
actionable subsidies that caused serious prejudice.   
 109. With respect to the second question, th ere will be value in the Panel making a 
recommendation under both Articles 4.7 and 7.8 of  the SCM Agreement.  A subsidy becomes a 
prohibited  subsidy because it is contingent on exports or  on the use of domestic over imported goods.  
If the forbidden contingency is removed, the s ubsidy may still cause ongoing adverse effects.  In 
addition, there may still be continuing adverse effect s from subsidies that were previously contingent 
on export or local content subsidies.  Without  a recommendation under Article 7.8, these ongoing as 
well as continuing adverse effects could not be  remedied.  Finally, recommendations on both 
prohibited and actionable subsidy claims may avoid la ter complications in the event of an appeal of 
the Panel’s final determination.     
 
110. Thus, Brazil urges the panel to make firs t a recommendation under Article 4.7 of the SCM 
Agreement that the Step 2, as well as GSM 102, GSM 103 and SCGP export credit guarantee programmes be withdrawn without delay.  The Pa nel should also make a recommendation that the 
United States remove the adverse effects of th e Step 2 and GSM 102 export credit guarantee 
programmes under Article 7.8 of the SCM Agreement.   
 
(b) take into account the effects of the interact ion of those prohibited subsidies with other, 
allegedly, actionable subsidies?  If so, how is this relevant to the issue of causation under 
Article 5 of the SCM Agreement ?  BRA, US 
 Brazil’s Answer
: 
 111. With respect to the first question, the text of Article 5 of the SCM Agreement provides that “[n]o Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of 
Article 1 , adverse effects”.  The clear intention is for panels to take into account in assessing adverse 
effects any and all subsidies that are specific, incl uding those found to be prohibited under Article 3.  
The only subsidies excluded are those that are not sp ecific.  The ban on adverse effects also embraces 
adverse effects caused by the interaction be tween all actionable subsidy programmes.   
 112. Because the Panel is required to examine all actionable subsidies in making its causation 
determination, it is not appropriate for it to separatel y analyze the individual effects of each subsidy.  
Thus, the Panel should look at the interaction of the various types of subsidies at issue and at their 
collective effects.  No attribution of the effects to i ndividual subsidies or to prohibited and “other” 
actionable subsidies is necessary because the remedies  of Articles 4.7 and 7.8 of the SCM Agreement 
are not contradictory.    
113. Even if the Panel were to decide that it woul d be appropriate to examine individual effects of 
subsidies, Brazil has produced extensive evidence of the link between the serious prejudice caused WT/DS267/R/Add.2 
Page I-205 
 
 
and the individual and collective effect s of all of the actionable subsidies.145  If the Panel chooses to 
examine the individual instead of th e collective effects of some of the US subsidies, it can do so based 
on the evidence produced by Brazil.146  This evidence establishes cau sation whether the subsidies are 
examined individually or collectively.  With resp ect to the interactive effects of the various US 
subsidies, please see Brazil’s Answer to Questions 146.   
 
146. Brazil acknowledges that there are some interaction effects that may increase or 
decrease the overall effects of the subsidies (Braz il's further submission, para. 225).  How would 
your analysis under Articles 5(c) and 6.3 of the SCM Agreement and Article XVI of GATT 1994 
differ if it excluded, for example,  crop insura nce subsidies, PFC and/or direct payments?  BRA 
 
Brazil’s Answer : 
 
114. The evidence in the record is more than sufficient to establish present and threat of significant 
price suppression, increasing world market share, and inequitable share of world export trade even if 
PFC/direct payments and crop insurance subsidies were  not deemed to be actionable subsidies.    
 115. In response to the Panel’s question, Brazil ask ed Professor Sumner to use his model described 
in Annex I to Brazil’s 9 September Further Submission to eliminate the effects of all subsidies except 
the PFC/direct payment and crop insurance subsidies .  Professor Sumner’s analysis examined the 
effects of the remaining US subsidies with respect  to a number of factors such as planted acreage, 
production, US price, adjusted world price etc.  The complete set of results is  set forth in Exhibit Bra-
301.
147  Brazil describes the interactive effects of all US subsidies except crop insurance and 
PFC/direct payments on US export and world A-Index prices below.   116. Analyzing the results for the MY 1999-2002 period from Exhibit Bra-301 shows that but for  
the payments from all US subsidy programmes (e xcept the PFC and crop insurance), US exports 
would have fallen by 36.81 per cen t and the world A-Index prices would have increased on average 
by 11.00 per cent (or 5.73 cents per pound).  When crop insurance and PFC/direct payments are included in the original analysis, US exports fa ll by 41.17 per cent and A-Index world prices would 
increase by 12.55 per cent (6.5 cents per pound).
148  
 
117. When the period for MY 2003-2007 is examined, eliminating all subsidies except for crop 
insurance and direct payments means that, on aver age, US exports would fall by 37.31 per cent and 
the A-Index world price would increase by 8.36 per cent (4.63 cents per pound).149  By comparison, 
when all US subsidies (including PFC/direct paymen t and crop insurance) are eliminated, US exports, 
on average, would decrease by 44.02 per cent and the A-Index price would increase by 10.80 per 
cent.150   
 
                                                      
 145 Brazil’s 9 September Further Submission, Sections 3.3.4.7 (individual effects) and 3.3.4.8 
(collective effects). See also Brazil’s 7 October Oral Statement, paras 31-34 (USDA’s analysis of individual 
effects of marketing loan subsidies for cotton for marketing years 2000 and 2001).    
146 The collective and individual effects of the various  US subsidies are analyzed by Professor Sumner 
at Tables 1.5(a) – (e) of Annex I to Brazil’s 9 September Further Submission.  See also Brazil’s 9 September 
Further Submission, Sections 3.3.4.7 (individual effects) and 3.3.4.8 (collective effects).  See further Brazil’s 7 
October Oral Statement, paras 31-34 (USDA’s analysis of individual effects of marketing loan subsidies for 
cotton for marketing years 2000 and 2001).    
147 See Exhibit Bra-301 (Additional Results from Profes sor Sumner’s Model, Table “Impact of removal 
of all domestic support except PFC/d irect payments and crop insurance”) 
 148 Brazil’s 9 September Further Submission, Annex I, Table I.5a. 
 149 See Exhibit Bra-301 (Additional Results from Profes sor Sumner’s Model, Table “Impact of removal 
of all domestic support except PFC/d irect payments and crop insurance”) 
 150 Brazil’s 9 September Further Submission, Annex I, Table I.5a. WT/DS267/R/Add.2 
Page I-206  
 
118. Brazil notes that most of its evidence does not involve proof regarding PFC/direct payments or crop insurance and would, therefore, not be imp acted by the assumption in the Panel’s question.  In 
addition, many of the econometric analysis cited by Brazil focus on only some of the subsidies challenged by Brazil.  The results of these studi es are consistent with the findings of Professor 
Sumner’s analysis set out in Annex I to Brazil’ s 9 September Further Submission and Exhibit Bra-
301.  In sum, even ignoring the effects of the cr op insurance and PFC / dir ect payment programmes, 
the US subsidies cause serious prejudice to the inter ests of Brazil, within the meaning of Articles 5(c), 
6.3(c) and (d) and GATT Articles XVI:1 and 3.  
148.   How should the significance of price suppression or depression be assessed under 
Article 6.3(c) of the SCM Agreement ? In terms of a meaningful effect?  Or another concept? 
BRA, US  
Brazil’s Answer
: 
 
119. The significance of price suppression should be assessed by reference to whether it 
meaningfully affects producers or suppliers of the same product that receives the benefits of the 
challenged subsidies.151  Price suppression that does not meaningfully affect suppliers or producers of 
a product cannot give rise to serious prejudice, since it would not be significant.  The text of Article 6.3 does not set a numerical limit on the le vel of price suppression.  What renders price 
suppression significant or insignificant is whether or not it causes adverse effects to the producers or 
suppliers of the Member(s) concerned, not whethe r an arbitrary level of numeric significance is 
achieved.
152   
 120. Contrary to the US arguments, there is not an artificial distinction between whether price 
suppression is “significant” and whether such levels of suppression meaningfully affect suppliers or 
producers of the product receiving the benefits of the subsidies.  Brazil provided considerable 
evidence setting forth how its producers suffered adve rse effects from the levels of price suppression 
that can be attributed to US subsidies during MY 1999-2002.
153  A good example of the significance 
of the levels of price suppression demonstrated by  Brazil for MY 2000-2001 is found in the testimony 
of Christopher Ward.  He indicated that a 10-per ce nt increase in prices for Mato Grosso producers in 
MY 2000 and MY 2001 would have pe rmitted them to cover their variable costs for MY 2001 and 
come close to covering variable costs in MY 2000.154  However, because of the losses they suffered 
without such revenue increases, many Mato Grosso  producers reduced production or were forced out 
of cotton production – Mato Grosso produc tion fell by 34 per cent between MY 2000-2001.155   
 121. The record shows that the adverse effects suffered by Brazilian producers have also been 
suffered by producers in Africa.
156  Nicolas Minot testified for Benin at the hearing on 8 October.  His 
econometric analysis focused on the effect of  lower upland cotton prices on poverty among Benin 
cotton farmers.  Based on his economic analysis, a ten per cent decrease in upland cotton prices drove 
                                                      
 151 Brazil’s 9 September Further Submission, paras. 251-259; Brazil’s 7 October Oral Statement, paras. 
30-34.   
 152 See also New Zealand’s 1 October Further Third Party Submission, paras. 2.21-2.27, tying the 
analysis of significance under Article 6.3(c) to the notio n of serious prejudice to the Member(s) concerned under 
Article 5(c).   
 153 Brazil’s 9 September Further Submission, paras. 444-455 and Annex III.  
 154 Exhibit Bra-283 (Statement of Christopher Ward – 7 October 2003, paras. 8-10 and accompanying 
graph).   
 155 Exhibit Bra-283 (Statement of Christopher Ward – 7 October 2003, paras. 8-10 and accompanying 
graph).   
 156 Statement of Mr. Minot. Oral Statement of Benin, 8 October 2003, paras. 29-33 ; Statement of 
Mr. Ibrahim Malloum, Oral Statement of Chad, 8 October 2003, paras. 13-15.  WT/DS267/R/Add.2 
Page I-207 
 
 
approximately 83,500 Benin upland cotton farmers below the poverty line.157  The evidence that 
African producers have suffered adverse effects by r eason of the effects of the US subsidies confirms 
and supports the evidence presented by Brazil that its producers are suffering adverse effects as well.   
 122. But even if the Panel decides to adopt some sort  of numerical standard not reflected in the text 
of Article 6.3(c), Brazil has also set forth evidence showing that the levels of price suppression found 
by a number of different economists are “significant”.
158  In assessing whether the various levels of 
price suppression found by USDA and other economists are “significant,” the Panel should take into 
account the fact that upland cotton is a primary commodity traded in huge volumes and produced and 
consumed in a large number of countries.  Un der these circumstance s, any measurable and 
identifiable effect on the world price from the subsidies provided by a single Member is important.  In 
this case, the Panel is not faced with a difficu lt decision because during MY 1999-2002 – and even 
during MY 1997-1998 – the record shows that the absolute numerical levels of price suppression caused by some or all of the US subsidies were significant, ranging from 4 to 26.3 per cent of the world price, and 10 to 33.6 per cent of the US price.
159  
 
153.   Would the conditions in Article 6.3(d) of the SCM Agreement be satisfied in respect of 
time periods other than the one specified? What relevance, if any, would this have for Brazil's claims? BRA  
Brazil’s Answer
: 
 
123. Brazil has demonstrated that the conditions of Article 6.3(d) of the SCM Agreement are 
fulfilled for MY 2001,  2002 and 2003.160  The record indicates that the conditions of Article 6.3(d) of 
the SCM Agreement would also have been fulfilled for MY 1999 and 2000.  In addition, the increase 
in the US share of the world upland cotton market fo llows a consistent trend.  This consistent trend 
exists whether the Panel analyzes the trend ove r the period MY 1996-present (described by USDA as 
constituting a significant change in US farm policy161) or over the period MY 1986-present (since the 
introduction of the marketing loan programme for upland cotton162). 
 124. The US world market share in MY 2000 w as 24.7 per cent, an increase over the previous 
three-year average (MY 1997-1999) of 23.2 per cent.
163  Similarly, the US market share in MY 1999 
was 24.1 per cent, an increase over the previous  three-year average (MY 1997-1998) of 23.4 per 
cent.164 
 125. Further, if the “time period” for assessi ng a “consistent trend” was changed from 1996-2003 
to 1985-2003, the results would not be different.  The following figure demonstrates that the increase 
in the US world market share also follows a consistent trend since MY 1986.
165 
                                                      
 157 Benin’s 8 October Oral Statement (Statement of Nicolas Minot, para. 24-25) (estimating that a 
40 per cent reduction in price caused 334,000 people to fall below the poverty line, and indicating that smaller 
reductions in the cotton price cause roughly proportional changes in income, as shown in Table 3 of his paper 
attached to Benin’s 1 October Further Third Party Submission).    
158 Brazil’s 9 September Further Submission, Table 22, page 110; Brazil’s 7 October Oral Statement, 
paras. 30-34.   
 159 See Brazil’s 9 September Further Submission, paras. 148-161, 190, 200-232; 254 Table 23, 379-
384.  See also Brazil’s 7 October Oral Stat ement, paras. 31-34.   
 160 Brazil’s 9 September Further Submission, Sections 3.4 and 4.12.2. 
 161 Exhibit Bra-79 (“US Farm Programme Benef its: Links to Planting Decisions & Agricultural 
Markets“, USDA, Agricultural Outlook, October 2000, p. 10). 
 162 Exhibit Bra-12 (“Cotton, Background for the 1995 Farm Legislation,” USDA, April 1995, p. 15) 
 163 Exhibit Bra-302 (Revised and Extended Data on Article 6.3(d) claim). 
 164 Exhibit Bra-302 (Revised and Extended Data on Article 6.3(d) claim). 
 165 Exhibit Bra-302 (Revised and Extended Data on Article 6.3(d) claim). WT/DS267/R/Add.2 
Page I-208  
 
US World Market Share Upland Cotton (MY 1986-2003)
051015202530354045
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
marketing yearpe
rce
nta
ge
 
 
126. The trend line beginning in MY 1986 in the gra ph above shows an overall consistent increase 
of US export market share over an 18-year period.  This steady long-term in crease coincides with the 
introduction of the marketing loan programme in MY  1986.  Another highly trade distortive subsidy, 
the Step 2 payments, was introduced in MY 1990.  The combination of these two subsidies, along 
with the other trade-distortive subsidies, played an  important role in the progressive increase in US 
world market share over the long-term period c overed by the MY 1986-2003 graph above.  Thus, 
looking at all the trends collectively provides corrobor ating evidence that the large increases in the US 
world market share from MY 1998 to the present are ca used, in significant part, by the US subsidies, 
in violation of Articles 5(c) and 6.3(d) of the SCM Agreement.   127. Brazil notes that MY 1998 was an unusual year with a relatively low US world market share 
as a direct result of a 20-per cent abandonment of upland crop acreage due to weather-related 
issues.
166  But for those weather-related problems, the US world market share would have been higher 
in MY 1998.       128. Finally, Brazil wishes to correct a typogra phical error in its calculation of the US world 
market share for MY 1997.  The correct market  share (as reflected in Figure 26 of Brazil’s 
9 September Further Submission) is 27.6 per cent, rather than 19.8 per cent,
167 as was incorrectly 
noted in Exhibit Bra-206.  Brazil notes that this typographical error did not affect the calculations of the increase in the US world market share.
168  Correcting for this error, Brazil resubmits the corrected 
figures: 
                                                      
 166 See US 30 September Further Submission, para. 19. 
 167 The error results from a typographical error in the line of the “total world exports”, which were 
26.7 million bales in MY 1997 and not 36.7 million bales, as erroneously included in the calculation. 
 168 Brazil notes that Figure 26 of Brazil’s 9 September Further Submission is unaffected by this data 
error and shows a very similar trend in the US world market share in cotton. 
     percentage WT/DS267/R/Add.2 
Page I-209 
 
 
 
Figure 25 (para. 270)169 
U.S. World Market Share Upland Cotton (MY 2001)
051015202530354045
1996 1997 1998 1999 2000 2001
marketing yearpercentageU.S. World Market Share
Linear (U.S. World Market Share)
 
 
 
Figure 37 (para. 402)170 
U.S. World Market Share Upland Cotton (MY 2002)
051015202530354045
1996 1997 1998 1999 2000 2001 2002
marketing yearpe
rc
en
ta
geU.S. World Market Share
Linear (U.S. World Market Share)
 
                                                      
 169 Exhibit Bra-302 (Revised and Extended Data on Article 6.3(d) claim). 
 170 Exhibit Bra-302 (Revised and Extended Data on Article 6.3(d) claim).      percentage WT/DS267/R/Add.2 
Page I-210  
 
 
Figure 38 (para. 405)
171 
U.S. World Market Share Upland Cotton (MY 2003)
051015202530354045
1996 1997 1998 1999 2000 2001 2002 2003
marketing yearpercentageU.S. World Market Share
Previous 3-Year Average
Linear (U.S. World Market Share)
 
129. As the Panel can see, all three graphs show a trend line that matches the actual curve even 
better than the trend line presented by Brazil in its 9 September graphs.  Also, all trend lines show that 
there is a dramatically increasing US world mark et share in upland cott on, in violation of 
Article 6.3(d) of the SCM Agreement.  161.   Would a finding of serious prejudice under Article 5(c) of the SCM Agreement  be 
determinative for a finding under Article XVI:1 of the GATT 1994?  Why or why not?  What, if any, is the role of footnote 13 of the SCM Agreement  in this context?  BRA, US 
  
Brazil’s Answer
: 
 
130. A finding of serious prejudice based on the effects described in SCM Article 6.3(a), (b), (c) or (d) would be determinative for a finding under GA TT Article XVI:1.  GATT Article XVI:1 concerns 
measures that are (i) subsidies, and which (ii) cause or threaten serious prejudice to the interests of any other Member.  Footnote 13 of the SCM Agreem ent provides that “[t]he term ‘serious prejudice 
to the interests of another Member' is used in this Agreement in the sam e sense as it is used in 
paragraph 1 of Article XVI of GATT 1994, and includes threat of serious prejudice”.   Footnote 13 
clarifies that the instances that  constitute serious prejudice within the meaning of the SCM 
Agreement, including Article 5(c), constitute at the same time serious prejudice within the meaning of 
GATT Article XVI:1.  In addition, if the Panel dete rmines that a particular measure is a “subsidy” 
under Articles 1 and 2 of the SCM Agreem ent, that measure would constitute ipso facto  a subsidy for 
the purposes of GATT Article XVI:1.  In sum, Articles 5(c) and 6.3 of the SCM Agreement operationalize and clarify the meaning of serious  prejudice as contained in GATT Article XVI:1.
172 
 
163.   Are US cotton producers able to cover the fixed and variable costs without subsidies? 
Please provide substantiating evidence.  Of what rel evance is this, if any, to Brazil's actionable 
subsidy claims ? US, BRA 
                                                      
 171 Exhibit Bra-302 (Revised and Extended Data on Article 6.3(d) claim). 
 172 This interpretation of the relationship between Articles 5(c) and 6.3 of the SCM Agreement and 
GATT Article XVI:1 is without prejudice to the continue d relevance of GATT Article XVI:3, as discussed in 
Brazil’s answers to Question 185. WT/DS267/R/Add.2 
Page I-211 
 
 
 
Brazil’s Answer : 
 131. Brazil has established in paragraphs 117-12 3 of its 9 September Further Submission that 
between MY 1997-2002, US upland cotton producers on average were not able to cover their total 
cost of production, i.e., the sum of fixed and variable costs.
173  The gap between the total cost of 
production and the revenue generate d from both upland cotton lint and cottonseed increased steadily 
from 2.66 cents per pound in MY 1997 to 39 cents per pound in MY 2001 before falling slightly to 
34.38 cents per pound in MY 2002.174  On a percentage basis, the average total costs to produce a 
pound of upland cotton in the United States betwee n MY 1999-2002 were 77 per cent higher than the 
average market prices received by US farmers.175   
 132. Similarly, the Institute for Agriculture a nd Trade Policy in Minneapolis found in a study 
entitled “United States Dumping on World Agricu ltural Markets” that based on USDA cost of 
production data, the United States e xported its upland cotton below its to tal cost of production in each 
year between MY 1990-2001.  The study found th at US upland cotton was exported between 9 and 
57 per cent below the total cost of production.
176  This evidence on export prices is entirely consistent 
with Brazil’s analysis of the gap between total cost of production and farm prices.177 
 133. Further, Brazil has used USDA data and the FAPRI 2003 baseline projections on prices and 
costs of production to analyze the likely gap betw een total costs of production and market revenues.
178  
Based on this information, the gap between total cost  of production and market returns to producers of 
upland cotton will be between 24.85 cents per pou nd in MY 2003 and 21.85 cents per pound in MY 
2007.179 
 134. Thus, US producers were not able to meet th eir total cost of production since MY 1997, and 
based on USDA and FAPRI baselines, they will not be  able to meet their total cost of production 
through MY 2007.  This means that US upland cott on producers would not have met their cost of 
production for 11 consecutive years absent large US G overnment subsidies.  The average gap between 
the total cost of production and market return in  those eleven years will be 22.85 cents per pound.
180  
The only possible conclusion is that many US pr oducers and much US production could not exist 
without US subsidies, as confirmed by the National Cotton Council.181 
 
135. The consistently large cost-re venue gap, among other factors, establishes the link between US 
subsidies and increased and maintained high levels of  US production and exports.  Given the high cost 
of production that significantly exceeds market re venues, absent the US subsidies, many US 
                                                      
 173 See also Brazil’s Answer to Question 125 (2) (c). 
 174 Exhibit Bra-205 (Costs and Returns of US Upland Cotton Producers). 
 175 See Exhibit Bra-205 (Costs and Revenues of US Upland Cotton Producers).  The number represents 
the gap between the cost of production of cotton lint and the price received by producers for cotton lint.  It does 
not take into account cottonseed revenue that would slightly narrow the gap. 
 176 Exhibit Bra-212 (“United States Dumping on World Agricultural Markets,” Institute for Agriculture 
and Trade Policy, p. 21).  
177 Farm prices are somewhat lower than export prices. 
 178 Brazil’s 9 September Further Submission, paras. 353-359. 
 179 Exhibit Bra-205 (Costs and Returns of US Upland Cotton Producers). 
 180 In such a situation it is materially irrelevant whether US producers met their variable cost of 
production.  Meeting at least the variable cost of production may be a short-term option for farmers to stay in business.  However, over the long-run, farmers need to cover their total cost of production.  Not covering total 
cost of production for eleven consecutive years would certainly force any producer in any industry out of 
business.  
181 Exhibit Bra-3 (Roger Thurow / Scott Kilman, “US Subsidies Create Cotton Glut That Hurts Foreign 
Cotton Farms,” The Wall Street Journal, 26 June 2002, p. A1) quoting Kenneth Hood, the then Chairman of the 
National Cotton Council as saying “cotton farm ers . . . can’t exist without subsidies.” WT/DS267/R/Add.2 
Page I-212  
 
producers would have to cut upland cotton produc tion, and much upland cotton acreage would no 
longer be planted to upland cotton.  This result is  intuitively clear and is confirmed by evidence of 
significant production cut-backs by Mato Grosso pro ducers (34 per cent) who are sensitive to changes 
in prices, as described in Christopher Ward’s statement of 7 October.
182  It is also confirmed by the 
results of many economists examining the effects of  eliminating US subsidies.  They found that 
eliminating the US subsidies that cover the US producer cost-revenue gap would result in lower US 
production, leading to lower US exports and higher US and world prices.183 
 136. The Panel has also asked for US cost data on variable and fixed costs.  Brazil provides below 
the most recent USDA data covering the period MY 1997-2002.
184  These data demonstrate that the 
“gross value of the US production” did not permit US upland cotton producers to cover their total 
costs of production.  In MY 2001, the gross value of  the production did not even permit them to cover 
their variable costs of production.  In MY 2002, th eir revenue only covered s lightly more than their 
variable costs.  Not reflected in the chart below is  the fact that US subsidies made up all (or almost 
all) the difference between the “gro ss value of the US production” and the “total costs listed” between 
MY 1997-2002.    
  
US cotton production costs and returns per plante d acre, excluding direct Government payments, 
1997-2002  1/ 
Item 1997 1998 1999 2000 2001 2002 
 dollars per planted acre 
Gross value of production:       
  Primary product: Cotton 477.48 307.20 274.48 324.33 222.60 257.88 
  Secondary product: Cottonseed 68.07 48.90 40.32 50.85 48.80 49.95 
  Total, gross value of production 545.55 356.10 314.80 375.18 271.40 307.83 
       
Operating costs:       
  Seed 17.63 17.87 18.35 30.10 37.82 47.99 
  Fertilizer 35.31 31.76 29.91 31.32 35.26 30.56 
  Chemicals 60.19 58.54 58.60 58.32 59.25 56.80 
  Custom operations 23.27 13.02 19.67 19.93 19.99 19.25 
  Fuel, lube, and electricity 31.64 26.29 26.64 36.97 36.49 31.37 
  Repairs 25.39 27.32 26.28 27.18 28.53 29.10 
  Interest on operating inputs 6.57 5.40 5.61 7.55 4.71 2.31 
  Ginning 62.75 43.78 53.08 51.46 57.14 55.61 
  Purchased irrigation water 8.71 6.89 6.12 6.55 5.05 5.01 
  Total, operating costs 271.46 230.87 244.26 269.38 284.24 278.00 
       
                                                     
 
 182 See Exhibit Bra-283 (Statement of Christopher Ward – 7 October 2003, para. 6) discussing a drop in 
the upland cotton acreage in Mato Grosso by 35 per cent between 2000/2001 and 2001/2002 due to low upland 
cotton prices. 
 183 The collective and individual effects of the various  US subsidies are analyzed by Professor Sumner 
at Tables 1.5(a) – (e) of Annex I to Brazil’s 9 September Further Submission.  See also Brazil’s 9 September 
Further Submission, Sections 3.3.4.7 (individual effects) and 3.3.4.8 (collective effects).  See further Brazil’s 
7 October Oral Statement, paras 31-34 (USDA’s analysis of individual effects of marketing loan subsidies for cotton for marketing years 2000 and 2001).   
 
184 http://www.ers.usda. gov/Data/CostsAndReturns/d ata/recent/Cott/R-USCott.xls , visited 
25 October 2003 WT/DS267/R/Add.2 
Page I-213 
 
 
Allocated overhead:         Hired labour 33.72 33.92 35.48 36.98 37.89 38.16 
  Opportunity cost of unpaid labour 28.03 28.76 29.27 29.90 30.28 32.73 
  Capital recovery of machinery and equipment 94.21 93.16 96.80 97.97 101.49 100.39 
  Opportunity cost of land 58.33 46.04 51.84 51.68 43.83 46.76 
  Taxes and insurance 14.97 14.20 15.07 15.93 16.68 17.01 
  General farm overhead 15.55 14.21 15.35 15.82 16.11 15.97 
  Total, allocated overhead 244.81 230.29 243.81 248.28 246.28 251.02 
       
Total costs listed 516.27 461.16 488.07 517.66 530.52 529.02 
        
Value of production less total costs 
listed 29.28 -105.06 -173.27 -142.48 -259.12 -221.19 Value of production less operating 
costs 274.09 125.23 70.54 105.80 -12.84 29.83 
1/ Estimates based on 1997 survey.       
2/ Method used to determine the opportunity cost of land.     
 
J. CAUSATION  
 
165.  Please comment (and submit substantiating evidence) on the US assertion that the FAPRI 
model has been designed and developed for pr ospective analysis, and is not suitable for 
retrospective counterfactual analysis.  What is the reliability of past FAPRI-produced analyses when compared with actual data for the period covered by them?  Is there any other instrument 
that can be used to try to identify the effect of subsidies already granted, or of their removal? 
BRA, US 
 
Brazil’s Answer
: 
 137. Concerning the first question, there is nothi ng inherently different in using a calibrated 
simulation model  (the category of models into which th e FAPRI and many other models fall) to 
investigate (i) questions of the future effects on prices and quantities of a potential change in policy 
or, instead, (ii) questions of how the recent pattern  of prices and quantities w ould have been different 
if a different set of policies would have been in  place.  Calibrated simulation models, including the 
FAPRI model, are routinely used for both kinds of questions.  The applications are identical.  In one 
case, the comparison for the results from the counte r-factual policy option is to an unobserved future 
baseline.  In the other case, the comparison for the results from the counter-factual policy option is 
retrospective to past actual events.  138. The FAPRI policy simulation framework is an  elaborate set of suppl y and demand equations 
(along with associated stock equations and equilibri um conditions that set quantity supplied equal to 
quantity demanded).  The framework includes, as a component, a set of “baseline” projections of 
agricultural prices and quantities for future peri ods that are based on explicit assumptions about 
policy, climate, technological change, macroeconom ic conditions, etc.  In many applications, the 
relevant questions investigated by the model are of  the following form:  if some specific policy were 
different in the future, how would this affect the future outcomes for farm commodity prices and 
quantities.  For example, this is the form of questi on that is often posed in the context of options for 
changing US farm subsidies in the future.  Becau se they have baseline projection components, the 
FAPRI framework and a few others are well suited fo r these future-oriented questions.  But the use of 
such models to analyze the recent past is also co mmon whenever that is a relevant question.   WT/DS267/R/Add.2 
Page I-214  
 
 139. As with other calibrated simu lation models, the FAPRI model itself is also used routinely for 
both projections and retrospective counterfactual analysis.  One recent publication that applied 
retrospective counterfactual analysis concerned worl d peanut (groundnut) policy.  That study adapted 
the basic FAPRI framework, much as it was adapted to  apply to the current case for upland cotton, to 
consider international peanut policy questions.  The model is calibrated to three recent years – 
1999/2000, 2000/2001 and 2001/2002 – and examines a peanut trade liberalization scenario.
185  
 140. A second recent retrospective counterfactual app lication was to the US sugar programme in a 
project conducted for the US General Accounting Offi ce.  In that analysis, a version of the FAPRI 
domestic sugar model was combined with th e CARD international sugar model (much as 
Professor Sumner has done for upland cotton, as report ed in Annex I to Brazil’s 9 September Further 
Submission).  The model was calibrated to 1999 data , and results considered the effects of policy 
reform relative to the 1999 crop year actual outcomes.
186 
 
141. In addition, Brazil notes that USDA has freque ntly used calibrated simulation models to 
perform retrospective, counterfactual analysis.  For example, USDA economists calibrated the USDA 
“SWOPSIM” model, which was used extensively to  analyze trade policy options in the 1980s and 
1990s, to 1989 data and solved it for commodity pric es and quantities that would have obtained in that 
year under alternative trade liberalization scenarios.187  
 
142. The USDA “FAPSIM” model, which is quite similar to the FAPRI model, is a calibrated 
simulation model that is also used  for retrospective counterfactual an alysis and for considering policy 
options relative to projections.  According to J. Michael Price of the USDA Economic Research 
Service, who was one of the developers of the m odel and currently maintains and operates the model, 
it is calibrated to historical data each year as well as to the official USDA baseline.  That model is 
used for responding to questions about future policy options and to retrospective counterfactual 
questions.  Indeed, one of the first published appli cations of the “FAPSIM” model was a retrospective 
counterfactual analysis of US grain storage policy.188 
 143. One of the most recent applications of the USDA “FAPSIM” model was to respond to 
requests for both alternative projections and re trospective counterfactual analysis from the  
Commission on the Application of Payment Limitations for Agriculture .  These results, which have 
been discussed in previous submissions by  Brazil, used the FAPSIM policy framework.
189 
 144. According to the Commission Report (chaired by the Chief USDA Economist):  
“Westcott and Price analyzed the effects of eliminating marketing loans on 
production and prices of major crops over the period from 1998 through 2005.  The 
                                                     
 
 185 Exhibit Bra-303 (John C. Beghin and Holger Matthey. “Modeling World Peanut Product Markets: A 
Tool for Agricultural Trade Policy Analysis.” Center for Agricultural and Rural Development (CARD), 
May 2003).  
 186 Exhibit Bra-304 (John C. Beghin, Barbara El Osta, Jay R. Cherlow, and Samarendu Mohanty. “The 
Cost of the US Sugar Programme Revisited,” Center for Agricultural and Rural Development (CARD), March 2001). 
 
187 See http://www.ers.usda.gov/data/sdp/view.asp?f=trade/92011/ and 
http://www.ers.usda.gov/data/sdp/view.asp?f=trade/92012/.  
188 Exhibit Bra-305 (Larry Salathe, J.Michael Pri ce and David Banker. “An Analysis of the Farmer 
Owned Reserve Program 1977-82.”  American Journal of Agricultural Economics, February 1984, p. 1-11). 
 189 See Brazil’s 7 October Oral Statement, paras. 31-34. WT/DS267/R/Add.2 
Page I-215 
 
 
baseline used for the analysis was the USDA 2000 baseline, which did not anticipate 
the sharp decline in cotton price for 2001 crop year.”190   
 . . . 
 
“The Commission requested that the above study be updated to take into account the 
sharp decline in cotton prices for the 2001 crop (Westcott).  The updated analysis 
indicated that elimination of marketing lo an benefits for the 2001 crop would have 
lowered cotton acreage by 2.5 to 3.0 million acres or 15-20 per cent and reduced rice acreage by 300,000 acres or 10 per cent.”
191 
145. Finally, there are literally hundreds of othe r academic and government studies using a variety 
of models calibrated on retrospective data that analyze policy questions.  All computable general 
equilibrium models use this approach, and most ac ademic partial equilibrium simulation models do so 
as well.    146. Concerning the second question, it is difficult to  determine the reliability of the analysis of 
potential  (i.e., future) policy outcomes because – by defin ition – the baseline approach will not mirror 
exactly the actual conditions.  This is why base line projections use long-term data to even out 
inevitable fluctuations in commodity market developments.  Similarly, the but for analysis of a 
retrospective study attempts to simulate what woul d have (but did not actually) occur with different 
policy assumptions.  However, the retrospective analys is has the benefit of using actual market data 
and not projected benchmarks.  It is, of course, possible to critique  selected portions of the FAPRI 
baseline projections if they are treated as forecast s of the future values for prices and quantities.  
Against this benchmark, the FAPRI projections – like all others – will sometimes miss future 
movements in commodity markets.    147. One measure of the reliability of the FAPRI b aseline is that the FAPRI model continues to be 
relied upon regularly by a variety of US government and US industry organizations to guide decisions 
on important policy questions.  USDA even provided the FAPRI economists with their highest award 
based on the 2002 baseline analysis.
192  In addition, FAPRI economists  over the years have performed 
checks to ensure that the FAPRI model is as reliab le as possible.  For example, observed (actual) 
planted acreage has generally responded in the dir ections the model projects when the loan rates and 
other driving factors are relatively constant.  In addition, FAPRI constantly examines the internal 
consistency of the model and its economic logic when compared to actual market events and 
conditions and makes appropriate adjustments, as necessary.      148. Concerning the third question, there are a number of other potential simulation modelling 
frameworks that can be used as instruments to respond to retrospective counterfactual policy 
questions.  The USDA FAPSIM model is one such framework.  It was used, for example, in the 
Westcott/Price analysis of the effect of removing all marketing loan payments for MY 2000 and MY 
2001.
193  However, the FAPSIM model does not have a full international cotton model as used in the 
                                                      
 190 Exhibit Bra-276 (Report of the Commission on the Application of Payment Limitations for 
Agriculture, August 2003, p. 124).  
 191 Exhibit Bra-276 (Report of the Commission on the Application of Payment Limitations for 
Agriculture, August 2003, p. 125).  See further: Westcott, Paul C. “Marketing Loans and Payment Limitations.” 
Presentation to the Commission on the Application of Payment Limitations for Agriculture, May 2003 as cited 
in the Payment Limitations Report;  Exhibit Bra-222 (West cott, Paul C., and J. Michael Price. Analysis of the 
US Commodity Loan Program with Marketing Loan Provisions. USDA, ERS Agricultural Economic Report 
801, April 2001);  Westcott, Paul and Mike Price. Estimates done at the request of the Commission on the 
Application of Payment Limitations for Agriculture u tilizing the Economic Research Service’s FAPSIM model, 
2003 as cited in the Payment Limitations Report. 
 192 Brazil’s 9 September Further Submission, Annex I, para. 4 (last sentence).   
 193 See Brazil’s 7 October Oral Statement, paras 32-33.   WT/DS267/R/Add.2 
Page I-216  
 
FAPRI/CARD framework, and thus would be less appr opriate for dealing with the world price aspects 
of this case.  In general, for specific questions about how quantities and pri ces of upland cotton would 
have been different but for US upland cotton subsid ies, the appropriate models with which Brazil is 
familiar would all follow the same basic simu lation framework as the FAPRI model.    
 167. How does Brazil react to Exhibit US-44? BRA  
Brazil’s Answer
: 
 149. The United States claims that Exhibit US -44 demonstrates the “disconnect between the 
decline in cotton prices … and the incen tive offered by US marketing loans.”
194  But all that Exhibit 
US-44 does is to show monthly A-Index prices for upland cotton.  These prices, as with other primary 
agricultural commodities, move up and down with larg e swings.  This exhibit provides no insight into 
the link between US producer’s decisions to k eep planting upland cotton as upland cotton prices 
(including A-Index prices) move up and down.  Furthe r, the quantity of subsidies provided by the US 
marketing loan is a function of the difference between  the loan rate (currently 52 cents per pound) and 
the adjusted world price (AWP) for upland cotton – not the A-Index price.195  As the Panel can see 
from the chart provided in response to Question 181, the AWP is consistently and considerably below 
the A-Index.  150. A relevant graph to examine the causal link between US subsidies and US production is one 
with a horizontal line representing the marketing loan  rate, and which compares that line against the 
AWP, which is the basis for the payment of marketin g loans.  This is illustrated in the graph below:
196   
 
Average World Price and Loan Rate
0102030405060
06/
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9906/
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nts
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Difference Between Loan Rate and Average World Price
 
 
151. This graph shows first what the Exhibit US-44 neglected to illustrate – that except for a short 
period in MY 2000, the AWP was below  the loan rate throughout all of MY 1999-2002, and that 
marketing loan payments corresponding to the diffe rence between the AWP a nd the loan rate were 
                                                      
 194 US 7 October Oral Statement, para. 23. 
 195 See Brazil’s Answer to Question 180. 
 196 The data is based on the data collected for Brazil’s Answer of Question 181, see Exhibit Bra-311.    Cents per pound WT/DS267/R/Add.2 
Page I-217 
 
 
made.  All of the dark area below the 52 cents line  represents marketing loan subsidies paid to US 
upland cotton producers.  This illustrates US producer s’ indifference to market prices.  To paraphrase 
the United States, the line of 52 cents per pound illu strates a “disconnect,” but it is not one between 
the A-Index price and US subsidies.  Rather, th is graph illustrates the disconnect between the AWP 
(and more importantly, the US price received by  upland cotton producers) and the acreage and 
production response of US producers:  even when pr ices go to record lows, US producers’ revenue is 
insulated from the decline.  This revenue not only kept them in production, but it allowed them to 
increase production during MY 1999-2001.  And more re markably, it kept many of the producers 
planting 14.2 million acres of cotton when the AW P was near record lows in the period from 
February-June 2002.  These low prices during the cruc ial planting decision period are clearly reflected 
in the figure above.197  It was this period that USDA economists Westcott and Price examined and 
found that but for the marketing loan payments in MY 2001, US upland cotton production would be 
2.5-3 million bales less than it actually was.    152. Thus, this graph helps explain why there is  such a limited response from high-cost US upland 
cotton producers to changes in upland cotton prices.   Of course, the graph above does not represent 
the full amount of revenue supplied by all US s ubsidies.  Other programme features and other 
programmes provide additional subs idies that cause the effective per unit revenue guarantee to be 
much higher than the loan rate.  153. If the purpose of Exhibit US-44 was to demonstrate the absence of a link between US upland 
cotton production (and price suppression) and US marke ting loan payments, then it flies in the face of 
the findings of USDA’s own economists.  Brazil h as referenced the testimony of USDA’s chief 
economist, among many other USDA economists, w ho have candidly acknowledged the enormous 
production and price effects that US marketing loan  subsidies have on stim ulating and maintaining 
large amounts of US upland cotton production.
198  
 
170.   Brazil quotes a report that states that a 10 per cent increase in soybean prices reduces 
upland cotton acreage by only 0.25 per cent (Brazil's 7 October oral statement, para. 27). Could Brazil indicate if this analysis is done on  a short-run basis or a long-run basis? BRA  
 
Brazil’s Answer
: 
 
154. The authors of the USDA study cited by  Brazil – USDA economists Westcott and Meyer – 
use a “modified version of the estimated elasticities from Lin et al.,”199 which Westcott/Meyer refer to 
as a technical improvement.  The original study by Li n et al. appears to estimate short to medium-run 
elasticities.  Lin et al. use what they describe as “new supply response elasticities . . . in short-term, 
acreage forecasting applications”.200  For the estimation of the elasticities themselves, Lin et al. use 
two models that are solved by regression analysis of the effect of expected relative price changes 
between crops and the resulting acreage effects in the two following years.201   
 
                                                      
 197 See Brazil’s 7 October Oral Statement, paras. 32-33. 
 198 Brazil’s 9 September Further Submission, paras. 148-161.  See further Brazil’s 7 October Oral 
Statement, paras 31-34.   
 199 Exhibit Bra-275 (“US Cotton Supply Response Under the 2002 Farm Act,” Westcott and Meyer, 
USDA, 21 February 2003, p. 9).  Brazil is not in a position to specify in which sense the estimated elasticities 
are modified. 
 200 Exhibit Bra-306 (“Supply Response under the 1996 Farm Act and Implications for the US Field 
Crops Sector,” Lin et al., USDA, July 2000, p. 2). 
 201 Exhibit Bra-306 (“Supply Response under the 1996 Farm Act and Implications for the US Field 
Crops Sector,” Lin et al., USDA, July 2000, p. 9-16). WT/DS267/R/Add.2 
Page I-218  
 
155. Lin et al. present their results in Table 21 of their study.
202  It appears that the resulting 
estimates of the acreage pr ice elasticities are short or medium -term elasticities (acreage reaction one 
to three years in the future), and that the adaptations by Westcott and Meyer are also short to medium-
term elasticities.203  
 172.   Please estimate the price effect, in cents  per pound, of the growth in the US retail 
market which it is said has directly contribut ed to strengthening world cotton prices.  US 
 
Brazil’s Comment
: 
 
156. Brazil emphasizes that its claims under Article  6.3(c) of the SCM Agreement revolve around 
the present and threatened suppression of prices.  Thus, whether world upland cotton prices are 
strengthening or weakening is irrelevant to the question whether those prices would have been higher 
(at any price level) but for  the US subsidies.   
 176.   With reference to Figure 4 of Brazil's Further Submission, how does Brazil explain the 
apparent  decrease in prices in 2001 and the increa se of the A-Index in recent months, despite 
the continued use of US subsidies on upland cotton? BRA   
Brazil’s Answer
: 
 
157. Brazil has consistently argued that over the period of investigation (MY 1999-2002), the US 
subsidies caused price suppression that was significa nt when A-Index prices declined and when A-
Index prices increased both during and near the e nd of the period of investigation in mid-2003.204  As 
Brazil explained at the meeting on 7 October 2003, A -Index prices rise and fall for a variety of supply 
and demand reasons.205  One of the reasons that prices fell as low as they did in MY 1999-2001 and 
did not rise as far as they should have in MY 2002 was due to the US subsidies.  This is best 
illustrated in Figure 14, set out in Brazil’s 9 Sept ember Further Submission and reproduced below:   
  
                                                      
 202 Exhibit Bra-306 (“Supply Response under the 1996 Farm Act and Implications for the US Field 
Crops Sector,” Lin et al., USDA, July 2000, p. 60). 
 203 Due to the adaptations, the elasticities reported by Westcott and Meyer are not identical to those 
reported by Lin et al.  
204 Brazil’s 9 September Further Submission, paras. 83-89 (discussing definition of “price 
suppression”); paras. 92-93 (discussing “causation”).   
 205 Brazil’s 7 October Oral Statement, paras. 18-28. WT/DS267/R/Add.2 
Page I-219 
 
 
Figure 14206 
Price Suppression MY 1999-2002
40455055606570
1999 2000 2001 2002
marketing year
A-Index w/ out U.S. Subsidies
A-Index
 
158. This figure represents Professor Sumner’s find ings, but a similar figure could be reproduced 
to reflect other levels of price suppression – incl uding the 33.6 per cent suppression of US prices 
found by USDA’s own economists for MY 2001,207 as well as the ICAC and other international 
organizations’ findings of price suppression caused by US subsidies for upland cotton.208  Professor 
Sumner’s findings indicate that during MY 1999-2002, there were a number of global supply and demand factors (including $12.9 billion in US subsid ies) that caused upland cotton prices to fall and 
remain at low levels compared to historical pric es throughout the period of investigation.  The upper 
line on the graph reflects the contribution of the $12.9 billion in US subsidies to keeping A-Index 
prices suppressed.  The area below the upper line and above the darker area reflects the amount of 
price suppression.  In other words, regardless of whether market prices rise or fall, there is always a price-suppressive effect.    
159. With respect to the Panel’s specific question re garding the effects of US subsidies in the latter 
half of MY 2002, the record shows that US and A-Index prices rose in MY 2002 for a number of 
supply 
and demand factors – many of which also impacted  the market during the fall of prices in MY 
1999-2001.  The most important supply factor was the decline  in production of 1.71 million tons in 
MY 2001-2002 by non-US producers such as the Afri can Franc zone, Southern Africa, East Asia, 
South Asia, and the former Soviet Union countries.209  The evidence suggests that many of these 
producers could not maintain existing levels of pr oduction at lower prices that existed in MY 2001 
and MY 2002.  For example, Christopher Ward te stified that even though Brazilian Mato Grosso 
producers had extremely high yields and low costs, they were forced by low prices to cut their 
production by 34 per cent in 2001 and by 25 per cent in 2002, compared with 2000 production levels.
210  Similarly, Mr. Ibrahim Malloum, President of CottonChad, testified that lower prices in MY 
                                                      
 206 A-Index prices with and withou t subsidies are based the baseline and the change from the baseline 
as reflected in the results of Professor Sumner’s simulation model.  See Brazil’s 9 September Further 
Submission, Annex I, Table I.5a. 
 207 Brazil’s 7 October Oral Statement, para. 32-33.   
 208 See Brazil’s 9 September Further Submission, paras. 148-162 (discussing price suppressing effects 
of marketing loan payments including Figure 11 at paragraph 160), para. 190 (NCC estimates of  3 cent per pound price suppressing effect from only the GSM 102 program), paras. 200-213 (various international studies), 
paras. 214-232 (Professor Sumner’s analysis).  See also  Brazil’s 7 October Oral Statement, paras 31-34 
(discussion of Westcott/Price studies of price suppressing effects of marketing loans in MY 2000 and MY 2001).   
 
209 Exhibit Bra-208 (“Cotton: World Statistics,” ICAC, September 2003, p. 28-29).   
 210 Exhibit Bra-283 (Statement of Christopher Ward – 7 October 2003, para. 6).   WT/DS267/R/Add.2 
Page I-220  
 
2001-02 meant that Chadian production fell because producers could not afford inputs such as 
fertilizer.
211   
 160. For US producers at the time of planting for the MY 2002 crop – between January-April 2002 – the AWP and US price received by US producers were near record lows.
212  Faced with an annual 
39 cents per pound differential between total costs and such prices in MY 2001, US cotton producers 
still planted 14.2 million acres of upland cotton for MY 2002.213  The resulting US production in MY 
2002 was 16.73 million bales (or 3.64 million metric tons).  This is an extraordinary amount of 
acreage and production given the huge gap betw een US producers’ costs and expected market 
revenue.  It is estimated that without US subs idies, US production in MY 2002 would have been 
approximately 1.92 million metric tons, or 1.72 milli on metric tons less than what US upland cotton 
farmers actually produced.214  The effects of this additional 1. 72 million metric tons of subsidy-
generated production can be judged from the effects of an actual decline in world supply of 2.365 
million metric tons215, which contributed to an increase in A-Index prices of 33  per cent between MY 
2001 and MY 2002.216  If an additional  1.72 million metric tons of US production were taken out of 
world supply, prices would have been even higher.   Professor Sumner has indicated that A-Index 
prices in MY 2002 would have increased by  17.70 per cent absent the US subsidies.217  Thus, the 
effect of the US subsidies in MY 2002 – even as prices increased – was to suppress prices.    
178. The Panel notes Exhibit US-63.  Could the US please provide a conceptually analogous 
graph concerning US export sales during the same period? US 
 Brazil’s Comment
: 
 161. Brazil offers a conceptually analogous figur e to Exhibit US-63 concerning US and rest-of-
the-world export sales.  The figure below shows the relative changes in US and non-US exports as 
compared to the previous year for the period MY  1997-2002, based on data  covering the period MY 
1996-2002.
218 
 
                                                      
 211 Chad’s 8 October Oral Statement (Statement of Ibrahim Malloum, para. 7).   
 212 See Brazil’s Answer to Question 167.   
 213 Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4).   
 214 Brazil’s 9 September Further Submission, Annex I, Table I.5a applying the percentage change. 
 215 Exhibit Bra-208 (“Cotton: World Statistics,” ICAC, September 2003, p. 4). 
 216 Exhibit Bra-208 (“Cotton: World Statistics,” ICAC, September 2003, p. 106). 
 217 Brazil’s 9 September Further Submission, Annex I, Table I.5a. 
 218 Exhibit Bra-307 (Change in US and World Exports in Percent).  The exhibit also contains the 
underlying data for the figure with the sources being described in more detail in Exhibit Bra-302 (Revised and 
Extended Data on Article 6.3(d) claim). WT/DS267/R/Add.2 
Page I-221 
 
 
Percent Chan ge in
-60-40-20020406080
1997 1998 1999 2000 2001 2002
marketing yearch
ange
in
perc
ent
from
pr
eviou
s
ye
arUnited States
Rest of the World
 
 
162. The figure demonstrates that US exports in creased in every year except for MY 1998, during 
which the United States claims it suffered a major cr op failure.  In addition, US exports increased in 
all years, except for MY 1998, more than exports  from non-US producers, which since MY 2000 even 
decreased continuously.  The figure demonstrates that the United States gains world market share, 
with its own exports increasing since MY 1999, at th e expense of non-US exports, which have fallen 
since MY 2000. 
 163. In sum, this figure supports Brazil’s claim of  serious prejudice under Articles 5(c) and 6.3(d) 
of the SCM Agreement.  It also supports Brazil’s claim of serious prejudice under Articles XVI:1 and 
3 of GATT 1994 because the USshare of world export tr ade increased, in significant part, by the US 
subsidies at the expense of other lower-cost producers. 
 
179 Could Brazil comment on the argument that  decoupled payments and other subsidies to 
upland cotton are largely being capitalized into  land values and that removing these subsidies 
would reduce the cost of production of upland cotton producers (US 7 October oral statement, 
para. 48).  What would be the net effect of these adjustments? BRA 
 Brazil’s Answer
: 
 164. A February 2003 study by ERS economists estimated that “decoupled” payments lead to an increase of about 8 per cent in US farmland values.
219  A more comprehensive ERS 2001 report 
estimating the regional effects of all subsidies (not  just decoupled subsidies) on land values found that 
land values increased by 16 per cent in the regions wh ere upland cotton is grown.  This is shown in 
the following chart:220   
 
                                                      
 219 Exhibit Bra-308 (“Decoupled Payments:  Household Income Transfers in Contemporary US 
Agriculture,”  ERS Agricultural Economic Report No. 822).    
220 Exhibit Bra-309 (Barnard C., Nehring, R., Ryan, J., Collender, R. “Higher Cropland Value from 
Farm Programme Payments: Who Gains?” Economic Res earch Service. USDA Agri cultural Outlook November 
2001, p. 29). 
     Change in percentage from previous year WT/DS267/R/Add.2 
Page I-222  
 
ERS/USDA Estimated Cropland Value Attributable to 
Commodity Programme Payments 
Region Total Value of Land 
Harvested in 8 
Programme Crops Estimated Value 
Attributable to 
Commodity 
Programme 
Payments Per cent of Value 
Attributable to 
Commodity 
Programme 
Payments 
Prairie Gateway  41.70 9.40 23.00 
Mississippi Portal 17.30 2.70 16.00 
Fruitful Rim 21.60 2.20 10.00 
Southern Seaboard 18.20 1.80 10.00 
Eastern Uplands 4.60 0.50 10.00 
Total 103.40 16.60 16.05 
 165. Brazil notes that neither of these studies provid es an estimate of the percentage of each dollar 
of “decoupled” or total subsidy payments that are capitalized into land values .  However, an 
August 2003 study by ERS economists indicates that PFC payments in MY 1997 resulted in an 
increase of land rents by 34-41 cents of per PFC dollar.
221  Thus, contrary to the premise of the 
Panel’s question, this evidence suggests that PFC payments are somewhat, but not “largely 
capitalized” into land rents.   
 166. There would be only a minimal impact on tota l costs of production for upland cotton farmers 
from the removal of both “decoupled” and total US  subsidies.  For the allegedly “de-coupled” 
payments referred to in the February 2003 ERS st udy, the impact of an 8 per cent reduction in land 
values translates into a decrease in total costs of US upland cotton producers by less than one per cent 
(0.75 per cent).
222  If the effects on increased land values from all subsidies are taken into account 
(using the 2001 ERS regional study), then US upland cotton producers’ costs would have declined between MY 1999-2002 by only 1.49 per cent.
223  In response to the Panel’s question, the net effect of 
these tiny adjustments throughout MY 1999-2002 on th e very wide cost-revenue gap and the other 
costs of production analysis conducted by Brazil in its various submissions is obviously minimal.   
  
167. Finally, the United States at paragraph 48 of its 7 October Oral Statem ent criticized Professor 
Sumner’s analysis for allegedly not factoring into his estimates the effect of direct payments being capitalized into increased land rents.  The US criticis m is misplaced.  Professor Sumner’s model used 
very low estimates of production incentives for ever y dollar of PFC payments (only 15 per cent) and 
direct payments (only 25 per cent).
224  By taking a very conservative approach for these direct 
payments, Professor Sumner’s analysis more than allows for the effects these payments have in 
increasing land values.  This can be illustrated by using the 34-41 per cent results of the August 2003 
land rent study referred to above.  The results of  this study suggest that 66-59 cents of each PFC 
dollar are not reflected in increased rents.   This leaves more than enough residue from each PFC and 
direct payment dollar to account for the only 15-25 per cent production effects for PFC/direct 
payments found by Professor Sumner.225  
 
180. Please describe the precise formula as to how USDA determines the "adjusted world 
price" using the Liverpool A-Index, the NY futures price and any other relevant price indicators.  Please submit substa ntiating evidence.  BRA, US 
                                                     
 
 221 Exhibit Bra-310 (“The Incidence of Government Program Payments on Agricultural Land Rents:  
The Challenges of Identification”, Roberts, Kirwan, and Hopkins, August 2003, American Journal of 
Agricultural Economics, p. 767.).   
 222 Exhibit Bra-7 (ERS Data: Commodity Costs and Returns). 
 223 Exhibit Bra-7 (ERS Data: Commodity Costs and Returns). 
 224 Brazil’s 9 September Further Submission, Annex I, para. 48.  
 225 Brazil’s 9 September Further Submission, Annex I, para. 48.  WT/DS267/R/Add.2 
Page I-223 
 
 
 
Brazil’s Answer : 
 168. Brazil looks forward to rece iving a detailed description of the complicated calculation of the 
adjusted world price from the United States in reply to this question.  Brazil has set forth a brief 
description of the calculation of th e adjusted world price in paragraph 73 of its 24 June First 
Submission, and will elaborate to the best of its understanding.  169. The details of the complicated calculation me thod for the adjusted world price are laid down 
in 7 CFR 1427.25.
226  The weekly Cotton Outlook published by Cotlook Ltd. provides a somewhat 
simpler description of the process.  Exhibit Bra-51 includes the Cotton Outlook description of the “US 
Pricing Mechanism”, including the calculation of  the adjusted world price for the week of 
31 January 2002.227   
 170. The descriptions shows that the adjusted wo rld price is calculated based on the A-Index from 
which a total adjustment factor is subtracted, thus: 
 
The Adjusted World Price
 (AWP) is calculated from CIF North Europe quotations, 
adjusted for shipping, location and quality  differentials.  The Shipping Differential  is 
derived from the average over the preceding 52 weeks, or as many of that number of weeks for which quotations are available, of the difference, calculated from 
Thursday’s values only, between the average of the Memphis and California/Arizona 
CIF North Europe quotations, and the Midd ling 1-3/32” (31-35) domestic spot market 
average.  However, the Shipping Differentia l in any week may not fall below, or rise 
above 115 per cent, of an assessed actual transportation cost (now 12.9 cent).  A 
further discount, the Course Count Adjustment
, is applied by reference to the amount 
by which the World Quality difference exceeds the appropriate Loan Quality 
Difference.  It applies to cotton of any grade stapling 1-1/32” or shorter, and to selected lower grades in longer staples.
228 
171. Brazil also notes that under certain conditions , the Secretary of Agriculture is entitled to 
reduce the adjusted world price belo w the result of this calculation – th e so-called Step 1 adjustment.  
In such circumstances, the adju sted world price would be reduced by a maximum of the difference 
between the A-Index and the average of the cheap est US Middling 1-3/32” CIF North Europe quotes 
– thus, the amount by which the US price quotes exceed  the average of the fi ve cheapest price quotes 
worldwide.  Such a downward adjustment would incr ease the amount of marketing loan payments that 
US upland cotton farmers receive and help clo se the cost-revenue gap that US producers face. 
 181. Please provide a side-by-side chart of the w eekly US adjusted world price, the Liverpool 
A-Index, the NY futures price, and spot market prices from 1996-present.  What, if anything, does this reveal? BRA, US 
Brazil’s Answer
: 
 172. In Brazil Bra-311, Brazil provides a side-by-side  chart of the weekly US AWP, the A-Index, 
the nearby New York futures price, the average US spot market price and prices received by US 
producers from January 1996 to the present.  Th e figure below shows the respective price 
developments over this period.  Exhibit Bra-311 also contains a colour copy of this chart.
229 
 
                                                      
 226 Exhibit Bra-36 (7 CFR 1427.25). 
 227 Exhibit Bra-51 (Cotton Outlook, 1 February 2002, p. 16). 
 228 Exhibit Bra-51 (Cotton Outlook, 1 February 2002, p. 16) (emphasis in original). 
 229 The data has been obtained from the Cotton Outlook published by Cotlook, Ltd. in Liverpool.  WT/DS267/R/Add.2 
Page I-224  
 
Upland Cotton Prices: 1996 - Present
20.0030.0040.0050.0060.0070.0080.0090.00
January-96
April-96
July-96
October-96January-97
April-97
July-97
October-97January-98
April-98
July-98
October-98January-99
April-99
July-99
October-99January-00
April-00
July-00
October-00
January-01
April-01
July-01
October-01
January-02
April-02
July-02
October-02
January-03
April-03
July-03
October-03cents per pound
Adjusted World Price NY Futures Weekly Average of US Spot Markets Weekly Average of the A-Index Prices Received by Producers 
 
173. The figure demonstrates that the A-Index pri ce is consistently 12-14 cents per pound higher 
than the adjusted world price (“AWP”), which constitutes the basis for the US marketing loan 
payments.  The average difference between both prices over the 1996-present period is 13.76 cents 
per pound.  As expected, both prices move in parallel.   Further, both prices follow the price trends that 
originate from the New York futures market or at leas t move in parallel to those prices.  There is also 
a close linkage between the average US spot market price and the New York futures and A-Index prices.  
174. The figure further demonstrates that the New York futures prices a nd the average US spot 
market prices are usually more volatile than the A-Index and AWP prices.  Thus, any rapid increases 
or decreases in the New York futu res prices will not necessarily be reflected to the same extent in 
AWP or prices received by US producers – the pric es of which marketing loan and counter-cyclical 
payments, respectively, are triggered.  Th ey may just be a temporary phenomenon.  
 
175. In sum, the price movements support Brazil’ s argument that New York futures, US and 
international prices for upland cotton are closely linked, and that price movements and trends 
originating from the US market are clos ely tracked by prices on the world markets.
230 
 176. That US and international – and indeed Brazilian – prices closely track each other 
demonstrates that production and price effects from the US subsidies on the US market are 
transmitted to the international upland cotton market and to third country markets such as the Brazilian market or markets where Brazil exports its upland cotton.  The Panel will remember that the 
A-Index is composed of price quotes from 16 di fferent upland cotton export markets around the 
world.
231  Thus, if USDA studies like those undertak en by Westcott and Price establish price-
suppressing effects of the US subsidies for the US  market, those effects will also occur on the 
                                                      
 230 See Section 3.3.4.9 of Brazil’s 9 September Further Submission, para. 233-250. 
 231 Brazil’s 9 September Further Submission, Annex II, para. 24.  WT/DS267/R/Add.2 
Page I-225 
 
 
international and third country markets.  The para llelism in the price movements establishes the link 
between price suppression in the US and internati onal markets and other third country markets. 
 
182. Please explain why the US can be taken to be price leaders , or price setters , (and not just 
takers) when US producers receive large subsid y payment to support the difference between 
world prices  and their own costs?  BRA 
 
Brazil’s Answer : 
 177. The Panel’s question focuses first on “US produ cers” who receive large subsidies.  One of the 
premises of this question is that US producers receive subsidies that account for the difference 
between world prices and their own costs.  This is not en tirely correct.  US producers receive what the 
USDA refers to as “Average price received by US producers”.  During the MY 1999-2002 period, this 
US producer price was on average 9.2 cents per pound, or 17.6 per cent, below the world A-Index 
price.
232  Other than the first month of marketing year 1999, the A-Index price was always higher than 
the US price received by US producers between MY 1999-2002.  The lower prices paid to US 
producers are partly explained by the transportation costs of upland cotton from the United States to foreign markets, where most US upland cotton is  marketed.  However, as the Panel’s question 
suggests, the total revenue received by US produc ers includes marketing loan payments that are a 
function of the set loan rate (52 cents in MY 20 02) and the adjusted world price that itself is 
determined in part by reference to the A-Index prices.   
  
178. During MY 1999-2002,  individual US producers of upland cotton did not “set” or “lead” A-
Index prices.  Most US producers were isolated from the effects of market price during MY 1999-2002.  As the Panel’s questions implies, on average,  US producers were generally able to cover their 
costs based on a combination of market revenue and the large subsidies they received during MY 
1999-2002.
233  The guaranteed subsidies and price suppor t at high price levels ensured a revenue 
stream that left them largely indifferent to market prices throughout the entire period of investigation.     179. The Panel’s question further asks how the Unite d States could be a “price setter” in the world 
upland cotton market.  Individual US exporters  of US upland cotton do not “set” or “control” the 
price of upland cotton.  In a world-wide market such as the upland cotton market, no single private 
trader has the market power (in an anti-trust sense)  to “set” the world price.  As Andrew Macdonald 
testified, prices of upland cotton are discovered hourly and daily by traders in the futures, spot, and 
forward delivery markets based on key supply and demand factors.
234  Nor has Brazil argued that the 
US leads prices down by initiating a price war, as may occur with industrial products. 
  
180. What Brazil has argued is that the United States is a leading driver  of the world upland cotton 
market to the extent it suppresses the price of upla nd cotton.  The United States can do this because of 
its large guaranteed production and di rect subsidies that inject a near permanent stream of large US 
production and supplies into the world market.  US export subsidies drive the world market in the 
sense that they stimulate the demand for high-cost US upland cotton at the expense of other world producers.  Further, its size (by far the largest e xporter and second largest producer), its transparency, 
which in turn plays a major role in the price disc overy in the New York futures market, and the ability 
of US exporters to use the Step 2 and GSM 102 tools to market US upland cotton, allow it to suppress world prices.
235  Only by taking these price-suppressing factors into account could it be said that the 
United States “leads” world prices.   
                                                      
 232 See Brazil’s Answer to Question 181 fo r data on the A-Index prices and the prices received by US 
producers. 
 233 See Brazil’s Answer to Questions 125 (2) (c) and 163. 
 234 Brazil’s 9 September Further Submission, Annex II, paras 11-13, 15-25 and 38-42.  
 235 Brazil’s 9 September Further Submission, paras. 134-145;  Annex II, paras. 38-42 and Chad’s 8 
October Oral Statement (Statement of Ibrahim Malloum), para. 13-14. WT/DS267/R/Add.2 
Page I-226  
 
 181. For example, the large size of the US pr oduction, which represents approximately 20 per cent 
of total world supply annually, is a key fact or in driving and influencing world prices.
236  Shifts in US 
production caused by good or bad US weather influence total world supply and create an impact on world prices.
237  In much the same way as US weather play s a role in the discovery of world prices 
(by reducing US and, thus, world stocks), continue d high levels of US produ ction generated by US 
subsidies suppressed world prices throughout the period of investigation by increasing world supplies.   
 182. Further, the dominant (over 40 per cent) export market share of the United States coupled with the Step 2 and GSM 102 export subsidies creates a further suppressing effect on world prices.
238  
These export subsidies allow US exporters to price their upland cotton below the prices of most other 
world producers because Step 2 gives them (not US  producers) the difference between the lowest US 
price and the A-Index price (the average five lowest prices in the world market).239  These subsidies, 
along with the domestic production and direct paymen t subsidies, have perm itted exporters of high-
cost US upland cotton to increase US world mark et share even as prices plunged throughout MY 
1999-2001.  Thus, while individual US exporters may not have “set” or “led” prices, the US subsidies 
allowed these exporters to continue marketing high-cost US cotton at whatever market price was 
determined by global supply  and demand conditions.   
 
K. ARTICLE XVI OF GATT 1994 
 
183. Why does Brazil believe that the appropri ate "previous representative period" is the 
term of the previous Farm Bill, MY1996-2002?  (Brazil's further submi ssion, para. 282)  BRA 
 
Brazil’s Answer : 
 
183. The Panel’s question has stimulated a re-eva luation by Brazil of the appropriate “previous 
representative period” in relation to Article XVI:3.  Brazil agrees with the US arguments made in the 
EEC – Wheat  Flour  GATT dispute that the appropriate “previous representative period” in 
Article XVI:3 should be one in whic h trade patterns have not been distorted by subsidies.  In that 
dispute, the United States correctly argued:     
 
…that the three most recent calendar years could not be used as the representative period in the case since, given the distortion of trade patterns resulting from the heavy 
use of export subsidies by the EEC, it di d not constitute a period during which 
“normal market conditions existed.”  Th ere was ample GATT precedent for selecting 
a period when subsidization was not unduly affecting the market shares.  During the 
1995 Review Session it was agreed that in de termining what is an equitable share of 
world trade, the CONTRACTING PARTIES s hould not lose sight of the “fact that 
                                                     
 
 236 Brazil’s 9 September Further Submission, para. 135. 
 237 Consider the following market reports:  Exhibit Bra- 312 (Cotton Outlook, 4 October 2002, p. 3 
(“Current developments on the production side – though perhaps not the consumption side – would seem to be 
constructive for prices. Yield potential in several parts of the world appears to be diminishing as a result of 
unfavourable weather – including storm systems affecting open cotton in parts of the United States.”));  Exhibit 
Bra-312 (Cotton Outlook , 27 September 2002, p.3 (“Tropical Storm Isidore drove New York futures to higher 
levels earlier this week, on the grounds that its predic ted path would bring heavy rainfall across a huge swathe 
of the south eastern United States and the Memphis Territory, and thus damage yield and quality prospects…  
[D]espite the adverse weather, the US will continue to need to make inroads into what remains a significant 
exportable surplus.” ));  and Exhibit Bra-312 (Cotton Outlook, 7 June 2002, p. 3 “Many eyes are directed 
towards developments in West Texas, where rain appear s to have fallen too heavily in places where it is less 
needed and insufficiently in the dryland areas where soil moisture is lacking.”)). 
 238 See Brazil’s 9 September Further Submission, paras. 139-142. 
 239 Chad’s 8 October Oral Statement (Statement of Ibrahim Malloum), para. 14;  Brazil’s 9 September 
Further Submission, Annex II, paras. 31, 49-53. WT/DS267/R/Add.2 
Page I-227 
 
 
the export subsidies in existence during the selected representative period may have 
influenced the share of the trade obtained by the various exporting countries.”  (GATT, BISD 3
rd Supplement, paragraph 19, page 226).  Then, in 1960, the 
CONTRACTING PARTIES adopted a Panel Re port which dealt with notification of 
subsidies, in which it was agreed that an analysis of the effect of a subsidy should 
include statistics “… for a previous representative year, which were possible and 
meaningful, should be the latest period pr eceding the introduction of the subsidy or 
preceding the last major change in the subsidy.” (GATT, BISD 9th Supplement, 
Annex II(b)(ii), page  194)….  Thus, it was necessary to examine a period of which 
preceded the adoption of the EEC’s subsidy syst em in order to assure that the trade 
distorting effect which the EEC system had already had on world markets was minimized as a factor in judging “equitable share.” 
240 
184. There has been no period since the 1930s when US producers of upland cotton were not 
subsidized.241  Since the 1980s in particular, US upland cotton producers have been guaranteed very 
high levels of government payments by a variet y of subsidies, including the marketing loan 
programme that began in MY 1986.  The revenue guar antee that these subsidies provide has locked in 
large amounts of apparently permanent high-cos t US upland cotton production and exports.  These 
distortions exist even in those years in which actual quantities of payments under the programmes are 
minimal due to higher prices.  This is because the subsidies provided to high-cost producers in years of low prices mean they stay in business to c ontinue to produce upland cotton also at times when 
subsidies fall due to increased prices.  The rela tively small planted acreage and production response 
by US producers to market prices over many year s reflects the effects of this guaranteed US 
government revenue.  185. In view of the US arguments in EEC – Wheat Flour and the long-term distortions in the US 
production and exports caused by US subsidies, one  appropriate “representa tive period” would be a 
simulated period in which no subsid ies were provided.  The Panel would examine the question:  what 
would be a Member’s share of world trade if it recei ved no subsidies?  This qu estion, of course, is a 
function first of the amount of acreage and produc tion, and ultimately exports attributed to the 
subsidies.  The Panel is fortunate to have the benefit of very recent 2003 analysis by USDA 
economists Westcott and Price, who estimated that up to 3 million US acres of upland cotton 
production would have not been planted in MY 2001 if no marketing loan payments were made that 
year.  These 3 million acres represent 19.36 per cent of US upland cotton acreage in MY 2001.
242  A 
reduction by this amount would imply a reduction in US production of 3.79 million bales for MY 
2001.243  Consequently, US exports would also fall by  about 3.79 million bales, representing 34.74 per 
cent of US exports in MY 2001.244  The implied export effects from the Westcott/Price study are very 
similar to those found by Professor Sumner, who estimated the export-increasing effects of the 
marketing loan programme in the comparable period to be 29.67 per cent and the effects of all US 
subsidies to increase US exports by 48.16 per cent.245 
 186. The record provides an example of what the US share of world export trade in upland cotton 
would be in a marketing year in which production  and exports fell by amounts similar to those 
estimated by Professor Sumner and Westcott/Price.  In MY 1998, 20 per cent of US upland cotton 
                                                     
 
 240 GATT Panel Report, EEC – Wheat Flour , para. 2.8 – 2.9 (emphasis added). 
 241 See Brazil’s 9 September Further Submission, para. 269. 
 242 Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4). 
 243 19.36 per cent of 19.603 million bales as reported in Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” 
USDA, January 2003, p. 4).  
244 Exhibit Bra-4 (“Fact Sheet: Upland Cotton”, USDA, January 2003, p. 5). 
 245 Brazil’s 9 September Further Submission, Annex I, Tables I.5d and I.5a.  See paras. 17-18 and 75 
for determining the comparable period. WT/DS267/R/Add.2 
Page I-228  
 
acreage was abandoned and US harvested acreage fell by 2.8 million acres compared to MY 1997.
246  
US production fell by 4.77 million bale s and US exports fell by 3 million bales.  As a result, US world 
market share declined from 27.6 per cent in MY 1997 to 17.9 per cent in MY 1998.247  This 
considerable decrease in the US share of world ex port trade provides an approximation for the Panel 
to assess what the equitable US share would be but for the US subsidies in MY 2001-2003.  Thus, 
MY 1998 is a useful representative period for the Panel to examine (in conjunction with Professor 
Sumner’s and USDA economists Westcott/Price’s analysis).   187. An alternative representative period that the Panel could use for assessing the inequitable 
nature of the US share of world export trade in  upland cotton is the period MY 1994-96, during which 
the average level of US subsidies fell to “only” $495 million per year.
248   The development of the US 
world market share in MY 1994-1996 compared to MY 2001-2003 is shown in the graph below:249   
 
U.S. Share of World Export Trade (MY1994-2003)
1015202530354045
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
marketing yearpe
rce
nta
ge
 
 
188. During the period 1994-1996, US producers were generally able to cover their total costs of 
production largely from market revenue.  In th ese conditions, US world market share averaged 
28.4 per cent.250  Yet, in conditions where market revenue  plunged, costs of production and the cost-
revenue gap increased.  Average MY 1999-2002 US s ubsidies were six times greater than the period 
MY 1994-96, and US world market share increa sed to between 38 and 41.6 per cent in MY 2001-
2002.  These record high levels of world market shar e were purchased with la rge increases in both the 
quantity and level of guaranteed subsidies in MY 2001-2003 – huge marketing loan payments as well 
as increases in revenue support of 10 cents a pound resulting from the 2002 FSRI Act.251  Thus, even 
though the period MY 1994-1996 was still heavily in fluenced by the revenue guarantees provided by 
the numerous US upland cotton subsidy programmes, this period could be a representative period for 
the Panel to examine for the purposes of making its “i nequitable” share of world export trade findings.   
                                                      
 246 Exhibit Bra-4 (“Fact Sheet: Upland Cotton”, USDA, January 2003, p. 4-5).   
 247 Exhibit Bra-302 (Revised and Extended Data on Article 6.3(d) claim). 
 248 See Brazil’s 9 September Further Submission, para. 110, note 145 and Figure 2.   
 249 Exhibit Bra-302 (Revised and Extended Data on Article 6.3(d) claim). 
 250 Exhibit Bra-302 (Revised and Extended Data on Article 6.3(d) claim). 
 251 Brazil’s 9 September Further Submission, para. 309.      percentage WT/DS267/R/Add.2 
Page I-229 
 
 
 
184. Why does Brazil believe that an "equitable share" is one which factors out all subsidies?  
To the extent that domestic support a nd export subsidies are permitted by the Agreement on 
Agriculture , why should they not be accepted as being normal conditions in analyzing an 
equitable market share?  (See Brazil's further submission, paras 288-289)  BRA 
 Brazil’s Answer:  
 
 
189. Brazil believes, for the reasons artic ulated by the United States in the EEC - Wheat Flour  
dispute quoted in Brazil’s Answer to Question 183,  that the appropriate representative period for 
evaluating the inequitable share of share of world export trade is one in which no (or at most very 
few) trade-distorting subsidies were provided.  Selecting an earlier  representative period where the 
market share is not tainted with subs idies allows an assessment of whether a later  market share is 
tainted by subsidies.  As the United States argued well in EEC – Wheat Flour, the inequitable  nature 
of a world market share can best be judged in comparison to what an equitable , i.e., non-heavily 
subsidized world  market share would be.  This is consiste nt with Brazil’s arguments in paragraphs 
288-289 of its 9 September Further Submission that a non-subsidized world market share of 17 per cent is, by definition, an equitable share for the purpose of Article XVI:3.  By contrast, a heavily 
subsidized and subsidy-increased world market  share of 41.6 per cent in MY 2002 is inequitable.
252   
 190. With respect to the second question, Brazil not es that although agricultural domestic and – to 
a certain extent - export subsidies are not prohibite d, GATT Article XVI places clear limits to such 
subsidization.  Section A determines, for example, that subsidies must be notified when the operate 
“directly or indirectly to increase exports of any product from, to reduce imports of any product into, 
its territory”.  More specifically, it established that the subsidizing Member must avoid causing 
serious prejudice to the interest of other Members.   Therefore, even purely domestic subsidies should 
only be granted in a manner that does not affect the equilibrium of world trade that would be achieved 
in their absence.    191. The GATT Article XVI obligations – especially  those of the second sentence of paragraph 3 – 
are primarily focused on the effects of subsidies th at operate to increase exports.  Paragraph 2 places 
particular emphasis on the fact that such subsid ies “may cause undue disturbance” to the “normal 
commercial interests” of other Members.  Large s ubsidies stimulating expor ts cannot be understood 
not to cause “undue disturbance” that affect the “n ormal commercial interest” of other Members.  
Otherwise, GATT Article XVI:3 would be stripped of any meaning.  If, the starting point to an analysis of an equitable share grandfathers subsidies that were being previously granted, such analysis 
would start from an inequitable situation of equilibrium.   
 
192. The term “equitable” is defined as something that is “characterized by equity or fairness; fair, 
just.”
253  “Equitable” does not relate to something that is “legal” or “permitted.”  Something that is 
permitted may well be not equitable.  The fact that certain subsidies are “permitted” does not 
grandfather their effects and transforms them in to “normal conditions in analyzing an equitable 
market share,” as put by the Panel in this question.   The text of GATT Article XVI:3 requires that the 
test of “equitable” market share be primarily and in trinsically linked with the concept of fairness.  
Therefore, an “equitable” analysis of a fair equilibri um   of market shares cannot be one that starts by 
accepting as legitimate – or as “normal conditions” – the effects of widespread and expensive 
subsidies that only a few Members can afford, to the expense of developing countries.   
 
193. Brazil does not believe that subsidies representi ng 95 per cent of the value of a widely-traded 
commodity product like upland cotton can ever be c onsidered to have been  provided under “normal 
conditions”.  Nor can a dramatic in crease in absolute levels of s ubsidies coupled with the increase in 
                                                      
 252 See Brazil’s 9 September Further Submission, para. 288.   
 253 The New Shorter Oxford English Dictionary, 1993 edition, p. 843. WT/DS267/R/Add.2 
Page I-230  
 
the subsidization rate (and in absolute subs idy payments) during the period MY 1999-2002 over a 
previous representative period be considered to be “normal conditions”.  Further, when a more than 
doubling of world market share by a WTO Member co incides with record low world prices, record 
gaps  between total costs and market revenue and r ecord amounts of that Member’s subsidies, the 
subsidies cannot be considered to have been provided in “normal conditions”.   
 
185. Please respond to the following quest ions concerning the relationship between 
Article XVI:3 of the GATT 1994, the disciplines on export subsidies and domestic support in the 
Agreement on Agriculture  and the disciplines on prohibited export subsidies and actionable 
subsidies in Articles 3, 5(c) and 6.3(d) of the SCM Agreement .  BRA, US 
 
(a) Are agricultural domestic support progr ammes challengeable under Article XVI:3 of 
the GATT 1994?  How, if at all, is the title of  Section B of Article XVI ("Additional provisions on export subsidies " (emphasis added)) relevant?  How, if at all, are Articles 
13 and 21.1, or any other provisions of the Agreement on Agriculture, relevant?  
 
Brazil’s Answer
: 
 194. With respect to the first question, the answ er is that any domestic support programme that 
grants “directly or indirectly” “ any form of subsidy  which operates to increase the export of any 
primary product” is covered by the second senten ce of Article XVI:3.  All of the domestic support 
subsidies challenged by Brazil in this case operate  to increase US exports.  Professor Sumner found 
that each of the challenged US subsidies he ex amined had the effect of increasing US exports.
254   
 195. Because Article XVI, including Article XVI:3, d eals with serious prejudice to the interests of 
another Member, the direct context for interpreti ng its provisions is found in Article 5 of the SCM 
Agreement.  Article 5 makes no distinction between  subsidies contingent upon export and domestic 
support subsidies.  It provides that “[n]o Member should cause, through the use of any subsidy 
referred to in paragraphs 1 and 2 of Article 1, adverse effects to the interests of other Members”.  
Articles 1 and 2 of the SCM Agreement in turn make no distinction between export and domestic 
support subsidies.    
196. The United States argues that the only subs idies governed by Article XVI:3 are export 
subsidies.
255  This argument misreads Article XVI:3.  A lthough the first sentence of Article XVI:3 
refers to “subsidies on the export of primary products,” the second sentence provides: 
 
“If, however , a contracting party grants directly or indirectly any form of subsidy 
which operates to increase the export  of any primary product from its territory . . .”  
The word "however" is important, as it signifies that  the second sentence contradicts the first and does 
not follow from it.  Similarly, the use of the phrase “on the export of primary products” in the first 
sentence of Article XVI:3 is quite different from the phrase “which operates to increase the export of” 
in the second sentence of Article XVI:3.  The notio n of “on the export” is analogous to the export 
contingency set out in Article 3.1(a) of the SCM Ag reement.  However, the phrase “which operates to 
increase the export of” does not contain an export contingency requirement.  Rather, it focuses on 
effects – whether the subsidies have the effect of incr easing exports.  Thus, read in light of the SCM 
Agreement, the second sentence of Article XVI:3 en compasses a notion of export-related subsidies 
that is far broader than subsidi es that are “contingent upon export performance;” it includes as “export 
subsidies” those that operate to increase exports.     
 
                                                      
 254 Brazil’s 9 September Further Submission, Annex I, Tables 5a-5g.   
 255 US 7 October Oral Statement, para. 61. WT/DS267/R/Add.2 
Page I-231 
 
 
197. Indeed, the reading of the second sentence of Article XVI:3 as meaning “subsidies contingent upon the export of products” would render Article  XVI:3 a nullity.  This is because under the US 
interpretation, any form of subsidy covered by th e second sentence of Article XVI:3 would already be 
deemed prohibited as an export subsidy under Article 3.1(a).  Given Article 13 of the Agreement on 
Agriculture, GATT Article XVI:3 is clearly intended to  continue to provide ri ghts and obligations for 
Members.  Further, Article XVI is not a prohibited subsidy provision – it is an actionable subsidy 
provision.  The subsidies and the provisions of Article XVI that are not superceded by the provisions of the SCM Agreement or the Agreement on Agriculture
256 must be read consistent with the 
actionable subsidy provisions of Article 5 of the SCM Agreement.  Article 5 makes no distinction 
between subsidies that are contingent upon export and those that are not.  
 
198. With respect to the Panel’s second question, th e title of Section B is not determinative.  In 
light of the use of the phrase “any form of subsid y” in the second sentence of Article XVI:3, the title 
of Section B is properly read as encompassing any subsidies that have any effect on a Member’s 
exports – whether they be “export subsidies” con tingent upon export or whether they are “export 
subsidies” having the effect of increasing exports.  Finally, Brazil notes that the US argument that 
places primary reliance on the title of Section B to in terpret the second sentence of Article XVI: 3 is 
also questionable given the fact that Article XVI:5 is also covered by the title of Section B – and it 
deals with all types of subsidies covered by Article XVI.   199. With respect to the Panel’s reference to Article 21 of the Agreement on Agriculture, Brazil 
does not believe that it is particularly rele vant.  As the Appellate Body noted in the EC – Bananas  
case, Article 21 of the Agreement on Agriculture pr ovides that the provisions of GATT 1994 and the 
other multilateral trade agre ements on trade in goods “ shall apply subject to the provisions of this 
Agreement”.
257  The drafters of the WTO Agreement did not intend agricultural trade to be a GATT-
free zone − quite the opposite.  They simply provided transitional provisions in Article 13 of the 
Agreement on Agriculture to moderate the appli cation of some GATT provisions, strictly on a 
temporary basis. 258  
 200. Article 13 of the Agreement on Agriculture is not that relevant in providing guidance 
regarding whether domestic support measures are included within the meaning of “any type of 
subsidy” under Article XVI:3, second sentence.  Article 13(b)(ii) exem pts non-green box domestic 
support only from actions based on paragraph 1 of GA TT Article XVI, and does not directly exempt 
Article XVI:3.  However, Article XVI:1 and 3 must be read together in order to assert a claim of 
serious prejudice.
259   
 
201. Article 13(c)(ii) of the Agreement on Agricu lture provides that during the “implementation 
period”, export subsidies that conform fully to Pa rt V, as reflected in a Member's Schedule, are 
exempt from “actions” based on Article XVI.  By implication, such export subsidies are subject to 
actions under Article XVI after the expiry of the peace clause and will be subject to such actions as of the time that the Panel issues its ruling.  Th e same applies for green box domestic support under 
Article 13(a)(ii).  Those subsidies are also ex empt from actions under GATT Article XVI, including 
Article XVI:3.  But these subsidies can be challe nged under Article XVI:3 following the termination 
of the peace clause.   
(b) Are the requirements of Article XVI:3 of  the GATT 1994 reflected in, developed by or 
subsumed by the requirements in Article 6.3(d) of the SCM Agreement , or in any other 
                                                     
 
 256 See US- FSC, WT/DS108/AB/R, para 117 quoted in Question 185(a).   
 257 Appellate Body Report, EC – Bananas , WT/DS27/AB/R , para. 155.  
 258 Appellate Body Report, EC – Bananas , WT/DS27/AB/R , para. 155. 
 259 Brazil’s 7 October Oral Statement, para. 59 (arguing  that Articles XVI:1 and 3 are directly linked).   WT/DS267/R/Add.2 
Page I-232  
 
provisions of the covered agreements?  Of what  relevance, if any, is the Appellate Body 
Report in US-FSC , para. 117
260 here? 
 Brazil’s Answer: 
 202. Brazil agrees that Article 6.3(d) reflects one of the situations that would also fall under GATT 
Article XVI:3.  An increase in the world market sh are compared to the previous three-year average 
through the effects of subsidies would be consistent with a finding of an inequitable share of world trade under GATT Article XVI:3.  However, an incre ase over the previous three-year average is not a 
necessary prerequisite for a finding of a violation of GATT Article XVI:3.  For example, a Member’s 
share of world export trade may be inequitable even if that share has not increased over the average of 
the past three years.  Similarly, a Member’s increas e in exports may be inequitable even if an increase 
in exports has not followed a consistent trend, as required under Article 6.3(d).   
 203. GATT Article XVI:3 is concer ned with whether a particular level of a Members’ share of 
world export trade is equitable, whereas Article 6.3(d) of the SCM Agreement only addresses an 
increase in the share.  Article 6.3(d) creates a pres umption that an increase in a Member’s world 
market share over its previous three-year average that follows a consistent trend over a period when 
subsidies have been granted nullifies and impairs ot her Member’s rights.  No such presumption exists 
for Article XVI:3 – the nullification and impairment must be demonstrated by showing that the share 
                                                     
 
 260 WT/DS108/AB/R, para 117: 
"… the provisions of the SCM Agreement  do not provide explicit assistance 
as to the relationship between the export subsidy provisions of the 
 SCM Agreement  and Article XVI:4 of the GATT 1994. In the absence of 
any such specific textual guidance, we must determine the relationship 
between Articles 1.1(a)(1) and 3.1(a) of the  SCM Agreement  and 
Article XVI:4 of the GATT 1994 on the basis of the texts of the relevant 
provisions as a whole.  It is clear  from even a cursory examination of 
Article XVI:4 of the GATT 1994 that it differs very substantially from the subsidy provisions of the SCM Agreement , and, in particular, from the 
export subsidy provisions of both the SCM Agreement  and the Agreement on 
Agriculture .  First of all, the  SCM Agreement  contains an express definition 
of the term "subsidy" which is not contained in Article XVI:4.  In fact, as we 
have observed previously, the  SCM Agreement  contains a broad package of 
new export subsidy disciplines that "go well beyond merely applying and interpreting Articles VI, XVI and XXIII of the GATT 1947".  Next, 
Article XVI:4 prohibits export subsidies only when they result in the export 
sale of a product at a price lower than  the "comparable price charged for the 
like product to buyers in the domes tic market."  In contrast, the 
 SCM Agreement  establishes a much broader prohibition against any subsidy 
which is "contingent upon export performance".  To say the least, the rule contained in Article 3.1(a) of the  SCM Agreement  that all subsidies which 
are "contingent upon export performance" are prohibited is significantly 
different from a rule that prohibits only those subsidies which result in a lower price for the exporte d product than the comp arable price for that 
product when sold in the domestic market.  Thus, whether or not a measure 
is an export subsidy under Article XVI:4 of the GATT 1947 provides no 
guidance in determining whether that measure is a prohibited export subsidy 
under Article 3.1(a) of the  SCM Agreement .  Also, and significantly, 
Article XVI:4 of the GATT 1994 does not apply to "primary products", 
which include agricultural products.  Unquestionably, the explicit export 
subsidy disciplines, relating to agricultural products, contained in Articles 3, 8, 9 and 10 of the
 Agreement on Agriculture  must clearly take precedence 
over the exemption  of primary products from export subsidy disciplines in 
Article XVI:4 of the GATT 1994." WT/DS267/R/Add.2 
Page I-233 
 
 
of world export trade is inequitable.  While a particular situation may – as in this dispute – fall under 
both provisions, the focus and proof required for both provisions can be different.  204. Thus, Article 6.3(d) of the SCM Agreement s ubjects a specific subset of the situations 
covered by GATT Article XVI:3 to th e remedy provided in Article 7.8 of the SCM Agreement.  But it 
does not cover all of the situations covered by GATT Ar ticle XVI:3.  This marks the crucial 
distinction between the provisions on export subsidi es in the SCM Agreement that “take precedence” 
over those in GATT
261 and the provisions on actionable subsidies in both agreements that are 
complementary.  
205. With respect to the Appellate Body’s holding in paragraph 117 of US – FSC , the provisions 
on export subsidies in Articles 3 and 4 of the SC M Agreement represent the results of years of 
negotiations that have pushed the level of obligation in this area  well beyond Article XVI:4.  The 
conclusion that the Appellate Body drew in that in stance was that “whether or not a measure is an 
export subsidy under Article XVI:4 of the GATT 1947 provides no guidance in determining whether 
that measure is a prohibited export subsidy under Article 3.1(a) of the SCM Agreement.”  Brazil 
agrees that the provisions of Article XVI:2-4 that  deal with subsidies contingent upon export 
performance are superceded by the respective export subsidy provision contained in the Agreement on 
Agriculture and in the SCM Agreement.    206. However, as Brazil has argued in response to Question 185(a), the second sentence of GATT 
Article XVI:3 is not a provision limited to subsidies contingent upon export performance.  Rather, its 
disciplines apply to any form of subsidy that operates to incr ease the exports of a Member.  Thus, it is 
not superceded by the export subsidy provisions  of the Agreement on Agriculture and the SCM 
Agreement.  Rather, it provides rights and obligatio ns concerning any form of a subsidy independent 
of the right and obligations set forth in Article 3 of the SCM Agreement.
262   
 
(c) Of what relevance, if any, is the fact that the definition of "subsidy" in Article 1 of the 
SCM Agreement  and the prohibition on subsidies contingent upon export in 
Article 3.1(a) were introduced in the Uruguay Round, but did not exist at the time that the GATT 1947 was negotiated?   
 Brazil’s Answer
: 
 207. The short answer is “not at all.”  What is important for the Panel to consider is the entire 
package of Uruguay Round agreements, including the GATT 1994 and the contemporaneous SCM Agreement, not what was in GATT 1947.   
 
208. Every agreement attached to the WTO Agre ement is contemporaneous with every other 
attached agreement.  The GATT 1947 no longer binds WTO Members; what is binding is the GATT 1994.  The SCM Agreement and the GATT 1994 must be  read together, and each provides “context” 
for interpreting the other, in the sense of Article  31(2) of the Vienna Convention on the Law of 
Treaties.  As the Appellate Body noted in Argentina – Footwear
263, and as is now well established, the 
WTO Agreement is a single undertaking.  All WTO ob ligations are, therefore, generally cumulative, 
and Members must comply with all of them simulta neously:  “It is important  to understand that the 
WTO Agreement is one treaty.”264  Thus, in as far as GATT Article XIX and the Agreement on 
Safeguards apply cumulatively, GATT Article XVI and the SCM Agreement apply cumulatively.  
                                                      
 261 Appellate Body Report, US – FSC , WT/DS108/AB/R, para. 117. 
 262 See GATT Panel Report, EC – Sugar Exports (II) , para. V.(g). 
 263 Appellate Body Report, Argentina – Footwear Safeguards , WT/DS121/AB/R, paras. 82-84. 
 264 Appellate Body Report, Korea – Dairy Safeguards , WT/DS98/AB/R, para. 74-75; quotation from 
para. 75 (emphasis added). WT/DS267/R/Add.2 
Page I-234  
 
Brazil refers the Panel to its Answer to Question 1 85(a) for a further discussion of the issues relevant 
to Question 185(c).    
N. CLARIFICATIONS 
 
189. Please indicate whether the correct figure in paragraph 37 of Brazil's 7 October oral 
statement is 38.1 per cent or 38.3 per cent? BRA  
Brazil’s Answer
: 
 
209. Brazil confirms that the correct figure in para graph 37 of Brazil’s 7 October Oral Statement is 
38.3 per cent, i.e., that the US world market share in MY 2001 was 38.3 per cent.265 
 
190. Please confirm that the figure "17.5" in paragraph 43 of Brazil's 7 October oral 
statement, is "percentage point".  BRA 
 Brazil’s Answer
: 
 210. Brazil confirms that the figure “17.5” in pa ragraph 43 of Brazil’s 7 October Oral Statement 
refers to an increase by 17.5 percentage points in the world market share.  Brazil further notes that – 
as explained in note 468 to Figure 26 of its 9 September Further Submission – the world market share 
refers to the world market share in the intern ational cotton market, including the upland cotton and 
extra-long staple cotton market, as data on upland co tton only is not available to Brazil.  However, 
given the small size of the extra-long staple market as compared to the upland cotton market, this only 
minimally distorts the data.
266 
 
191. Could Brazil clarify its statement in para. 12 of its 9 September further submission:  
"Alternatively crop insurance is  not specific because the 2000 ARP Act denies benefits to 
commodities representing more than half of th e value of US agriculture.  Further US crops 
represent only 0.8 per cent of total US GDP." (emphasis added) BRA  
Brazil’s Answer
: 
 211. Brazil thanks the Panel for bringing to its  attention the error in paragraph 12 of its 9 
September Further Submission.  As clarified in paragraphs 67-69 of the same submission, Brazil 
meant to state that “[a]lte rnatively, crop insurance is specific  because the 2000 ARP Act denies 
benefits to commodities representing more that half of the value of US agriculture” (emphasis added). 
 
                                                     
 
 265 Exhibit Bra-206 (Data on Article 6.3(d) claim). 
 266 Compare  Exhibit Bra-208 (“Cotton: World Statistics,” ICAC, September 2003, p. 2-7). WT/DS267/R/Add.2 
Page I-235 
 
 
ANNEX I-6 
 
 
ANSWERS OF THE UNITED STATES TO 
QUESTIONS FROM THE PA NEL TO THE PARTIES 
FOLLOWING THE SECO ND SESSION OF THE 
FIRST SUBSTANTIVE PANEL MEETING 
 
27 October 2003 
 
 A. REQUEST FOR PRELIMINARY RULINGS  122. Does Brazil allege that cottonseed payments , interest subsidies and storage payments are 
included in the subsidies that cause serious pr ejudice?  Do they appear in the economic 
calculations?    BRA 
 
123. Does Brazil's request for th e establishment of the Panel name the statute authorizing 
cottonseed payments for the 1999 crop?    BRA 
 
B. EXEMPTION FROM ACTIONS 
 
124. According to its revised timetable, the Pane l will issue its report to the parties after the 
end of the 2003 calendar year.  Does this have any impact on "exempt[ion] from actions" under 
Article 13(b)(ii) and 13(c)(ii) of the Agreement on Agriculture?  BRA, US  
 
1. The scheduled issuance of the Panel’s report after the end of the 2003 calendar year has no 
impact on the applicability of Article 13(a)(ii), (b)( ii) and (c)(ii) of the Agreement on Agriculture to 
the US measures in this dispute.  There is no qu estion, and Brazil has not contested, that Article 13 
was in effect at the time of the Panel’s establishmen t, and the Panel’s terms of reference set on that 
date are to examine the matter raised in Brazil’s panel request in light of the covered agreements, 
which include the Agreement on Agriculture.   
 
2. As a separate matter not presented by this  dispute, the United States notes that the 
commitments of the United States with respect to cotton are specified by marketing  year, not calendar 
year.  Therefore, the end of the 2003 calendar year  would in any case not be relevant to the question 
of when the provisions of Article 13 cease to have effect with respect to US support measures for 
upland cotton.
1 
 
C. IDENTIFICATION OF THE SUBSIDIZED PRODUCT  
 125.   
(1)  In view of requirements in the FAIR Ac t of 1996 and the FSRI Act of 2002 that contract 
acreage remain in agricultural or conservation uses and which impose penalties if the producer 
grows fruits or vegetables, how likely is it th at the producer with upland cotton base acreage 
will not use his or her land to produce pr ogramme crops or covered commodities?  US  
 
                                                     
 
1 See Agreement on Agriculture Article 1(i) (“‘[Y]ear’ in paragraph (f) above and in relation to the 
specific commitments of a Member refers to the calendar, financial or marketing year specified in the Schedule 
relating to that Member.”) WT/DS267/R/Add.2 
Page I-236  
 
3. With respect to contract acreage on a farm, the 2002 Act generally allows any commodity or 
crop to be planted on base acres on a farm for whic h direct payments are made, with limitations for 
certain commodities (fruits, vegetables (other than le ntils, mung beans, and dry peas), and wild rice).  
With some exceptions, planting of those limited commodities on base acres is prohibited and could 
lead to reduced or eliminated direct payments.
2  Otherwise, a producer (or landowner) is permitted to 
make any other use of the land so long as the land on the farm in a quantity equal to base acreage is 
used for an agricultural or conserving use.3  Thus, the direct payment recipient has the flexibility to 
plant and harvest any other commodity or crop on the land representing their upland cotton base acreage; indeed, direct payment recipients may pl ant nothing at all and still receive payment.  (We 
note that the foregoing description of the “planting flexibility” under the 2002 Act is relevant only to 
base acres on a farm for which direct payments are made; other acres on the farm need not comply 
with any of the contract requirements set out in Sections 1105 and 1106 of the 2002 Act.)  4. The data demonstrate that planting and harv esting decisions by US producers result in US 
upland cotton area varying significantly.  In market ing year 2003, for example, US farmers planted 
13,748,000 acres, a decline of 11.3 per cent from the recent high reached in marketing year 2001.
4  As 
indicated in the US closing statement at the second session of the first panel meeting, US harvested acreage largely increases and decreases in line with the rest of the world.
5  In marketing year 2001, 
US area harvested increased by almost the exact same  percentage as did the rest of the world.  In 
marketing year 2002, the per cent decline in  harvested acreage in the United States was greater  than 
that observed in the rest of the world.  Thus, regardless of whether US farmers who plant upland 
cotton may also be holders of upland cotton base acres, and contrary to Brazil’s assertions, US 
farmers respond to market signals by planting or harvesting upland cotton much as producers in the rest of the world do.  
(2) Brazil has submitted that "The record su ggests that historic producers are current 
producers."  It points to factors including th e specialization of upland cotton producers, the 
need to recoup expensive investments in cotto n-specific equipment, and the geographic focus 
and climatic requirements of upland cotton produc tion in the "cotton belt". (Brazil's rebuttal 
submission, footnote 98, on page 24) 
 
(a) Regarding the specialization of upland cotton producers and the geographic focus of 
upland cotton production, how does Brazil take  account of the fact that cotton is 
produced in 17 of the 50 states of the Unit ed States and that average cotton area is 
approximately 38% of a cotton farm's acres? (This information is taken from the US's 
response to question 67bis, footnote 35).  BRA 
 
(b) Regarding the geographic focus of upland cotton production, how many other crops can 
upland cotton producers viably grow in th e cotton belt, other than fruits and 
vegetables?  US  
 
5. Based on planted acreage data as reported by National Agricultural Statistics Service
6, US 
upland cotton is produced in several diverse regi ons across the Cottonbelt, generally known as the 
Southeast, Delta, Southwest, and West regions.  Acro ss the regions (as well as within a given region), 
producers are faced with differing physical growi ng environments as well as economic factors that 
help determine the viability of upland cotton or some  other alternative crop in any given year.  Over 
                                                      
2 See US Answer to Question 26 from the Panel, para. 56. 
3 2002 Act, § 1105(a)(1)(D) (Exhibit US-1). 
4 US Department of Agriculture, National Agricultural Statistics Service, Acreage .  Cr Pr 2-5 (6-03).  
June 30, 2003.  Available at:  http://usda.mannlib.c ornell.edu/reports/nassr/field/pcp-bba/acrg0603.pdf 
5 See US Closing Statement at the Second Session of the First Panel Meeting, paras. 5-6; Exhibit US-
63. 
6 See Exhibit Q125(2)(b). WT/DS267/R/Add.2 
Page I-237 
 
 
the last several years, producers have reduced plantings of upland cotton and increased plantings to alternatives.  A list of the full range of alterna tive crops that are viable in these areas would be 
extensive.  Below we present a regional breakdown of some principal alternative crops to upland 
cotton as well as historical plantings since 1996 of these crops compared with upland cotton.  
6. Upland cotton producers in the Southeast region (Alabama, Florida, Georgia, North Carolina, 
South Carolina, and Virginia) have corn and soybean s as principal alternative crops.  Peanuts are also 
an alternative, though mainly in Georgia.  Be tween 1996 and 2003, area planted to upland cotton, 
corn, and soybeans in the Southeast averaged about  8.6 million acres, ranging from 8.2 to 9.1 million 
acres.  During this same period, upland cotton area ranged from 3.0 to 3.6 million acres.  Since 2001, 
upland cotton has been reduced in favour of corn and soybeans in this region.  
 7. Upland producers in the Delta region (Ark ansas, Louisiana, Mississippi, Missouri, and 
Tennessee) also have corn and soybeans as an alternativ e and, to a lesser extent, rice in some areas.  
Between 1996 and 2003, area planted to these 4 cr ops averaged 22.9 million acres, ranging from 22.2 
to 23.8 million.  At the same time, upland cotton ar ea ranged from 3.2 to 4.6 million acres.  Like the 
Southeast region, the Delta area planted to upla nd has declined since 2001 in favour of corn and 
soybeans.  8. The Southwest region (Texas, Oklahoma, and Kansas) has the most diverse growing environment of the 4 regions.  In the northern part of the region – where most of upland cotton is 
grown – principal alternatives to upland cotton may include wheat and sorghum.  In the southern part, 
however, corn, soybeans, and sorghum are generally an alternative to upland cotton.  The Southwest 
region planted an average of 26.3 million acres to these 5 crops between 1996 and 2003.7  Area 
ranged from 24.5 to 27.9 million acres during this  period.  Meanwhile, upland cotton area ranged 
from 5.7 to 6.7 million acres.  Since 2000, upland area in the Southwest has fallen in favour of 
sorghum, wheat, and corn.   
 9. In the West region (California, Arizona, a nd New Mexico), upland producers have a variety 
of alternatives, including corn, extra-long staple (ELS) cotton, alfalfa, a nd wheat.  Between 1996 and 
2003, area planted to these 5 crops averaged 4.3 million acres in the region, ranging from 4.0 to 4.6 million.  At the same time, upland cotton area has ranged from 0.7 to 1.4 million acres.  The last 
several years, however, have seen upland area declin e in favour of one or more of the alternative 
crops.   
(c) Regarding the high cost of upland cotton production, can Brazil show that farms who 
planted upland cotton could only have cov ered their costs by receiving upland cotton, 
rice or peanut payments in every year from 1999 through 2002?  BRA 
 (d) Regarding the need to recoup investments in  cotton-specific equipment, is it important 
to planting decisions that upland cotton producers cannot run any other crop through 
their cotton-pickers?  How does this affect the likelihood that they will grow other 
crops?  US  
 
10. The National Agricultural Statistics Service (NASS) reported that in 2002, farmers paid 
an average of $225,000 for a cotton picker .
8  Farmers may respond to machinery costs through the 
contracting-out of harvesting operations and re ntal or leasing of cotton-picking machinery. 
 
                                                      
7To be conservative, we have excluded Kansas wheat and sorghum acreage from the totals presented 
due to the state's large production of these crops and relatively small production of cotton. 
8 US Department of Agriculture, Natio nal Agricultural Statistics Service, Agricultural Prices 2002 
Summary .  Pr 1-3 (03)a  July 2003.  Available at:  http://usda.mannlib.cornell.edu/ 
reports/nassr/price/zap-bb/agpran03.pdf WT/DS267/R/Add.2 
Page I-238  
 
11. In the short run, investment costs may slow acreage adjustments to market prices.  This does 
not mean, however, that cotton producers do not respond to changes in market prices.  Research by Lin et al. suggest that cotton producers may, in fact, be more responsive to own price changes (that is, the response of cotton acreage to changes in co tton prices as opposed to changes in prices of 
competing crops) than other competing crops  are.
9  In the long run, fixed assets like cotton pickers 
are less of a constraint to entry, and thus one woul d expect the acreage respon se to changes in price to 
be larger.  
Acreage own-price elasticity for major field crops 
Crop National acreage price elasticity 
Wheat 0.34 
Corn 0.293 
Sorghum 0.55 
Barley 0.282 
Oats 0.442 
Soybeans 0.269 
Cotton 0.466 
Source: Lin et al., Appendix table 21 (Exhibit US-64). 
 
(3)  In calculating the amount of PFC, MLA, direct and counter-cyclical payments that went 
on upland cotton, Brazil made an adjustment for the ratio of current acreage to base acreage 
(see its answer to question 67, footnotes 2, 3, 4 an d 5).  Is this an appropriate adjustment for the 
particular factors referred to abov e?  Why or why not? BRA, US 
 12. Brazil’s adjustment is not appropriate.  It does not explicitly take into account any of the 
factors referred to above.  Instead, Brazil’s belate d adjustment is simply based on the assumption that 
all of the planted cotton acreage was by producers who had cotton base acreage exactly equal to their 
planted acreage.  This assumption is inaccurate and causes Brazil's figures to be in error.  For some 
producers, cotton planted acres exceed their histori cal base, and some cotton acres are planted by 
producers who have no cotton base.  As noted in the US further submission, important changes such 
as lowered costs from pest eradication and adoption of biotechnology have lowered costs and brought 
new areas and farmers into cotton production.  Br azil’s adjustment takes no account of these changes. 
 13. More fundamentally, the relevant point is that any producers who have upland cotton base 
will receive direct and counter-cyclical payments regardless of whether they plant upland cotton.  
Thus, the decision to plant upland cotton will be based on expected economic returns of cotton and 
competing crops – not the level of direct and coun ter-cyclical payments that are decoupled from the 
decision to produce upland cotton.  And the fact th at these are decoupled payments means that the 
amount of the payment could not in any event be allocated only to cotton production.  (4) Dr. Glauber has alleged that there are stat istical problems in comparing planted acres 
to programme acres because of abandonment of crops and also because planted acres are only 
survey estimates, not reported figures (See Exhibi t US-24, the first full paragraph in P2).  
Would it be more appropriate to divide harvest ed acreage by base acreage?  What margin of 
error is there between the survey estim ates and reported figures? BRA, US 
 
14. Exhibit US-24 outlines the statistical problem s associated with dividing complying base acres 
by planted acres.  The discussion addressed co mplying base acres under the Acreage Reduction 
Programme of 1990 Farm Bill and did not address programme payment acres as defined under the 
                                                     
 
9 Lin, W., et al. . Supply Response Under the 1996 Farm Act and Implications for the US Field Crops 
Sector.  US Department of Agriculture, Economic Re search Service, Technical Bulletin No. 1888 , 
Appendix table 21 (Exhibit US-64). WT/DS267/R/Add.2 
Page I-239 
 
 
1996 Farm Bill.  Dividing harvested acreage by base acreage could potentially overstate the difference if there is significant acreage abandonment after producers reported their payment acres to the Farm 
Service Agency.  Also, there remains a problem w ith the comparison since harvested acres are survey-
based while base acres are reported numbers.  
15. In the June Acreage  report, the National Agricultural St atistics Service reports reliability 
estimates for selected crops.  The reliability of acreage estimates is computed by expressing the 
deviations between the planted acreage estimates and the final estimates as a per cent of the 
final estimates and averaging th e squared percentage deviations for the 1983-2002 twenty-year 
period; the square root of this average beco mes statistically the "Root Mean Square Error.” 
Probability statements can be made concerning expected differences in the current estimates 
relative to the final estimates assuming that fa ctors affecting this year's estimate are not 
different from those influencing the past 20 years. For example, the "Root Mean Square Error" for the upland cotton planted estimate is 2.4 per cent. This means that chances are 2 out of 3 that the current cotton acreage will not be above or below the final estimate by more than 2.4 
per cent.  NASS reports that the 90 per cent confidence interval for the upland cotton estimate 
is 4.1 per cent.  This means that chances are 9 out of 10 (90 per cent confidence level) that the 
difference will not exceed 4.1 per cent .
10 
 
(5)  Do the acreage reports under section 1105(c) of the FSRI Act of 2002 indicate or assist 
in determining the number or proportion of acres of upland cotton planted on upland cotton 
base acres?  Was there an acreage reporting requirement for upland cotton during MY1996 
through 2002? BRA, US 
 
16. The acreage reports filed under Section 1105(c)  of the 2002 Act by farms receiving direct and 
counter-cyclical payments indicate what crops are planted on a farm.  A farm is an administrative 
construct that consists of tracts of land that are ope rated as one unit.  The farm may be operated by 
more than one producer, and a producer may pro duce crops on more than one farm.  The acreage 
report does not indicate the quantity of base acres on the farm.  Because the acreage reports are filed 
after the planting season but before the harvest, the reports do not contain information on the quantity 
of production on each farm.   
17. Based on a very preliminary review of a sa mpling of marketing year 2002 acreage reports, the 
United States estimates that roughly 53 per cent of farms that were eligible for direct and counter-
cyclical payments for upland cotton base acreage al so planted at least one acre of upland cotton in 
2002.  That is, approximately 47 per cent of farms receiving direct and counter-cyclical payments in 
2002 for upland cotton base acreage planted no upland cotton at all. 
 
18. Over the period 1996 through 2002, there was no statutory requirement for acreage reports by 
recipients of decoupled payments or marketing lo an payments.  By regulation, producers who signed 
up for disaster assistance or who received marketing loan benefits (including loan deficiency payments) were asked to file planting acreage reports.  Reports for producers receiving disaster 
assistance were to cover all acreage on the farm wh ile reports for producers receiving marketing loan 
benefits were to cover only acreage for the crop recei ving benefits.  As a result, acreage reports over 
the period of the 1996 Act are incomplete.  
(6)  Please prepare a chart showing upla nd cotton base acreage, planted acreage and 
harvested acreage for MY1996 through 2002.  Does the planted acreage fluctuate within a broad 
band?  If not, does this indicate any stability in decisions to plant the same acres to upland 
cotton?   BRA, US 
 
                                                     
 
10 US Department of Agriculture.  National Agricultural Statistics Service.  Acreage.  CrPr 2-5 (6-03).  
30 June 2003.  Pp 38-39. WT/DS267/R/Add.2 
Page I-240  
 
19. The following chart shows upland cotton base acreage, planted acreage and harvested acreage 
for marketing years 1996 through 2002:  
US upland cotton area (thousand acres) 
Crop year Base acreage 1/ Planted acreage  2/ Harvested acreage  2/ 
1996 16128 14395 12632 
1997 16213 13648 13157 
1998 16412 13064 10449 
1999 16377 14584 13138 
2000 16268 15347 12884 
2001 16239 15499 13560 
2002 16217 (est.) 13714 12184 
1/ US Department of Agriculture, Farm Service Agency 
2/ US Department of Agriculture, National Agricu ltural Statistics Service, selected Acreage reports 
 20. Over the period 1996-2002, US upland co tton planted acres ranged considerably, from 
13,064,000 acres to 15,499,000 acres.  Year-over-y ear, planted and harvested acreage can rise or fall 
significantly.  For example, from marketing year 2 001 to marketing year 2002, planted acreage fell by 
1.785 million acres or 11.5 per cent; harvested acreage fell by 1.376 million acres  or 10.1 per cent.  
As was pointed out in the US closing statement at  the second session of the first substantive meeting 
of the Panel and in Exhibit US-63, year-over-year changes in US harvested cotton acreage have been 
similar to year-over-year changes for harvested co tton acreage outside of the United States.  These 
data do not provide any information on whether th e same or different acres are planted to upland 
cotton. 
 
21. As noted above in the US answer to Ques tion 125(5), based on a preliminary review of a 
sampling of marketing year 2002 acreage reports, it would appear that nearly half of farms receiving direct and counter-cyclical payments in 2002 for upland cotton base acreage planted no upland cotton 
at all.  That so many farms that produced uplan d cotton during the historical base period of 1993-1995 
or 1998-2001 no longer plant even a single acre of upl and cotton suggests that there has been a large 
exit of past cotton producers and a large entry of new producers or a large expansion by other historical cotton producers.  
(7)  Brazil states that one third of all US farm s with eligible acreage decided to update their 
base acreage under the direct payments and count er-cyclical payments programmes using their 
MY1998-2001 acreage.  What is the proportion  of the current base acreage for upland cotton 
resulting from such updating?  Is the observed updating of base acreage consistent with Brazil's argument that it is only profitable to grow upland cotton on base acreage (and peanut and rice 
base acreage)?  BRA  
(8)  How could one take account of uplan d cotton producers who receive PFC, MLA, direct 
and counter-cyclical payments for other c overed commodity base acreage?  BRA, US 
 
22. Under Brazil’s approach, one would need to take account of upland cotton producers 
receiving decoupled payments only for base acreage for other covered commodities.  This follows 
from Brazil’s explanation that “only the portion of  upland cotton [decoupled] payments that actually 
benefits acres planted to upland cotton can  be considered support to upland cotton”.
11  Thus, under 
Brazil’s approach, one would need to deduct a ny production (or acreage) attributable to such 
producers from the acreage figures Braz il has used to adjust the amount of decoupled payments on 
upland cotton base acreage.   
                                                     
 
11 Brazil’s Answer to Question 67 from the Panel, fn. 2-5. WT/DS267/R/Add.2 
Page I-241 
 
 
(9)   Assuming that Brazil's payment figures we re to amount to a prima facie case, please 
answer the following questions:  US  (a) How would the United States calculate or  estimate the proportion of upland cotton 
producers who receive subsidy payments for upland cotton base acreage?    
 
(b) Should any adjustment estimates be made for any factors besides those listed by Brazil?   
 (c)   What adjustment estimate would it be appropriate to make?  
(d) How could one take account of up land cotton producers who receive decoupled 
payments for other programme crop base acreage?   
 (e) Could the US specifically indicate what, in its view, are the flaws in the approach 
summarized in paras. 6-7 of Brazil's closing oral statement on 9 October (i.e. the use of 
the ration of 0.87 to adjust the amount of total upland cotton direct and CCPs for the 
MY to obtain the amount of subsidies recei ved by upland cotton producers)?  Can the 
US suggest an alternative approach that would yield reliable results in its view?  
 
23. Putting Peace Clause and green box issues to one  side, the United States believes that the 
issue of what payments may be attributed to upland cotton production is fundamentally part of 
Brazil’s burden to present evidence substantiating the amount of the subsidy that it is challenging.  
However, the United States would note that this issue is not a matter of “the proportion of upland 
cotton producers who receive subsidy payments for upland cotton base acreage.”  Rather, the issue is, 
first, what is the quantity of decoupled paymen ts received by upland cotton producers; second, how 
are those payments allocated across the total value of each farm’s agricultural production; and third, 
how much and in what amount are US cotton exports subsidized by these payments.  
 24. Brazil has conceded that decoupled paymen ts made with respect to upland cotton base 
acreage are not “tied to the production or sale” of  upland cotton, by adjusting such payments by 
0.87.
12  That is, Brazil recognizes that, even on its theo ry, at least 0.13 of these payments “can[not] be 
considered support to upland cotton” because at le ast that fraction of upland cotton base acres were 
not planted to upland cotton in marketing year 2002 .  Because these payments are not “tied to the 
production or sale” of upland cotton, as suggested by  Annex IV of the Subsidies Agreement, they 
must be allocated across the total value of producti on of each recipient.  Brazil has not denied the 
applicability of the allocation methodology set out in Annex IV, but neither has Brazil provided any 
evidence relating to the total value of production of decoupled payment recipients.13  
 
25. Brazil claims that its “suggested methodology  is based on the conclusion that all upland 
cotton producers received these payments”.14  In fact, Brazil’s methodology is based on the further 
assumptions that (1) every acre of upland cotton in marketing year 2002 was planted by a holder of upland cotton base acreage and (2) no such base acr eage holder planted more upland cotton than his 
or her base acres.
15  Brazil has provided no evidence to support these assumptions, which is no 
                                                      
12 In addition to issues relating to the “adjustment,” the United States disagrees with the total amount of 
decoupled payments paid with respect to upland cotton ba se acreage that Brazil calculates and uses as the base 
for its adjusted payment amounts.  See US Answer to Additional Question 67 bis from the Panel, para. 28, fn. 37, 
38. 
13 As noted in the Panel’s Question 125(2)(a), aver age cotton area is approximately 38 per cent of a 
cotton farm’s acres.  Thus, a substantial portion of th e average cotton farm’s agricultural production will be 
derived from production of other crops. 
14 Brazil’s Closing Statement at the Second Se ssion of the First Panel Meeting, para. 8. 
15 Using figures for marketing year 2002 planted acrea ge and base acreage, Brazil claims, “Out of the 
16.2 million upland cotton base acres, 2.1 million were not planted to upland cotton in MY2002.”  Brazil’s 
Closing Statement at the Second Session  of the First Panel Meeting, para. 6.  However, given the planting and WT/DS267/R/Add.2 
Page I-242  
 
surprise since the evidence is to th e contrary.  For example, the fluctuations in upland cotton planted 
and harvested area in recent years and the fact that  one-third of all US farms with eligible acreage 
decided to update their base acreage using th eir MY1998-2001 acreage, imply substantial new 
entrants or new acreage that were not included in  the base period figures under the 1996 Act.  In fact, 
as noted above in the US answer to Question 125(5), based on a preliminary review of marketing year 
2002 acreage reports, the United States estimates that nearly half of all farms receiving direct and 
counter-cyclical payments in 2002 for upland cotto n base acreage planted no upland cotton at all.   
 26. We also note that there are substantial re quirements with which a payment recipient must 
comply (see US answer to Question 162), such as highly erodable cropland conservation requirements 
and wetland conservation requirements.  
 D. "LIKE PRODUCT"  
126. Does the US agree that the product at i ssue is upland cotton lint and that Brazilian 
upland cotton lint is "like" US upland cotton lint within the meaning of Article 6.3(c) of the 
SCM Agreement in that it is a separate like product that is identical or has characteristics similar to the upland cotton lint from the United States?  (e.g. Brazil's further submission, para. 
81) US 
 
27. For purposes of this dispute, the United States is not arguing that all US cotton is "unlike" 
Brazilian cotton.  There are some grades of cotton that both produce.  Such grades would have similar 
characteristics although, as noted by Mr. Ward at the second session of the first panel meeting, Brazilian lint has been sold in the past at a substan tial discount to the New York futures price.  That 
discount has been declining over time as Brazil, a re latively new supplier internationally, works to 
establish a reputation for quality and reliability. 
 
E. "SUBSIDIES" 
 127. The Panel notes that the US contests that export credit guarantees constitute "subsidies".  The Panel recalls that the US ag rees that Step 2 payments are "subsidies" and 
wishes to have confirmation that it is correct  in understanding that the US does not disagree 
that the following are "subsidies" for the purposes of Article 1 of the SCM Agreement: 
marketing loan/loan deficiency payments, PFC, direct payments, market loss assistance and 
CCP payments, crop insurance payments, cotton seed payments, storage payments and interest 
subsidy (without prejudice to the Panel's rulings on the US requests for preliminary rulings on 
the latter two payments).  US  
 
28. With respect to marketing loan payments, the United States agrees that these product-specific 
amber box payments that are made to producers of upland cotton for the production of upland cotton are subsidies within the meaning of Ar ticle 1 of the Subsidies Agreement. 
 29. With respect to crop insurance payments, th rough which the United States pays a portion of 
the crop insurance premium for producers, the Un ited States agrees that these amber box payments 
are subsidies within the meaning of Article 1 of th e Subsidies Agreement.  We note, however, that 
these payments are not product-specific because they are not made to upland cotton producers for the 
production of upland cotton.  Rather, they are non-product-specific support made to “producers in general” (that is, generally).  Further, these cr op insurance payments are not specific within the 
meaning of Article 2 of the Subsidies Agreement because they are available with respect to all 
                                                                                                                                                                    
 
base acreage numbers, the most Br azil can logically claim is that “ at least  2.1 million [base acres] were not 
planted to upland cotton in MY2002”.  That is, if in 2002 new producers without base acres planted upland 
cotton or if some historical producers planted more than th eir base acres, then some portion of the 14.1 million 
planted acres in MY2002 were not planted “on” upland cotton base acres. WT/DS267/R/Add.2 
Page I-243 
 
 
agricultural products for which policies are offered by private companies.  Therefore, pursuant to 
Article 1.2, this “subsidy” is not subject to the provisions of Part III of the Subsidies Agreement. 
 30. With respect to cottonseed payments, we reca ll that these payments are not within the terms 
of reference of the Panel.
16  With respect to “other payments” for upland cotton notified by the United 
States to the WTO – that is, storage payments and in terest subsidy – the United States also recalls that 
these payments are not within the Panel’s terms of reference.17  Without prejudice to the US request 
for preliminary rulings on these three types of payments, the United States considers that these 
product-specific amber box payments are subsid ies within the meaning of Article 1. 
 
31. With respect to green box production flexibility contract payments under the 1996 Act and 
direct payments under the 2002 Act, the United Stat es does not consider that Brazil has demonstrated 
what is the amount of the subsidy attributable to upland cotton producers pursuant to Article 1.  Article 1 requires that a financial contribution by a government or public body or income or price 
support confers a benefit.  The subsidies Brazil chal lenges are subsidies to producers, users, and/or 
exporters of upland cotton.  However, Brazil has not identified the portion of the production flexibility 
contract payments that is properly attributable to upland cotton producers as opposed to other recipients of this subsidy.  In fact, Brazil con cedes that the entire amount of these payments does not 
confer a benefit on upland cotton producers by reduc ing the amount of production flexibility contract 
payments and direct payments on upland cotton b ase acres by the proportion 14/16.  However, Brazil 
has provided no evidence of the amount of these d ecoupled payments received by producers that 
currently produce cotton.  Nor has Brazil demonstrated  how much or to what extent US cotton exports 
are subsidized.  32. With respect to ad hoc  market loss assistance and counter-cyclical payments under the 2002 
Act, the United States also does not consider that Brazil has demonstrated what is the amount of the 
subsidy attributable to upland cotton producers pursu ant to Article 1.  Specifically, as with production 
flexibility contract payments and direct payments, Brazil has not identified the portion of the subsidy 
that is properly attributable to producers of upl and cotton as opposed to other recipients of this 
subsidy.  Brazil has not identified the benefit to upland cotton producers conferred by these payments.  
Rather, Brazil merely assumes that for every up land cotton harvested acre, upland cotton producers 
had a corresponding upland cotton base acre.  Howe ver, Brazil has provided no evidence of the 
amount of these decoupled payments received by  producers that currently produce cotton.   
 
F. PROHIBITED SUBSIDIES 
 128. Could the US respond to Brazil's assertions relating to the meaning and effect of the 
introductory phrase of Article 3 ("Except as pr ovided in the Agreement on Agriculture....")?  
Would the meaning/effect change if Article 13 of  the Agreement on Agriculture did not exist? 
BRA, US  
 
33. It is not entirely clear to the United States to  which assertions of Brazil the Panel refers in its 
question.  Moreover, the United States does not believe Brazil has purported to ascribe a specific 
meaning to that particular phrase.  Indeed, with respect to Article 3.1(b), Brazil’s arguments would 
effectively delete the introductory phrase in its entirety.
18 
 
G. SPECIFICITY / CROP INSURANCE 
 
129. In the event that the Panel does not consid er that the alleged prohibited subsidies fall 
within the provisions of Article 3 and are theref ore, pursuant to Article 2.3, "deemed to be 
                                                      
16 See, e.g. , US Further Submission, para. 8. 
17 See US Further Submission, paras. 6-7. 
18 See Answer of the United States to Panel Question 144, infra . WT/DS267/R/Add.2 
Page I-244  
 
specific", are there any other grounds on which Br azil would rely in order to support the view 
that such measures are "specific" within the me aning of Article 2 of the SCM Agreement (see, 
for example, fn 16 of Brazil's further submission)? BRA  130. Does Brazil agree that the US insurance premium subsidy is available in respect of all 
agricultural products?  Please cite relevant portions of the record.  BRA  
 131. How should the concept of specificity - and,  in particular, the concept of specificity to 
"an enterprise or industry or group of enterprises or industries" -- in Article 2 of the SCM Agreement apply to subsidies in respect of  agricultural commodities? Please answer the 
following questions, citing the principles in Article 2 of the SCM Agreement:   BRA, US  
 
(a) is a subsidy in respect of all agricultural, but not other, products specific? 
 
34. The United States does not regard a domestic  subsidy as being specific solely because the 
subsidy is limited to the agricultural sector.   As pr eviously noted, this proposition is codified in the 
US countervailing duty regulations, at 19 C.F.R. § 35 1.502(d).  Thus, the United States is of the view 
that the agricultural sector is too broad and too dive rse to constitute a single “enterprise or industry or 
group of enterprises or industries”.  
(b) is a subsidy in respect of all agricultural crops (i.e. but not to other agricultural 
commodities, such as livestock) specific? 
 
35. It is difficult to opine on this question in th e abstract.  However, this fact pattern does not 
apply to the US insurance premium subsidies, wh ich are also available in respect of livestock. 
 (c) is a subsidy in respect of certain identified agricultural products specific? 
 
36. It is difficult to opine on this question in th e abstract.  However, this fact pattern does not 
apply to the US insurance premium subsidies since the premium subsidy is a single subsidy 
programme available in respect of all products (while  policies issued by private parties are in certain 
instances available in respect of certain identified products). 
 
(d) is a subsidy in respect of upland cotton, but not other products, specific? 
 
37. The United States assumes that this would re quire that the subsidy be limited to certain 
entities or the upland cotton industry and so would be  specific.  This fact pattern, however, does not 
apply to the US insurance premium subsidies since the premium subsidy is a single subsidy 
programme available with respect to all products (w hile policies issued by private parties are in 
certain instances available in respect  of certain identified products). 
 
(e) is a subsidy in respect of a certain proportion of the value of total US commodities (or 
total US agricultural commodities) specific? 
 
38. In principle, a subsidy that is limited to a sufficiently small proportion of US commodities 
would be “limited”, and, thus, “specific” within the meaning of Article 2.1(c).  However, the 
Subsidies Agreement does not establish any quantitative  standards for determining when a subsidy is 
so limited, and a proposal to establish such st andards was rejected during the Uruguay Round.  
Therefore, the determination must be made on the basis of the facts of the particular case.  This is the 
approach taken by the US Department of Commer ce for purposes of the US countervailing duty law. 
 WT/DS267/R/Add.2 
Page I-245 
 
 
(f) is a subsidy in respect of a certain proportion of total US farmland specific? 
 
39. This question is not presented in this dispute,  but the United States would note that “land” is 
neither an “enterprise” nor an “industry”, and so the proportion of farmland as such would not be 
appear to be relevant to the analysis under Article  2 of the Subsidies Agreem ent.  The issue also does 
not appear to fall within the scope of Article 2.2, wh ich deals with regional specificity – that is, "total 
US farmland" does not correspond to a “designated geographical region”. 
 
132. Please state the amount and percentage of  upland cotton acreage covered by each crop 
insurance programme and/or policy under the ARP Act of 2000.  US 
 
40. There is one crop insurance programme, through which the United States provides premium subsidies on crop insurance policies that are o ffered by private insurance companies under the 
authority of the Federal Crop Insurance Act.  Th ere is no specific crop insurance programme or 
policies for cotton authorized under the Agricultural Risk Protection Act of 2000.  Within this crop 
insurance programme, there are different plans of in surance that offer different types of coverage, 
such as production plans of insurance or revenue plans of insurance.  All such  plans of insurance are 
reinsured by FCIC and a premium subsidy paid by the US Government, is available.  The amount and 
percentage of upland cotton acreage covered by each plan of insurance is shown in Exhibit US-65. 
 
133. Concerning Brazil's arguments in its oral statement, para. 7, can the US indicate if any 
producers of  livestock outside a pilot progr amme are covered by the crop insurance 
programme?   US 
 
41. Yes, producers of livestock outside of pilot programmes are covered by the crop insurance programme.  In addition, there are policies being de veloped pursuant to pilot programmes in order to 
expand the scope of insurance produc ts offered by private insurers to livestock producers.  Thus, US 
crop insurance payments on premiums are made to  a broad range of agricultural producers across the 
agricultural sector, including many livestock producers.  42. Livestock producers are eligible for severa l forms of “crop insurance” benefits under the 
provisions of the same operational statute that provi des for benefits for “crops”.  Under the Federal 
Crop Insurance Act (7 USC 1501-1524), the Federa l Crop Insurance Corporation (FCIC), an entity 
within the US Department of Ag riculture, can approve insurance products if there is “sufficient 
actuarial data” to justify it to producers of “agricultural commodities”.
19  See 7 USC 1508(a).  The Act 
defines “agricultural commodity” to  include a lengthy list of commodities, including such non-plant 
commodities as “finfish” and “mollusks”.  The de finition also includes any “other agricultural 
commodity”, except stored grain (the crop that produced  the grain would be elig ible for coverage), as 
determined by the Board of Directors of FCIC.   43. Thus, FCIC has the authority to offer in surance for livestock under its regular insurance 
programmes.  The FCIC has a pproved products providing income  protection to producers with 
livestock on t heir farm as contemplated in the stat ute.  In addition, with the enactment of the 
Agricultural Risk Protection Act of 2000 (ARPA) (Pub. Law 106-224), Congress specifically 
mandated that FCIC offer pilot programmes for livestock.  See 7 USC 1523.  44. The Adjusted Gross Revenue (AGR) product pr ovides protection against low revenue due to 
unavoidable natural disasters and market fluctuations  that occur during the insurance year. Covered 
farm revenue consists of income from all agricultural comm odities, including amounts of income 
from animals and animal products and aquaculture reared  in a controlled environment.  To be eligible 
to purchase an AGR policy, the producer can earn no  more than 35 per cent of expected allowable 
income from animals and animal products.  Because the amount of livestock is considered incidental, 
                                                     
 
19 See 7 US Code § 1508.   WT/DS267/R/Add.2 
Page I-246  
 
the expenditures are not counted against the funding limitations for livestock contained in 7 USC 1523 (which have never been reached).    45. The 35 per cent limit does not apply in th e so-called “AGR-lite” programme, which was 
developed by, and originally available only in, Penn sylvania , the state that developed the policy.  
However, beginning with the 2004 crop year, an “A GR-lite” product will be expanded to counties in 
Connecticut, Delaware, Maine, Vermont, Massach usetts, New Hampshire, New Jersey and Rhode 
Island, and selected counties in West Virginia, New York, and Maryland, as approved by RMA.  In 
all, the AGR-lite programme will now cover about 300 counties.  That expansion of AGR-Lite was 
announced in an 18 August 2003, press release, available on the RMA website.  
 
46. There are at least four kinds of products  specifically for livestock available to livestock 
producers, and they are described at the webs ite of the Risk Management Agency (RMA) 
(www.rma.usda.gov).  There are two different polici es that are available for swine producers.  The 
first is Livestock Risk Protect (LRP- Swine).  Or iginally that product was available only in Iowa.  
RMA recently announced that the policy may be o ffered to swine producers in 10 additional states: 
Illinois, Indiana, Kansas, Minnesota, Nebraska, Ne vada, Oklahoma, Texas, Utah and Wyoming.  The 
other policy available to swine producers is Livest ock Gross Margin (LGM), which is available in 
Iowa.  For cattle, there are two specialized polici es available.  Livestock producers may purchase a 
LRP-Feeder Cattle policy in Colorado, Iowa, Kans as, Nebraska, Nevada, Oklahoma, South Dakota, 
Texas, Utah, and Wyoming.  Finally, there are “LRP-Fed Cattle” policies in Illinois, Iowa and 
Nebraska.   
 
134. Please state the annual amount  of premiums paid or cont ributions made by US upland 
cotton farmers relating to each of the crop insu rance programmes and/or policies supported by 
the US Risk Management Agency and the Federa l Crop Insurance Corporation in each year 
from 1992 through 2002.  US  
47. Please see Exhibit US-66.  
135. Please state the annual amount of insura nce indemnity payments  made by the US 
government; or insurance companies particip ating in crop insurance programmes and/or 
policies under the ARP Act of 2000 to upland cotton farmers in each year from 1992 through 
2002.  US 
 
48. Please see Exhibit US-67.  136. Is the US arguing that crop insurance subs idies corresponding to "over 90 per cent of 
insured cotton area" (US 7 October oral statement, para. 46) in MY1999 through 2002 are consistent with paragraph 8(a) of  Annex 2 of the Agreement on Agriculture?   Is it correct that 
in the past these subsidies were nonetheless no tified to the Committee on Agriculture as 
non-product specific AMS (see, for example, G/AG/N/USA/43 in Exhibit BRA-47)? US 
 49. The United States has notified crop insuran ce payments to the Committee on Agriculture as 
non-product specific support.  This is  consistent with the US position that crop insurance subsidies are 
generally available subsidies to the agricultural sector as a whole.
20  In the US oral statement of 
7 October 2003, it is pointed out that over 90 per cent of the cotton area currently under the programme is insured at coverage le vels of 70 per cent or less of e xpected yield (or revenue).  Over 
all commodities, almost 70 per cent of total insured area is insured at 70 per cent or less of expected 
yield or revenue.  Thus, associated subsidies would be  consistent with paragr aph 8(a) of Annex 2 of 
the Agreement on Agriculture – that is, payments for relief from natural disasters that Members have 
                                                     
 
20 US Comments on Brazil’s Rebuttal Submission, paras. 34-42; US Rebuttal Submission, paras. 93-98; 
US Further Submission of September 30, 2003, paras. 14-15. WT/DS267/R/Add.2 
Page I-247 
 
 
agreed have no or at most minimal trade-distorting effects or effects on production.  The point is made 
to stress that such subsidies that satisfy green box criteria are likely non-production distorting, 
contrary to the assertions made by Brazil.  
H. EXPORT CREDIT GUARANTEES 
 
137. Please elaborate the meaning of "net losses" as is used in paragraph 70 of Brazil's 7 October oral statement. BRA   138. Please comment on Brazil's views stated in paragraph 70 of its 7 October oral statement. 
US 
 
50. In specific response to Brazil’s views stated in that paragraph, the United States invites the 
attention of the Panel to para graphs 157-162 of the 22 August US Rebuttal Submission, the table 
accompanying paragraph 161 of that submission, and paragraphs 144-150 of  30 September Further 
Submission of the United States.  Paragraph 70 of  Brazil’s 7 October oral statement is simply a 
recapitulation of arguments it had previously advanced.    51. As noted in paragraph 144 of the US Further Submission, current data for each of the cohorts 
for 1992, 1993, 1994, 1995, 1996, and 1999 indicates a profit.
21  As stated in OMB Circular No. A-
11: “The subsidy cost is the estimated present value of  the cash flows . . . resulting from a direct loan 
or loan guarantee . . . . A positive net present value means that the Government is extending a subsidy 
to borrowers; a negative present value means that th e credit programme generates a ‘profit’ 
(excluding administrative costs) to the Government.”22 
 
139. In the context of export credit guarantees,  is the Panel correct in understanding that 
Brazil's claims of inconsistency with the Ag riculture Agreement involve GSM 102, GSM 103 
and SCGP, but that it limits its "serious prej udice" allegations in respect of export credit 
guarantee programmes to the GSM 102 programme, and does not challenge GSM 103 and SCGP in this respect?  If so,   (a) could Brazil please explain why it did so, a nd confirm that all the data relied upon in its 
further submissions (e.g. in Table 13) relat e to the GSM 102 programme rather than to 
GSM 102, GSM 103 and SCGP (and, if the data n eeds to be adjusted to take account of 
a narrower "serious prejudice" focus, supply GSM-102-relevant data)?   BRA 
 (b) for the purposes of Article 13(c)(ii) of the Ag reement on Agriculture, is it necessary for 
the Panel to examine only GSM 102 or should the Panel's examination include also GSM 
103 and SCGP? Why or why not?  BRA 
 140. Could Brazil explain how, if at all, it has treated export cred it guarantees for the 
purpose of Table 1 of its further submission? BRA   
141. The Panel notes the US argument, inter alia  in its further submission, that the export 
credit guarantee programmes are "self-sustaining".  Recalling that item (j) of the Illustrative 
List of Export Subsidies in Annex I of the SC M Agreement refers to "premium rates", could the 
US expand upon how it takes into account the premium rates for the export credit guarantee 
programmes in its analysis.  US  
 
                                                     
 
21 See also  US Rebuttal Submission, para. 161 (chart of Subsidy Estimates and Reestimates by Cohort); 
US Further Submission, fns. 82 and 96. 
22 OMB Circular No. A-11, section 185.2, pp. 185-3 and 185-4 (italics added) (Exhibit Bra-116). WT/DS267/R/Add.2 
Page I-248  
 
52. Item (j) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement is concerned with whether premium rates are inade quate to cover the long- term operating costs and 
losses of the programmes.  A rate is applied against a transaction amount to generate revenue to 
cover any costs and losses.  In the context of the export credit guarantee programmes, the 
premium rate is applied against the volume of a particular transaction to generate revenue.  
The mere rate as an abstract number cannot ge nerate revenue.  Consequently, premium rates 
as applied to the volume of transactions is  necessarily the principal source of programme 
revenue.  In addition, recoveries – whether direct  or through rescheduling – are an additional 
source of revenue.  Revenue from all these sourc es are applied against its operating costs (e.g., 
administrative expenses) and losses from its claims  experience.  Alternatively, such recoveries 
may be viewed not as revenue but as a reduction  of loss arising from claims experience.  For 
example, a full recovery of an amount already pa id as a claim yields a net loss of zero.  
Arithmetically, this would yield the same result as treating the recovery as revenue, offsetting 
the equivalent amount of prior loss.  
 53. As the United States noted in footnote 81 of its 30 September Further Submission, Brazil has 
erroneously argued that item (j) compels considerati on only of premiums on the revenue side of the 
ledger for purposes of covering long-term operating co sts and losses.  In Brazil’s Comment on the US 
answer to Panel question 77 (para. 94), Brazil states that “item (j) limits the revenue to be used to 
offset operating costs and losses to ‘premium rates’ ”.  To the contrary, item (j) envisions an 
examination of whether premium rates are inadequa te to cover long-term operating costs and losses.  
It does not say that all other revenue must be ex cluded from the calculation of whether a loss has 
occurred.  Brazil would argue that if the United St ates paid a claim on day 1 and recouped in full on 
day 2 the amount it had paid, it could not include su ch recovery in a determination of whether the 
programme satisfied item (j).  Such a draconian result is economically illogical and certainly not 
compelled by the text.  As noted above, whether the recovery is viewed as revenue or as a subtraction 
from loss, the net result would be the same, but it must be included in any evaluation of whether 
premium rates cover long-term operating costs and losses.  54. As the United States further noted in its res ponse to Panel question 77 (11 August Answers to 
Panel Questions, para. 145), item (j) applies to thr ee different types of programmes:  export credits, 
export credit guarantees, and insurance.  In the ca se of export credit guarantees and insurance, the 
provider will occasionally incur claims.  To the exte nt such claims or defaults exceed revenue from 
whatever source it may be derived, the net result would be a loss arising from operations.  In an 
accounting sense such result would constitute an ‘operating loss.’.  55. Revenues derived from fees paid in connec tion with the export credit guarantee programmes 
form an integral part of the estimate and re-est imate process that currently indicate profitability for 
each of the cohorts in 1992, 19 93, 1994, 1995, 1996, and 1999.
23  The application of the rates in this 
regard to the analysis is properly extended to 1992, as this is the first fiscal year of applicability of 
government-wide accounting for federal credit progr ammes under the Credit Reform Act of 1990.  
This period also conforms with the period that  Brazil recognizes as appropriate for analysis under 
item (j).24  As a result of such profitability,  the programmes are self-sustaining. 
 
142. The US has pointed out that there are ma ny limitations on granting export credit 
guarantees and that there is no requirement to issue any particular guarantee (US further 
                                                      
23 See Answer of the United States to Panel Question 138,  supra .  See also  US Rebuttal Submission, 
para. 161 (chart of subsidy estimates and reestimates by cohort); US Further Submission, fns. 82 and 96. 
24 See First Submission of Brazil (24 June 2003), para. 282: “[A] ten-year period . . . fulfils the criterion 
of being ‘long-term’ within the meaning of item (j).”  In  contrast, no such long-term analysis is possible with 
respect to the Supplier Credit Guarantee Programme, the regulations for which were first promulgated only on 1 
July 1996, with transactions commencing during fiscal year 1997. WT/DS267/R/Add.2 
Page I-249 
 
 
submission, paras 153-156).   Can the Commodity Credit Corporation decline to grant an 
export credit guarantee even in cases where th e programme conditions are met?    US 
 
56. A proper response to this question requires one to define by what is meant by “programme 
conditions”.  The arguments of Brazil would appear to create a tautological circularity: if one assumes 
that none of the various discretionary progra mmatic and budgetary bases that would permit the 
Commodity Credit Corporation not to issue a particul ar export credit guarantee are in effect, then can 
the CCC decline to grant that particular guarantee?   Under those circumstances the question itself 
dictates that the answer must be “no”.  The Un ited States submits, however,  that assuming away all 
of the real-world bases that would permit CCC to de cline issuance of a guarantee is not a proper basis 
for analysis.  
 57. The fact remains, as the United States has pointed out, that numerous bases exist for denial of a guarantee.
25  Brazil has argued, however, that “CCC does not enjoy the discretion to refuse to issue 
a guarantee to an eligible individual”.26  This is simply not true.  Perhaps a practical example would 
further illustrate the point.   As the United States mentioned during the first substantive meeting of the 
Panel, CCC internally maintains limits on the amo unt of its exposure to obligations of particular 
foreign banks.27  Although a qualified applicant might apply for an export credit guarantee for an 
eligible good to an eligible destination (each of those elements themselves constituting potential bases 
for denying an application), notwithstanding the eligib ility of the applicant, good, and destination, if 
the foreign-bank obligor envisioned in th e transaction would exceed the applicable internally 
established  exposure limit if it consummated the tr ansaction, CCC could and would deny the 
application for the guarantee.  Thus, while it is  true that the CCC does not engage in any arbitrary  or 
standard-less denials, the point is that no exporter seeking to engage in a particular export transaction 
can be certain of obtaining a credit because of CCC d ecisions relating to the conditions for issuance of 
export credit guarantees. 
 
143. Brazil agrees with National Cotton Counc il estimates of the effects of the GSM 102 
programmes (Brazil's further submission, para. 190) but it also cites a different conclusion by Prof. Sumner (paragraph 192).  Brazil cites other estimates by Prof. Sumner throughout its further submission.  Does Brazil adopt Prof. Sumn er's conclusions and estimates as part of its 
submission?  BRA 
 
I. STEP 2 PAYMENTS  144. Is the Panel correct in understanding that the US does not dispute that Step 2 (domestic) 
payments are contingent upon import substitution, and that it argues that such measures are 
permitted due to the operation of the provisions of  the Agreement on Agriculture?  How is that 
relevant to a claim under Articles 5 and 6 of the SCM Agreement?  US  
 
58. The United States acknowledges that to recei ve a payment under the Step 2 programme a 
domestic user must open a bale of domestically pr oduced baled upland cotton.  As the United States 
noted in its Further Submission of 30 September 2003
28, the introductory clause of Article 3.1 of the 
Subsidies Agreement, “Except as provided in the Ag reement on Agriculture”, applies to both Articles 
3.1(a) and 3.1(b).  Brazil’s arguments would dele te the application of the introductory clause to 
Article 3.1(b).  As the exception’s applicability to Article 3.1(b) must be given meaning, the United 
States has noted that the Agreement on Agriculture  does permit domestic content subsidies in favour 
                                                      
25 See, e.g., US Further Submission (30 September), paras. 153-156 
26 Second Oral Statement of Brazil (7 October), para. 67. 
27 See  http://www.fsa.usda.g ov/ccc/banks_fore ign_rqts.htm. 
28 Paras. 165-176. WT/DS267/R/Add.2 
Page I-250  
 
of agricultural producers, albeit paid to processors, if  such subsidies are provided consistently with the 
Member’s domestic support reduction commitments.
29  The European Communities concur.30 
 59. As the United States has prev iously indicated to the Panel
31, the United States reports all Step 
2 payments as product-specific domestic support to cotton.  As the United States is entitled to the 
protection of the Peace Clause under Article 13(b)( ii) of the Agreement on Agriculture, the United 
States is exempt from action under Articles 5 and 6 of the Subsidies Agreement.  By their express 
terms, Articles 5 and 6 do “not apply to subsidi es maintained on agricultural products as provided in 
Article 13 of the Agreement on Agriculture”.  
60. The question of “import substitution” is otherw ise irrelevant to Brazil’s claims under Articles 
5(c) and 6, which focus on the effect of the pa rticular subsidy without regard to the origin 
requirements of the subsidy.  In contrast, Article  3.1(b) focuses on whether a subsidy is contingent 
upon use of domestic over imported goods  to determine whether a partic ular subsidy is a prohibited 
subsidy irrespective of its effect. 
 
J. ACTIONABLE SUBSIDIES 
 145. The Panel notes that different remedies a re available in respect of prohibited and 
actionable subsidies under Articles 4.7 and 7.8 of the SCM Agreement.  If the Panel were to conclude that a subsidy was prohibited and w ere to make a recommendation under Article 4.7 
of the SCM Agreement to withdraw the subsidy without delay, can the Panel: 
 (a) also conclude that the same subsidy had resu lted in adverse effects to the interests of 
another Member?  If so, what would be the value of such a conclusion in terms of the settlement of the matter before the Panel?   BRA, US 
 
(b) take into account the effects of the interact ion of those prohibited subsidies with other, 
allegedly, actionable subsidies?  If so, how is this relevant to the issue of causation under 
Article 5 of the SCM Agreement?  BRA, US  
 
61. As a practical matter, there may be limited va lue in a particular dispute from making a finding 
that a particular subsidy is both a prohibited su bsidy and causes adverse effects.  If a subsidy is 
prohibited, then the remedy required to be recomme nded under Article 4.7 is to withdraw the subsidy 
without delay.  A finding at the same time th at a subsidy causes serious prejudice, if done 
cumulatively with an analysis of other subsidies, would mean that it would leave unclear the question 
of whether the other, non-prohibited subsidies cause adverse effects.  That may diminish the value (in 
terms of resolving the dispute) of any finding concerning those other subsidies.   
 62. On the other hand, if the Panel were to make a separate “adverse effects” analysis for each of 
the non-prohibited subsidies, there would be no reason to  so analyze any prohibited subsidy.  First, an 
adverse effects analysis of a prohibited subsidy coul d not affect a panel’s findings with respect to each 
non-prohibited subsidy.  Second, since under Article 4 the panel would have recommended 
withdrawal of the prohibited subsidy, complianc e with Article 4 would also comply with a 
recommendation under Article 7.  Therefore, havi ng made a recommendation under Article 4 with 
respect to a subsidy, there would be no utilit y to also making a recommendation under Article 7. 
 
                                                     
 
29 US Further Submission (September 30, 2003), para. 167; First Written Submission of the United 
States, paras. 146-150. 
30 Answers of the European Communities to Panel Ques tion 40, paras. 72-78; First Oral Statement of 
the European Communities, paras. 31-37. 
31 See, e.g., First Written Submission of the United States, para. 129; G/AG/N/USA/43, at 20 
(Supporting Table DS:6) (Exhibit Bra-47) WT/DS267/R/Add.2 
Page I-251 
 
 
146. Brazil acknowledges that there are some interaction effects that may increase or 
decrease the overall effects of the subsidies (Braz il's further submission, para. 225).  How would 
your analysis under Articles 5(c) and 6.3 of the SCM Agreement and Article XVI of GATT 1994 
differ if it excluded, for example, crop insuran ce subsidies, PFC and/or direct payments?  BRA 
 
147. Does the US agree that subsidies provi ded under the marketing loan programme, 
counter-cyclical payments and market loss a ssistance are or were more than minimally 
trade-distorting?  If so, please elaborate on th e type of effects which are more than minimally 
trade-distorting within the meaning of Annex 2 of the Agreement on Agriculture but less than adverse effects within the meaning of Article 5 of the SCM Agreement.  US  
 
63. The issues of whether a measure is more than minimally trade-distorting and whether a measure has adverse effects require two different  analyses.  While it may be a necessary condition 
that a subsidy has trade- or production-distorting eff ects in order to find that it causes adverse effects, 
it is not a sufficient condition.  The question under an adverse effects analysis is one of the effect on a 
particular Member’s “interests” – for example, wh ether injury to the domestic industry of another 
Member, nullification or impairment, or serious prejudice to the interests of another Member.  
Therefore, the mere showing that a subsidy can distort trade or production does not necessarily mean 
it has, for example, seriously prejudiced a particular Member’s interests.  64. Marketing loan payments, counter-cyclical payments, and market loss assistance payments 
provide different types of support that can be expected  to have different effects.  As noted in the US 
answer to Question 127, the United States notifies marketing loan payments as product-specific amber 
box support.  These payments are linked to producti on of upland cotton in favour of the producers of 
upland cotton – a producer must have harvested co tton to receive the payment.  Therefore, the 
United States considers that marketing loan paymen ts could not satisfy the general and policy-specific 
criteria set out in Annex 2 of the Agreement on Ag riculture and therefore could not be deemed to 
have met the fundamental requirement of that Annex.    65. That a particular support measure does not c onform to the general and policy-specific criteria 
of Annex 2 is relevant to the type of support it is  deemed to be, which has meaning for a Member’s 
compliance with its reduction commitments.  That a particular measure is not green box, however, 
would not suffice to demonstrate that a measure has “adverse effects” within the meaning of Articles 
5 and 6 of the Subsidies Agreement.  A finding that  a subsidy has caused adverse effects is a fact-
intensive analysis.  In the case of a claim of serious  prejudice, for example, one of the four effects set 
out in Article 6.3 must be demonstrated (such as significant price suppression or depression by the subsidized product in the same market as the non-s ubsidized product is found) and the effects caused 
by the subsidy must rise to the level of “serious pr ejudice.”  Such a fact-intensive analysis must take 
into account, inter alia , the nature and amount of  the subsidy, market c onditions, and other factors 
affecting production, consumption, and prices.   66. Therefore, a conclusion that a measure does not provide green box support and therefore would not be deemed to have no or at most mini mal trade-distorting effects or effects on production 
cannot take the place of the fact-intensive ex amination required to show causation under the WTO 
Agreements.  For example, marketing loan paymen ts provide a revenue floor of 52 cents per pound 
for US upland cotton producers.  The effect of th is subsidy would depend in large part on the 
producer’s expected market revenue at the time of planting – that is, whether this expected revenue 
was above or below 52 cents per pound.  Thus, the eff ect of this subsidy would be quite different from 
a subsidy that merely provided an  unchanging per unit payment (e.g., 10 cents per pound), even if as a 
result of prices that actually develop over the cour se of a marketing year the per-unit payments under 
these two measures turn out to be the same.  As an other example, a measure that provided, in the 
aggregate, $1 of support linked to production of  upland cotton could not satisfy the general and WT/DS267/R/Add.2 
Page I-252  
 
policy-specific criteria of Annex 2 of the Agreement on Agriculture
32, but it would be difficult to 
conceive that the effect of $1 in subsidies could be “significant price suppression [or] price depression” or “an increase in the world market sh are of the subsidizing Member” given the large 
number of market participants (including cott on producers worldwide), highly developed cotton 
markets, and volume and value of cotton trade. 
 
67. With respect to counter-cyclical payments under the 2002 Act, the United States recalls that 
according to Brazil’s interpretation of the first sente nce of Annex 2 as a stand-alone requirement, if a 
measure has no more than minimal trade-distorting effects or effects on production, it follows that 
such a measure must be deemed green box.  As the United States has demonstrated, the economic 
literature on decoupled payments (counter-cyclical  payments are decoupled from production although 
linked to current prices) suggests that the effects on production of such income transfers are no more 
than minimal.
33  Therefore, although the United States would not contend that counter-cyclical 
payments conform fully to the policy-specific criteri a in Annex 2, there is not only no evidence that 
such payments have more than minimal trade-distorting effects or effect on production, but the 
evidence suggests the contrary.  In such a case, the effect of a paym ent that does not have more than 
minimal effects on production would not appear to be “significant price suppression [or] depression” or an “increase in the world market share of th e subsidizing Member”, much less “serious prejudice”. 
 68. The expired market loss assistance payments  were ad hoc payments made during the 1999, 
2000, and 2001 marketing years to holders of b ase acreage.  These payments were not linked to 
production – that is, a recipient need not have pro duced upland cotton or any crop at all in order to 
receive the payment.
34  However, because these payments were  explicitly made in reaction to low 
commodity prices, the United States considered th at these payments would not conform fully to the 
criteria in Annex 2 of the Agreement on Agricu lture and therefore notified these payments as non-
product-specific amber box support.  As noted a bove with respect to the 2002 counter-cyclical 
payments, however, the economic literature on paym ents decoupled from production suggests that the 
effects on production of income transfers such as the market loss assistance payments are no more 
than minimal.35  Therefore, the evidence suggests that th e effect of such payments could not be 
“significant price suppression [or] depression” or an  “increase in the world market share of the 
subsidizing Member” resulting in “serious prejudice”.  148. How should the significance of price suppres sion or depression be  assessed under Article 
6.3(c) of the SCM Agreement? In terms of a meaningful effect?  Or another concept? BRA, US 
 
69. As the United States has previously noted
36, in Article 6.3(c) the term “significant” modifies 
the phrase “price suppression or depression”, suggesting that it is the level of price suppression or 
depression itself that must be “important, notable” or “consequential”.37  As Brazil agrees38, important 
                                                      
32 For example, the measure would not qualify as dec oupled income support because, by requiring that 
recipients have produced upland cotton, the amount of the payment would be “related to, or based on, the type or volume of production . . . undertaken by the producer in any year after the base period”.  See Agreement on 
Agriculture, Annex 2, para. 6(b). 
33 See, e.g. , US Rebuttal Submission, paras. 59-64. 
34 Supplemental legislation authorizing each of these payments was passed several months after 
planting for the crop year in question had occurred.  Even if producers had some expectations of payment at 
planting time, they were eligible to receive such a paymen t regardless of what crop th ey planted.  Indeed, they 
could choose not to plant and still be eligible for the payment.  This would argue that market loss assistance 
payments, like production flexibility contract payments, direct payments, and counter-cyclical payments, are decoupled from planting decisions. 
35 See, e.g. , US Rebuttal Submission, paras. 59-64. 
36 US Opening Statement at  the Second  para. 58. 
37 US Further Submission, para. 83. 
38 See Brazil’s Further Submission, para. 88 (“This interpretation of price suppression and price 
depression is consistent with the relevant context of Article 6.3(c), which includes Article 15.2 of the SCM WT/DS267/R/Add.2 
Page I-253 
 
 
context for interpreting this phrase can be found in  Article 15.2 of the Subsidies Agreement, which 
sets out for countervailing duty purposes th e same effects found in Article 6.3.39  This text confirms 
that the relevant analysis is whether the level of price suppression or depression itself is “significant”: 
 
With regard to the effect of subsidized imports on prices, the investigating authorities 
shall consider whether there has been a significant price undercutting by the 
subsidized imports as compared with the price of a like product of the importing Member, or whether the effect of such imports is otherwise to depress prices to a 
significant degree or to  prevent price increases , which otherwise would have 
occurred, to a significant degree .
40   
Thus, Article 15.2 provides contextual support for reading the term “significant price suppression [or] 
depression” in Article 6.3(c) according to the ordinary meaning of its terms – that is, it is the degree of 
price suppression or depression itself that must be “significant”.  70. As suggested by this analysis, it is not the effect on the producers of the complaining Member 
that must be “significant”.  In determining whet her the alleged price suppression or depression is 
“important” or “notable”, it will of course be rele vant to look at that suppression or depression in the 
context of the prices that have b een affected – that is, at the degree  of suppression or depression. One 
absolute level of suppression or depression could be significant in the context of prices for one 
product but not for another and meaning must be given to the phrase “in the same market”.  149. What is the meaning of "may" in the chapeau of Article 6.3(c) in the context of Brazil's assertion that there is no need to conduct a distin ct analysis of "serious prejudice" under Article 
5(c) after having made a finding under 6.3(c) or (d)?  (Brazil's further submission, paras 437 ff).  How, if at all, are Articles 6.2 and 6.8 relevant in this context?  What context should the Panel 
use for assessing serious prejudice under Article 5(c) of the SCM Agreement if the Panel takes 
the view that Article 6.3(c) and (d) are permissive conditions for a determination of serious 
prejudice?  US 
 
71. The chapeau of Article 6.3 states that “[s]erious prejudice in the sense of paragraph (c) of Article 5 may arise in any case where one or more of the following apply”.  The Article then goes on 
to detail four effects that “may” result in serious pr ejudice arising.  Brazil’s reading would re-write the 
chapeau of Article 6.3, changing the permissive “may” into the obligatory “shall”.  The ordinary 
meaning of “may” is “to express possi bility, opportunity, or permission”.
41  Therefore, the ordinary 
meaning of the chapeau of Article 6.3 would be th at there is a “possibility” or “opportunity” for 
serious prejudice in the sense of Article 5(c) to arise where one or more of the effects listed in Article 6.3 is found. 
 
72. Article 6.2 clarifies that a prerequisite for a fi nding of serious prejudice is that at least one of 
the four effects in Article 6.3 must be demonstrated.  That is, Article 6.2 precludes a panel from 
finding serious prejudice (“serious prejudice sh all not be found”) if a subsidizing Member 
demonstrates that the subsidy has not had any of th e effects listed in Article 6.3.  This provided a 
subsidizing Member with a means to overcome the presumption created through the operation of 
                                                                                                                                                                    
 
Agreement .  That provision discusses standards for the determination of injury in countervailing duty cases and 
provides that the investigating authorities should consider whether the effect of imports is ‘to depress prices’ or 
‘to prevent price increases, which otherwise would have occurred . . .’[.]”) (emphasis added). 
39 Effects on prices form one part of a determination of injury for countervailing duty purposes.  
Pursuant to Article 15.1, such a determination of injury involves an objective examination of (a) the volume of 
subsidized imports and the effect of the subsidized impor ts on prices in the domestic market for like products 
and (b) the consequent impact of these imports on the domestic producers of such products. 
40 Subsidies Agreement, Article 15.2 (italics added). 
41 The Random House Dictionary of the English Language, Unabridged Edition  at 886 (1983). WT/DS267/R/Add.2 
Page I-254  
 
Article 6.1 while that provision was still in effect.  However, Article 6.1 demonstrates that Members 
knew how to create a presumption of serious prejudice: they did so by explicitly stating that, in certain 
cases, “[s]erious prejudice . . . shall be deemed to exist ” (italics added).  Article 6.2, while providing a 
means to rebut that presumption, does not by its  terms establish that serious prejudice “shall be 
deemed to exist” if one of the effects in Article 6.3 exists. 
 
73. Article 6.4 lends further contextual support to the interpretation that the use of the term “may” 
in the chapeau of Article 6.3 signifies that the effect s listed in Article 6.3 are permissive conditions for 
a determination of serious prejudice.  Article 6.4 states that “displacement or impeding of exports 
shall include any case in which, subject to the provisi ons of paragraph 7, it has been demonstrated that 
there has been a change in the re lative shares of the market to the disadvantage of the non-subsidized 
like product”.  Thus, given certain situations furt her explained in Article 6.4, displacement or 
impeding of exports “shall” exist.  However, Arti cle 6.3 does not state that, given those situations, 
displacement or impeding of exports resulting in serious prejudice  shall exist.  That is, the situations 
in Article 6.4 which must result in a finding of displacement or impeding of export do not, by the 
terms of the Article, also result in a finding of serious prejudice. 
 74. Article 6.5 similarly defines a situation in  which “price undercutting” under Article 6.3(c) 
“shall” be found but does not also mandate a finding of serious prejudice.  Had Members intended (as 
Brazil contends) that a finding under Article 6. 3 would necessarily suffice to demonstrate serious 
prejudice, one also would have expected Articles 6. 4 and 6.5 to mandate a finding of serious prejudice 
where a finding of one of the effects under Article 6.3 is mandated. 
 75. Article 6.8 provides further contextual support for reading Article 6.3 as setting out certain permissive conditions that could result in a panel fi nding that serious prejudice to the interests of a 
Member exist.  Article 6.8 states that, “in the absence of circumstances referred to in paragraph 7”, 
which merely preclude a panel from finding disp lacement or impediment resulting in serious 
prejudice, “the existence of serious prejudice should be  determined on the basis of the information 
submitted to or obtained by the panel” (italics a dded).  Again, this provision does not mandate a 
finding of serious prejudice should one or more of th e effects set out in Article 6.3 be demonstrated.  
Rather, it emphasizes that “the existence of serious prejudice” (rather than the existence of one of the 
effects in Article 6.3) “should be determined” by th e panel based on the information before it.  Thus, 
while a panel may be precluded  from making a finding of serious prejudice (where, for example, a 
complaining party has only alleged displacement or  impediment under Article 6.3, but one of the 
conditions in Article 6.7 exist), there is no curre ntly effective provision under which a panel is 
compelled  to find serious prejudice. 
 150. Is the list in Article 6.3 of the SCM Agree ment exhaustive, or co uld serious prejudice 
arise in circumstances other than those lis ted in paragraphs (a) through (d)? US 
 
76. Article 6.3 sets out four circumstances in wh ich the effects of subsidies “may” give rise to a 
finding of serious prejudice.  Article 6.2 establishes that “serious prejudice shall not be found” if a 
subsidizing Member demonstrates that a challenged subsidy has not resulted in any of those four 
effects.  Therefore, Articles 6.3 and 6.2 indicate that serious prejudice may not be deemed to have 
arisen without at least one of the four effect s listed in Article 6.3 having been demonstrated. 
 
151. Where in the text of Article 6.3(d) of the SCM Agreement is there a basis to take into 
account that 1998 may be a "misleading" year for the purposes of comparison?  For example, 
unlike the text of Article XVI:3 of the GATT 1994, there does not seem to be a general reference 
to "special factors".  US 
 
77. Article 6.3(d) requires that a complaining pa rty demonstrate that the effect of a challenged 
subsidy is an increase in the world market share in a particular subsidized primary product or 
commodity as compared to the average share it had dur ing the previous period of three years and this WT/DS267/R/Add.2 
Page I-255 
 
 
increase follows a consistent trend over a period wh en subsidies have been granted.  Where the 
evidence offered by a complaining party relies in large part on abnormal production and trade data 
evidently caused by factors unrelat ed to the challenged subsidy (in the case of the United States in 
1998, severe drought and record abandonment of plante d acres), use of that data cannot satisfy the 
complaining party’s burden of demonstrating cau sation – that is, the “effect of the subsidy”. 
 
78. Article 6.3(d) sets out a fairly mechanical two-part test: first, there must be an increase in world market share as compared to the average over the preceding period of three years.  Thus, 
assuming arguendo  that Brazil could challenge expired ma rketing year 2001 support measures, this 
test would compare the world market share of US upland cotton in that year to the average over the 
preceding three years.  Brazil, however, has misinter preted Article 6.3(d) and examined the US world 
export  share. 
 79. The second part of the test is that any su ch increase over the average of the preceding three-
year period “follows a consistent trend over a period when subsidies have been granted”.  The 
marketing year 2001 payments challenged by Brazil were first introduced for the 1996 marketing year 
by the 1996 Act.  Thus, Brazil must demonstrate that the alleged increase in world market share follows a “consistent trend” between marketing year s 1996-2001.  In fact, there is no consistent trend 
showing an increasing US world market share over th is period; that world market share has been 
inconsistent but showing a tendency to decline over that period.  As demonstrated in Exhibit US-47, 
US world market share surpassed 20 per cent in bo th marketing years 1996 and 1997 but has not 
thereafter. 
 80. Finally, as the United States has noted in its further submission, Brazil has limited its claim 
under Article 6.3(d) to alleged effects in marketing year 2001.
42  Thus, there can be no finding that 
challenged US subsidies under the 2002 Act presently  cause serious prejudice within the meaning of 
Article 6.3(d).  As the United States has previo usly noted, moreover, payments with respect to 
marketing year 2001 expired with the granting of support in respect of the 2002 marketing year’s 
production, which began on 1 August 2002 – that is , seven months before this Panel’s terms of 
reference were established.  Th e result is that Brazil is asking the Panel to make findings and a 
recommendation with respect to subsidies that had b een replaced at the time of panel establishment 
and that no longer exist to be withdraw n even were a recommendation to be made. 
 
152. If the US is correct in asserting that the Article 13(b)(ii) Agreement on Agriculture 
analysis is a year-by-year analys is, how would this affect the Panel's examination of  Brazil's 
claims of serious prejudice, including the three year period and the trend period in Article 6.3(d) of the SCM Agreement? US 
 
81. Article 13(b)(ii) exempts from action measures that, inter alia , conform fully to the provisions 
of Article 6 of the Agreement on Agriculture.  Ch ief among those provisions is the obligation that a 
Member remain within its Annual and Final Bound Commitment Levels for its Aggregate 
Measurement of Support, a commitment that is expressed by year.  Therefore, while a Member may 
breach the Peace Clause in a give n year by exceeding its bound commitment level, that Member may 
in the following year not breach the Peace Clause if its domestic support measures once again do not 
exceed its commitment levels.  Thus, to gauge wh ether domestic support measures have breached the 
Peace Clause requires a year-by-year analysis.
43 
 
                                                      
42 US Further Submission, para. 100. 
43 Brazil agrees that the Peace Clause requires a year-b y-year comparison .  Brazil insists, however, that 
once a Member has breached the Peace Clause once, that Member can never thereafter regain Peace Clause 
protection.  There is nothing in the text of the Peace Clause  that supports Brazil’s view on this point – nor, as a 
result, has Brazil pointed to any supporting text. WT/DS267/R/Add.2 
Page I-256  
 
82. The year-by-year analysis under the Peace Clause does not affect how the Panel would undertake a serious prejudice analysis; it affects only th e Panel's analysis of which of the US measures 
that Brazil has challenged may be the subject of th e serious prejudice analysis.  In the event, Brazil 
has only claimed that the effect of US subsidies in  marketing year 2001 was inconsistent with Article 
6.3(d).  Therefore, the Panel’s task is first to analyze whether US domestic support measures in 
marketing year 2001 breached the Peace Clause.  If so, then the Panel would be able to undertake a 
serious prejudice analysis – and that second analysis is distinct from the first one.  The United States has demonstrated that US meas ures in marketing year 2001 do not grant product-specific support to 
upland cotton in excess of that decided during the 1992 marketing year, whether measured according 
to the level of support granted by those measures or a price-gap AMS calculation. 
 
83. With respect to the two-part test of the thr ee-year average and consistent trend over a period 
when subsidies have been granted, the Peace Clau se would have no impact on these tests.  That is, 
assuming arguendo  that marketing year 2001 measures were not exempt from action, the fact that the 
Peace Clause exempts from action measures for other marketing years would not preclude the Panel 
from examining data and evidence from those years as part of its serious prejudice analysis of the 
2001 measures.  The payments made in those other marketing years (that is, the marketing year 1999 
measures and the marketing year 2000 measures) w ould be exempt from action; evidence relating to 
those years would not be sheltered from examination by the Panel in its serious prejudice analysis of the 2001 measures.  153. Would the conditions in Article 6.3(d) of the SCM Agreement be satisfied in respect of 
time periods other than the one specified? What relevance, if any, would this have for Brazil's claims? BRA 
 
154. Does the US agree that upland cotton is a "p rimary product or commodity" within the 
meaning of Article 6.3(d) of the SCM Agreement?  (ref. Brazil's further submission, para. 262)  
and within the meaning of Article XVI:3 of the GATT 1994?  US 
 
84. Yes.  
155. Please respond to Brazil's identification of the seven-year period beginning with 
MY1996 (following the passage of the FAIR Act of 1996) as the "most representative period" 
for the purposes of Article 6.3(d)? (ref. Brazil further submission, para. 269)  US 
 
85. Brazil has challenged only those US subsidies that allegedly had the effect of increasing US 
world market share in marketing year 2001 – that is, marketing year 2001 payments.  The second part 
of the test under Article 6.3(d) is that any increase in world market share that is the effect of the 
challenged subsidy over the average of the preceding three-year period “follows a consistent trend 
over a period when subsidies have been granted”.  The marketing year 2001 payments were granted 
under the 1996 Act.  Therefore, the “period when subsidies have been granted” for purposes of an 
analysis of the effect of marketing year 2001 suppor t would be the marketing year 1996-2001 period.   
 
86. The United States believes that marketing year 2001 support cannot cause present serious 
prejudice because these payments expired when marke ting year 2002 payments began to be made.  
Nonetheless, if marketing year 2001 payments ar e the challenged measures for purposes of Brazil’s 
Article 6.3(d) claim, there is no basis to include marketing year 2002 within the period when subsidies 
have been granted.  (We also note that Brazil iden tifies a seven-year period beginning with marketing 
year 1996 but presents data only for the six- year period through marketing year 2001.)  
 WT/DS267/R/Add.2 
Page I-257 
 
 
156. Does the US agree that "...footnote 17 [of the SCM Agreemen t] does not carve out 
upland cotton from the scope of Article 6.3(d) of the SCM Agreement"? (ref. Brazil further submission, para. 275).  US  
87. The United States is not aware of any “other multilaterally agreed specific rules apply to the 
trade in the product or commodity in question” within  the meaning of footnote 17 to Article 6.3(d) of 
the Subsidies Agreement.  
157. Does the reference to "trade" in footnote 17 of the SCM Agreement have any impact on 
the interpretation of "world market share" in Article 6.3(d))  If so, what is it?   US 
 
88. The use of the term “trade” in footnote 17 provides useful context in interpreting the phrase 
“world market share” in Article 6.3(d).  Specifi cally, Article 6.3(d) speaks of an increase in a 
Member’s “world market share”, not an increase in a Member’s “world trade share”.  By using the 
term “market” and not “trade”, Article  6.3(d) establishes that its scope is not limited to cross-border 
movements of a primary product or commodity.  That  is, the “world market” for a primary product or 
commodity encompasses all the markets in the entire “world”, including the market of the allegedly 
subsidizing Member.  Had Members desired instead to  restrict the analysis under Article 6.3(d) to 
cross-border shipments, they could have used the phrase “world trade share” or, in Brazil’s preferred 
formulation, “world export share”, or even (as in GATT 1994 Article XVI:3) “world export trade”.  
They did not.  Finally, we note that, rather than elaborating on the test under Article 6.3(d), footnote 
17 was intended to describe those products or commodities not covered by Article 6.3(d) and 
therefore could use the term “trade”.  
158. Please respond to Brazil's assertion that " ...the absence of any payment, production or 
expenditure limitations in the US marketing loan programme is analogous to the EC sugar 
regime that was challenged in EC - Sugar Ex ports II (Brazil) and EC - Sugar Exports I 
(Australia)."  (ref. Brazil further submission, para. 317)  US 
 
89. The EC sugar export regime challenged by Australia and Brazil under the GATT 1947 was 
manifestly different than the US marketing lo an programme, primarily in that the challenged 
programme was an export subsidy providing export refunds on exportable surpluses of sugar.  The 
Sugar Exports  panel concluded that in the particular ma rket situation prevailing in 1978 and 1979, the 
EC system had caused serious prejudice to Brazil’s interests because it had been applied in a manner 
which contributed to depress sugar prices.  The panel also concluded that the lack of “pre-established 
effective limitations” on those export refunds and th e application of that refund system “constituted a 
permanent source of uncertainty in world sugar mark ets and therefore constituted a threat of serious 
prejudice.  The panel’s finding on serious prejudice  was made carefully, circumscribed by “the 
particular market situation prevailing in 1978 and 1979”.  However, the panel’s finding on threat of 
serious prejudice was made without any explanation a nd apparently without argument by the parties.  
Therefore, it is difficult to see how the Panel could draw useful guidance from this finding by that 
panel or draw conclusions on relevant types of payments. 
 159. The EC, in its oral statement (paras 9 and 10), disagrees with the US interpretation of the terms "same market". Can the US comment on the EC's view? US 
 
90. The United States still has difficulty with th e EC view.  The United States cannot understand 
how the "world" can be one "market" for purposes of  Article 6.3(c), which by its nature calls for a 
comparison of the prices of the goods of one Member when competing in a market with the goods of 
another Member. Goods are not sold to the "world" – they are sold in the market of a particular 
country.    91. The EC on the other hand evidently considers th at it is at least possible that the world could 
function as one market and therefore constitute a “same market” for purposes of analyzing whether WT/DS267/R/Add.2 
Page I-258  
 
the “effect of the subsidy” is “significant pri ce suppression [or] depression” of the price of a non-
subsidized product in the same market.  For the re asons set forth in the US further submission, the 
United States considers that such an interpreta tion would render the “in the same market” language 
inutile because the subsidized and non-subsidized  products could never be found in the same 
geographic market and still be cons idered to be in the same “world market”.  Furthermore, under the 
EC's approach, a Member could be selling at a pric e well above another Member's price in the same 
country, and yet be found to be depressing prices on the "world market" due to a comparison between 
sales prices of the Member in one country compared to sales prices of the other Member in a different 
country.  
92. However, the EC itself concedes that a “world  market” could only be deemed to exist if there 
were not significant barriers to trade in the product at  issue, such as customs duties, technical barriers 
to trade, etc.  The EC’s own explanation suggests that such a “world market” is unlikely to exist 
because of significant barriers to trade somewhere in the world.  Thus, even under the EC’s approach, 
it is not the case that there is a “world market” for upland cotton. 
 
160. Without prejudice to the meaning of "world market share" as used in Article 6.3(d) of 
the SCM Agreement, can you confirm the world ex port share statistics provided in Exhibit 
BRA-206? US 
 
93. The table below reflects most recent updates for 2002-03 and 2003-04.  We caution that, as 
noted in the footnotes in the table, the data are drawn from different sources and data sets. Also, we 
have corrected data in BRA-206 for 1997-98 for to tal world exports, world upland exports, and US 
export share.   
World cotton exports (million bales) 
Year US upland 
exports (1) Total world 
exports (2) ELS world 
exports (3) World upland 
exports (4) US Share of 
World Exports 
(5) 
1996-97 6.399 26.929 1.017 25.912 24.70% 
1997-98 7.06 26.838 1.106 25.732 27.44% 
1998-99 4.01 23.668 1.085 22.583 17.76% 
1999-00 6.303 27.326 1.193 26.133 24.12% 
2000-01 6.303 26.589 1.127 25.462 24.75% 
2001-02 10.603 29.052 1.325 27.727 38.24% 
2002-03 11.266 30.629 1.989 28.640 39.34% 
Average:  98/99 - 00/01  
5.539  
25.861  
1.135  
24.726  
22.40% 
 99/00 - 
01/02 7.736 27.656 1.215 26.441 29.26% 
 00/01 - 
02/03 9.391 28.757 1.480 27.276 34.43% 
Source:   
(1) USDA,Fact Sheet Upland Cotton, 2003 p.5  
(2) USDA, ERS.  Cotton and Wool Yearbook, 2002, p. 31; Fact Sheet Upland Outlook, USDA, Oct 2003 table 2 (3) ICAC, Cotton World Statis tics, Sept. 2003, p. 7.  
(4) Calculation: (2) - (3) 
(5) Calculation: (1)*100/(4)  
 WT/DS267/R/Add.2 
Page I-259 
 
 
161. Would a finding of serious prejudice under Article 5(c) of the SCM Agreement be 
determinative for a finding under Article XVI:1 of the GATT 1994?  Why or why not?  What, if any, is the role of footnote 13 of the SCM Agreement in this context?  BRA, US 
 
94. Article 5(c) establishes that one of the adve rse effects that a subsidizing Member should not 
cause to the interests of other Members is “serious pr ejudice”, and footnote 13 to that Article states 
that the term “‘serious prejudice to the interests of another Member’ is used in the same sense as it is 
used in paragraph 1 of Article XVI of GATT 1994” .  Therefore, “serious prejudice” under Subsidies 
Agreement Article 5(c) and GATT 1994 Article XVI:1 must be read to have the same meaning.  As 
Article 5(c), and Article 6 which explains it, are the more detailed provisions on “serious prejudice” 
and contain a more effective remedy than the consultation envisioned under GATT 1994 Article 
XVI:1, the Panel’s analysis should begin with the S ubsidies Agreement provisions .  Were the Panel to 
agree that Brazil has not established that the eff ect of the challenged subsidy is “serious prejudice” 
within the meaning of the Subsidies Agreement, it would be difficult to see how the Panel could then 
determine that “serious prejudice” exists within the meaning of GATT 1994 Article XVI:1 since the 
term is used “in the same sense” in these provisions. 
 
162. Can the US confirm that marketing loan/LDP , step 2 and counter-cyclical payments are 
mandatory if the price conditions are fulfilled? US 
 
95. The statutory authority for marketing loan payments, step 2 payments, and counter-cyclical 
payments does not provide the Secretary with the authority to arbitrarily decline to make these 
payments to qualified recipients.  However, certain conditions must be met before these payments will 
be made: price conditions must be met, the producer  must meet all conditions for payment, including 
compliance with "sodbuster" and "swampbuster" provisions and any planting restrictions, the 
Commodity Credit Corporation (CCC) must not have exhausted its statutory borrowing authority, and 
Congress must not have cut back on the programme , by an appropriations bill or otherwise. 
 96. As the question notes, different price cond itions apply to each of these payments.  For 
example, in the case of marketing loan payments , the adjusted world price (as calculated by the 
Department of Agriculture) must be below 52 cents per pound.  Recently, the adjusted world price has 
been above 52 cents per pound and thus no marketi ng loan payments have been made to qualified 
recipients. 
 97. There is no preset limit on the total amount of  payments that can be made under each of these 
programmes although for counter-cyclical payments a maximum total outlay can be calculated using 
the base acres, base yields, and maximum paymen t rate for each commodity produced during the 
historical base period.  In addition, for certain recipients, per-person payment limits may apply.  We 
also note that under Section 1601(e) of the 2002 Act, the Secretary has the authority (so-called "circuit breaker" authority) to make adjustment s to farm programmes because of WTO domestic 
support reduction commitments.  Presumably, this au thority could result in refusals to make certain 
payments.  
98. Conditions for receiving counter-cyclical and marketing loan payments are numerous.  The 
programme contract  for counter-cyclical payments is required by section 1105 of the 2002 Act.  That 
section provides explicitly that the producers must ag ree: (A) to comply with the requirements dealing 
with the highly erodible cropland conservation found at 16 USC 3811 et seq .; (B) comply with the 
wetland conservation requirements found at 16 USC 3821 et seq .; (C) comply with the planting 
flexibility requirement of  Section 1106 of the 2 002 Act; (D) use the land representing the base acres 
for an agricultural or conserving use but not for a non -agricultural, commercial, or industrial use, as 
determined by the Secretary; and (E) control n oxious weeds and otherwise maintain the land in 
accordance with sound agricultural practices as dete rmined by the Secretary of Agriculture, if the 
agricultural or conserving use involves the noncu ltivation of any portion of the land as permitted 
under the specification just set out in (D).  For marketing loans, the loan agreement and loan WT/DS267/R/Add.2 
Page I-260  
 
regulations, contained in 7 CFR part 1421, specify various conditions that must be met and followed 
by the producer.  Under 16 USC 3811 et seq ., the wetland and conservation provisions c ited above are 
made applicable to all commodity benefits, including loans.  
163. Are US cotton producers able to cover th e fixed and variable costs without subsidies? 
Please provide substantiating evidence.  Of what rel evance is this, if any, to Brazil's actionable 
subsidy claims ? US, BRA  
99. The United States notes that even using cost data that reflects 1997 cost structures
44, US 
producers appear to have been able to cover variable costs through the sale of cotton at harvest time in 
every year but marketing years 2001 and (more narrowly) 2002.  In this, US producers were no 
different than Brazil’s farmer witness, Christophe r Ward, who stated: “But even with these high 
yields and the excellent quality of our land, we were not able to fully recover all of our variable costs 
of production during the 2000/01 an d 2001/02 seasons[,]” a position evidently shared by most 
producers in Mato Grosso, Brazil’s leading cotton-producing state.45   
 
100. Furthermore, even in years in which US produ cers may not have been able to cover fixed and 
variable costs, it does not follow that it is subsid ies that covered these costs.  Again, Mr. Ward 
explained that in marketing years 2000 and 2001, “Nor  were we able to meet our total costs which 
include the additional fixed costs.”  Therefore, producers can cover costs from revenue sources other 
than subsidies.  That harvest prices at times fa ll below costs does not necessarily mean that subsidies 
have had the effect of maintaining production. 
 
US upland cotton operating costs co mpared to harvest cotton price 
Year Cotton price at harvest  
($/lb) Average operating cost 
($/lb) 
 
1998 0.64 0.481 
1999 0.47 0.418 
2000 0.57 0.473 
2001 0.35 0.447 
2002 0.42 0.453 
Source: USDA, Economic Research Service, Ag ricultural Resources Management Survey 
(www.ers.usda.gov/data/ costsandreturns/testpick.htm)  
K. CAUSATION  
 164. When the US points, in its oral statement of 7 October, to the alleged "bias" of Prof. 
Sumner's model, is it arguing that US subsidi es are irrelevant to the movement in prices and 
production (acreage) of upland cotton? US  
 
101. The United States recognizes that subsidies can potentially affect production and prices of 
upland cotton.  The question is one of the nature  of the subsidy examined and the degree of any 
predicted effect, which could range from significant to negligible.  The criticisms of Dr. Sumner’s 
model outlined in the US oral statement of Octobe r 7, 2002 take issue with many of the underlying 
                                                     
 
44 Recall that the Department of Agriculture conduc ted a survey of cotton farmers in 1997.  For any 
cost data published by the Department since that time, the 1997 data has merely been updated by applying the producer price index to ‘update’ input costs.  See US Closing Statement at the Second Session of the First Panel 
Meeting, paras. 10-11. 
45 Statement of Mr. Christopher Wa rd at the Second Session of the First Panel Meeting, para. 6 
(emphasis added).  Mr. Ward goes on to state:  "Based on my discussions with many producers relating to Mato 
Grosso cotton production and revenue, I know that most other producers in State of Mato Grosso were in the 
same situation as we were during the 1999-2000 period." (Id  (emphasis added) WT/DS267/R/Add.2 
Page I-261 
 
 
assumptions in the model, particularly in regards to how decoupled payments were modelled and the 
choice of baselines used by Dr. Sumner, which have le d to results that have exaggerated the impact of 
US subsidies on world cotton markets.  
165. Please comment (and submit substantiating evidence) on the US assertion that the 
FAPRI model has been designed and developed for prospective analysis, and is not suitable for 
retrospective counterfactual analysis.   What is the reliability of past FAPRI-produced analyses 
when compared with actual data for the period covered by them?  Is there any other instrument 
that can be used to try to identify the effect of subsidies already granted, or of their removal? 
BRA, US 
 
102. FAPRI uses its models for prospective analyses;  that is, they analyze the future effects of 
proposed programme changes against a baseline th at assumes current programmes are in place.  
Recent examples of FAPRI analyses include the effects of stricter payment limitations on US farmers
46, an analysis of the European Union’s 2003 CAP Reform Agreement47, and the effects on the 
US dairy industry of removi ng current Federal regulations.48  These analyses are forward-looking 
examinations of the effects of policy changes.49 
 103. Econometric modelling systems similar to the ones maintained by FAPRI and USDA are 
designed for prospective analyses of altern ative policy assumptions.  The foundation for 
forward-looking analyses is the baseline projections, which are conditioned on specific assumptions 
for exogenous variables, i.e., those that are inde pendent of the modelling system.  The baseline model 
is also conditioned to incorporate the current structure of specific commodity markets through equation specifications, elasticity estimates, and structur al shift and dummy variables.  As a result, the 
baseline models will not be appropriately structured to analyze changes over a historical period.  For 
example, models calibrated for the current structure of the US textile industry may not be appropriate 
to assess the structure present in the late 1990's due to  the tremendous changes that have occurred.  
Another difficulty of using the system over a histori cal period is the degree of external shocks that 
impact the model.  In prospective analysis, assessing  the impacts of alternative policies occurs absent 
of extreme shocks from independent variables.  
                                                     
 
46 FAPRI.  FAPRI Analysis of Stricter Payment Limitations  FAPRI-UMC Report #05-03 17 June 2003.  
15 pp.  Available at: http://www.fapri.missouri.edu/FAPRI_Publications.htm. 
47 FAPRI.  Analysis of the 2003 CAP Reform Agreement.   FAPRI Staff Report #2-03, 9 September 
2003.  16 pp.  Available at: http://www.fapri.missouri.edu/FAPRI_Publications.htm 
48 FAPRI.  The Effects on the United States Dairy Industry of Removing Current Federal Regulations.   
FAPRI-UMC Report #03-03.  April 2003.  14 pp . Available at http://www.fapri.missouri.edu/ 
FAPRI_Publications.htm 
49 FAPRI recognizes the forward-looking nature of its  analyses and the limitations of those baselines 
quite clearly: 
 
Each year, FAPRI prepares a set of baseline pr ojections that provide information about the 
outlook for agricultural markets, farm progra mme spending, farm income, and a variety of 
other indicators. The baseline then serves as the point of comparison for analyses of alternative policy options.... 
 
The baseline is not a forecast of what will happen, but rather a projection of what could 
happen under a particular set of assumptions. Cu rrent global policies ar e held in place, even 
when there is reason to suspect changes are likely....  
In reality, these assumptions are certain to be violated and actual market outcomes will differ 
from the deterministic baseline projections presented in the supply-demand tables.... 
 
FAPRI 2003 US Baseline Briefing Book, Foreward, page 1. FAPRI-UMC Technical Data Report 
04-03 (March 2003) (www.fapri.missouri.edu). WT/DS267/R/Add.2 
Page I-262  
 
104. As mentioned by Dr. Sumner in Annex I to  Brazil’s submission of 30 September, baseline 
models such as the one utilized by FAPRI or USDA are not forecasting models.  They are used to 
analyse proposed policy changes.
50  The attached table shows the forecast accuracy for year ahead 
price forecasts by FAPRI.  FAPRI farm price projections for upland cotton compared to actual prices, MY1999-2003 ($/lb) 
FAPRI published 
baseline Marketing 
year FAPRI 
projected price Actual price 1/ Difference 2/ 
January 1998 1999/00 0.689 0.45 -0.239 
January 1999 2000/01 0.531 0.498 -0.033 
January 2000 2001/02 0.479 0.298 -0.181 
January 2001 2002/03 0.554 0.43 -0.124 
January 2002 2003/04 0.385 0.463  3/ 0.078 
Source: FAPRI, USDA World Agricultural Supply and Demand Estimates 
1/ Marketing year average farm price reported by USDA. 
2/ Actual farm price minus forecast price 3/ Average cotton farm price for August 2003.  USDA is prohibited from publishing cotton price 
forecasts. 
 105. One potential approach to using a baseline mode l to estimate the effects of subsidies during a 
historical period would be to use an ex post  prospective analysis.  Under an ex post  analysis, instead 
of using the current baseline for measurement, one would use a past baseline to make year-ahead 
projections of the effects of subsidies on the cotton market.  For example, to analyze the effects of 
subsidies on the 1998/99 marketing year, one could use the January 1998 FAPRI baseline model to project the effects of removing subsidies and compare them to baseline levels for the 1998/99 marketing year.  To analyze the 1999/00 marketing year, one would update the baseline to the January 
1999 baseline and so on, until the current baseline.  This would provide baseline comparisons that 
would reflect the estimated effects of the pr ogrammes at the time of planting in each year. 
 
166. The US states that "futures prices demo nstrate that market participants predict 
increasing upland prices over the course of the ma rketing year" (US 7 October oral statement, 
para. 62). Please elaborate on this argument including citing specific futures prices. US 
 106. Exhibit US-68 shows average daily closing prices for the December 2003 cotton futures 
contract.  Daily futures prices for December 2003 and May 2004 delivery have increased by as much 
as 35 per cent from January 2003 levels.  107. Futures prices reflect a price that a buyer is willing to pay to secure a supply at a given price 
and protect against the possibility of prices rising even  higher.  Thus, where futures contract prices are 
higher than current market prices, the futures pri ces suggest that cotton buyers are concerned about 
                                                     
 
50 For example, the US Department of Agriculture explains: 
The projections are a conditional scenario with no shocks and are based on specific 
assumptions regarding the macroeconomy, agricu ltural policy, the weather, and international 
developments. In particular, the baseline incorporates provisions of the Farm Security and 
Rural Investment Act of 2002 (2002 Farm Act)  and assumes that current farm legislation 
remains in effect through the projections peri od. The projections are not intended to be a 
Departmental forecast of what the future will be , but instead a description of what would be 
expected to happen under a continuation of the 2002 Farm Act, with very specific external 
circumstances. Thus, the baseline provides a point of departure for discussion of alternative farm sector outcomes that could result under different domestic or international assumptions." 
USDA Agricultural Baseline Projections to 2012. Office of the Chief Economist, US Department of 
Agriculture. WT/DS267/R/Add.2 
Page I-263 
 
 
the possibility of cotton prices rising still higher and ar e willing to lock in a purchase price that carries 
a premium over current prices.    108. In fact, current futures prices reveal that market participants anticipate upland cotton prices 
rising over the current 2003 marketing year.  
 
New York Cotton Exchange, Closing Futures Prices MY03 
Friday, 24 October 2003
51 
December 2003 contract 82.11 cents per pound 
March 2004 contract 84.34 cents per pound 
May 2004 contract 84.50 cents per pound 
July 2004 contract 84.64 cents per pound 
 That is, a producer may sell cotton futures for Dece mber delivery at 82.11 cents per pound, but for 
deliver later in marketing year 2003 the price rises to greater than 84 cents per pound.  To update the 
information provided by the United States to the Panel in its further submission
52, these futures prices 
indicate that the market expects cotton prices to remain well above their 20-year average of 67.86 
cents per pound (1983-2002) within the current 2003 marketing year and well above what Brazil 
calculates as the 1980-98 A-index average (74 cents per pound) – that is, the average for the period 
before  Brazil alleges serious prejudice through significant price suppression or depression.53  Thus, 
given expected cotton prices reflected in futures c ontracts, Brazil has not demonstrated any clearly 
foreseen and imminent likelihood of serious prejudice.   Quite the contrary: in marketing year 2003, 
upland cotton producers expect high and increasing prices.  
167. How does Brazil react to Exhibit US-44? BRA 
 
168. Please confirm that the production figures cited in Exhibit US-47 are for upland cotton 
only and do not include textiles. US  
 
109. Yes, the production figures cited in Exhibit US-47 are for upland cotton production only.  They do not include the raw cotton equivalent of textile production.  169. Can the US confirm the accuracy of the fa cts and figures cited in the four bullet points 
in paragraph 12 of Brazil's 7 October oral statement?  US 
 
110. From paragraph 12 of Braz il’s 7 October oral statement: 
  Between MY 1999-2001, prices received by US upl and cotton farmers fell by 34 per cent, yet 
US production increased by 20.3 per cent. . . . . 
 
 Fact check :  We can confirm the price and production figures given and would note again 
Brazil’s selective use of marketing year 2001 as the end-point for its comparison.  As Brazil 
complains of effects over marketing years 1999-2002, it would appear that Brazil has simply 
chosen to use MY2001 figures to inflate the figures it presents.  
 
 Between MY 1999-2002, the average US upland cotton farmer would have lost 24.3 cents per 
pound for every pound of cotton produced if reven ue were based only on market revenue.  
The US response to this huge gap between ma rket prices and costs was to increase 
                                                     
 
51 Current futures contract prices are available a t: http://www.nybot.com/cotton/  (click on “Futures”). 
52 See, e.g. , US Further Submission, para. 118. 
53 Brazil’s Further Submission, para. 114, figure 6. WT/DS267/R/Add.2 
Page I-264  
 
production leading to an increase of US exports by 78.7 per cent and to an increase in the US 
world market share from 24.1 per cent to 41.6 per cent. . . . . 
 
 Fact check :  Based on Economic Research Service (ERS) estimates provided in Exhibit US-
69, the market value of upland cotton (including the value of cottonseed) averaged $325.06 
per acre over MY 1999-2002.  Operating costs averaged $261.35 per acre over MY 1999-
2002.  The value of upland cotton production l ess operating costs averaged $63.71 per acre.  
Based on an average upland cotton yield of 577 pounds per planted acre, upland cotton producers received 11.05 cents per poun d above their operating costs.   
 
 We can confirm the export figure but note th at the US share of “world exports” rose from 
24.1 per cent in 1999/00 to 39.34 per cent in 2002/03.  (See US response to Question 160).  In addition, we note that US world market share over the marketing year 1999-2002 period fell from 18.6% in MY1999 to 16.9% in MY2000, rose to 19.8% in MY2001, and fell again to 19.6% in MY2002.
54 
 
 Between MY 1999-2001, the US dollar appreciated approximately 15 per cent against the 
currencies of other worldwide cotton producers. . . . US exports increased by 68 per cent. . . 
. . 
 
 Fact check :  ERS calculates a commodity-weighted exchange rate index for upland cotton 
based on the real exchange rates of importing c ountries, weighted by the share of US cotton 
exports.55  Based on this index, the dollar appreciated by 6.2 per cent from 1999 to 2001.  
ERS also calculates a commodity weighted exch ange rate index based on the currencies of 
other cotton producers and their share in world cotton trade.  Based on this index, the dollar appreciated by 11 per cent from 1999 to 2001. 
 
 Fact check :  We can confirm the US upland cotton export figure and again note Brazil’s use 
of marketing year 2001 for its comparison. 
 
 US costs of production are much higher than those of most other exporters of upland cotton, 
yet the US export market share increased from  24.1 per cent to 41.6 per cent between MY 
1999-2002. 
 
 Fact check :  In paras. 284 and 285 of its Furthe r Submission of 9 September 2003, Brazil 
uses data from the International Cotton Adviso ry Committee (ICAC) to compare costs of 
production across countries, which represents the most complete published comparisons of 
costs of cotton production for major cotton prod ucing countries.  Nevertheless, even when 
good survey data are available for one country, using cost of production data to draw valid 
economic conclusions is fraught with difficulties.   In fact, the ICAC specifically discourages 
this kind of cross-country comparison:  “ Because of a number of limitations, it is not 
advisable to compare the costs of productio n among several countries at the same time ”.
56 
 
 Fact check :  Over the period 1999/00 to 2002/03, the US share of world exports rose from 
24.1 per cent to 39.34 per cent.  (See US response to Question 160). 
 
170. Brazil quotes a report that states that a 10% increase in soybean prices reduces upland 
cotton acreage by only 0.25% (Brazil's 7 Octo ber oral statement, para. 27). Could Brazil 
indicate if this analysis is done on a short-run basis or a long-run basis? BRA  
                                                      
54 See Exhibit US-47. 
55 See Exhibit US-69. 
56 Raffiq Chaudhry, International Cotton Advisory Committee, “Cost of Producing Raw Cotton” 
Presented at the III Brazilian Cotton Congress,  Brazil, 31August 2001 (emphasis added). WT/DS267/R/Add.2 
Page I-265 
 
 
 
171. In paragraphs 22 and 23 of its further submission, we understand that the US is, in 
short, claiming that increased total supply (i.e. including polyester) drove prices down.  On the 
other hand, we note that, according to the fi gures in the chart in paragraph 22 of the same 
submission, the world production of cotton during this period has basically been steady. Do all 
polyester fibres as represented by these figures comp ete directly with cotton? That is to say, do 
these figures for polyester fibres include, for exam ple, those that are used for textiles that 
technically cannot be substituted by cotton? US  
 
111. The figures in the chart in paragraph 22 represent world polyester textile production.  
Polyester competes with cotton either directly in th e fibre market or indirectly through apparel and 
other intermediate products.  
172. Please estimate the price effect, in cents per pound, of the growth in the US retail 
market which it is said has directly contribut ed to strengthening world cotton prices.  US 
 
112. As was presented in the table in paragraph 27 of the Further Submission of the United States 
of 30 September 2003, US retail purchases of raw cotton fibre increased from 12.3 million bales in 1990 to 20.9 million bales in 2002, an increase of 8. 6 million bales.  This increase accounted for the 
entire increase in world retail purchases of raw co tton fibre over the same period and reflects an 
increase at the world level of 10 per cent.  Based on  the average demand elasticity of -0.25 used by 
Dr. Sumner in his analysis (see Annex 1 of Braz il’s Further Submission to the Panel, para 23), an 
equivalent price decline of 40 per cent would be necessary to generate a 10 per cent increase in 
demand of cotton, all else held equal.  Of course, this omits other factors such as supply response of 
world cotton producers and competition of manmade fibres.   Nonetheless, it is clear that the growth in 
retail purchases of cotton fibres in the United States has strengthened world prices. 
 
173. The US asserts that "burgeoning US textile imports … shifted the disposition of US 
cotton production from domestic mills to export markets" (US further submission, para. 20).  A 
similar description appears in paragraph 33, toge ther with the explanation that "the share of 
world cotton consumption supplied by US cotton has been roughly the same since 1991/92". 
Why have sales of US cotton for export increase d and sales of cotton imported into the US 
increased?  US  
 
113. The role and impact of rapidly growing US textile and apparel impor ts is fundamental in 
explaining the shift in the use of US cotton productio n from domestic mills to foreign mills.  As noted 
at paragraphs 20 and 33 of the US further submissi on, the US textile and a pparel industry has suffered 
from declining competitiveness compared with off-s hore producers for many years, reflecting many 
factors, including higher wage costs, a strong US dolla r, etc.  As domestic mills  have shut down in the 
United States, and production has moved overseas, dom estic demand for US cotton by domestic mills 
has declined sharply. 
 
114. But US consumer demand for cotton products has not declined.  That demand has increasingly been met by lower-priced imports of cott on textiles and apparel.  As can be seen in the 
table following paragraph 34 of the US further submission, US imports of cotton textiles (in cotton equivalents) have more than tripled since 1990.  It  is important to note that the import, export, and 
consumption data in that table are expressed in bale s of cotton-equivalent.  In other words, the data 
are not “sales of cotton imports”, but rather represent the amount of cotton imbedded in the particular 
products.
57  
                                                      
57 These estimates of the “cotton equivalent” of  textile imports are done by USDA’s Economic 
Research Service, based an a set of internationally-accepted conversion fact ors.  See Cotton and Wool Situation 
and Outlook  Yearbook . Market and Trade Economics Division, Econom ic Research Service. US Department of 
Agriculture, November 2002, CWS-2002. WT/DS267/R/Add.2 
Page I-266  
 
 115. US cotton is grown to be used to make co tton textiles and apparel.  The point of the US 
submission is to explain how the location of wher e US cotton is manufactured into products has 
shifted.  US and world consumers continue to  purchase cotton products.  But increasingly US 
consumers purchase those cotton products, made  from exported US cotton, from overseas 
manufacturers as US manufacturers are less able to comp ete.  That is the structural transformation that 
paras. 33-34 and the accompanying table seeks to present and explains at least in part some of the changes in US exports.  
174. How, if at all, did the Asian financial crisis affect the United States' world market share?  
Did it disproportionately affect the US  as compared to other exporters? US 
 
116. The Asian financial crisis disrupted cotton consumption (spinning) in the major consuming 
countries of Thailand, Indonesia, and the Republic of Korea in 1997/98, reducing their mill use 9 per cent from the preceding year.  In addition, the declin e in world economic growth induced by the crisis 
reduced total world cotton consumption 3.4 per cent in 1998/99 from the pre-crisis level in 1996/97.  
Subsequently, however, the depreciation of curre ncies in these three countries boosted their cotton 
consumption due to expanding tex tile exports.  World cotton consum ption rose 11 per cent between 
1996/97 and 2002/03, while consumption in Thailand, Indonesia, and Korea collectively rose 16 per 
cent.  During this same period, US spinners lost ma rket share to textile imports, due in large part to 
currency effects, and US domestic mill use fell 35 per cent. 
 
117. US export share in these markets is influenced  by total supply availability, qualities produced, 
and price.  For example, US export share of the thr ee countries’ consumption fell by more than half in 
1998/99, due to the drought-devastated US crop.  E xport share has since returned to the pre-crisis 
level of about 30 per cent and, with higher consumpti on, this added about 400, 000 bales to US exports 
between 1996/97 and 2002/03.  Since the combined total consumption increase for Thailand, 
Indonesia, and Korea was about 800,000 bales, this indicates that other exporters also increased exports by about 400,000 bales.  As US mill use of cotton declined while exports increased, US world 
market share was left relatively unchanged (with a slight downward bent) by the Asian financial 
crisis.  175. With reference to paragraphs 57-58 and the related table on page 21 of the US further submission, could you please clarify the arguments regarding the ratio of the soybean futures to the cotton futures prices since in the ta ble the inverse ratio is used?  US 
 
118. Attached is a corrected version of the table.   The ratio of cotton futures price to soybean 
futures prices is positively correlated with movement in planted cotton area. 
 
Expected cotton and soybean prices and planted cotton acreage 
Year December  cotton 
futures 
(cents/lb) November 
soybean futures 
($/bushel) Ratio of cotton 
futures to soybean 
futures Planted cotton 
acres 
(million acres) 
1996 78.58 7.23 10.87 14.4 
1997 76.82 6.97 11.02 13.6 1998 72.13 6.64 10.86 13.1 1999 60.32 5.11 11.8 14.6 2000 61.31 5.32 11.52 15.3 2001 58.63 4.67 12.55 15.5 2002 42.18 4.50 9.37 13.7 
2003 59.6 5.26 11.33 13.5 
 WT/DS267/R/Add.2 
Page I-267 
 
 
176. With reference to Figure 4 of Brazil's Fur ther Submission, how does Brazil explain the 
apparent  decrease in prices in 2001 and the increa se of the A-Index in recent months, despite 
the continued use of US subsidies on upland cotton? BRA 
 
177. Could the United States further elaborate on paragraph 50 of its 7 October oral 
statement?  US  
119. Lin et al. estimated that the own-price elasticity of cotton acreage under the FAIR Act was 0.466.
58  This is identical to the 2003 net-return el asticity reported by Dr. Sumner. However, it is 
incorrect to equate a price elasticity to net-return  elasticity given the linear specification utilized by 
Dr. Sumner.  The implied price elasticity from Dr . Sumner’s model would be approximately 50 per 
cent larger than the net-return elasticity.  Larger el asticities imply greater acreage shifts to change in 
policies or prices.   120. The relationship between the price elasticity and a net revenue elasticity can be shown as 
follows.  Given a linear specification as described by Dr. Sumner, then cotton area (CA) can be 
expressed:  (1)  CA = a0 + a1*CNR + a2*Z,  where CNR is Expected Cotton Net Returns and Z is  a vector of other variables including returns 
from competing crops.  
 
The elasticity with respect to CNR is found by diffe rentiating the equation with respect to CNR.  The 
derivative is the coefficient a1.  The elasticity, eNR, is expressed as follows: 
 (2)  eNR = a1 * CNR / CA.  
 
With CNR a function of the cotton price P, the elas ticity with respect to P can be determined by 
taking the derivative of the equation with respect to price P. Based on equation (1) from page 13 of 
Annex I, the derivative with respect to pri ce P is a1*Y, where Y is expected yield.  
 It follows that the price elasticity is eP = a1 * Y * P / CA.  One can then conclude that eNR/eP = ENR 
/ (Y*P).  
 The relationship between eNR and eP can be found by looking at the relationship between CNR and 
Y*P. Specifically, eP = ((Y * P) / CNR) * eNR.   
In recent years, the ratio of (Y * P) / CNR has been  approximately 1.5, implying that eP = 1.5 * eNR 
= 1.5 * 0.466 = 0.699.  
178. The Panel notes Exhibit US-63.  Could the US please provide a conceptually analogous 
graph concerning US export sales during the same period? US 
 121. Exhibit US-70 shows in table and graph form the per cent change over the previous year for 
upland cotton exports by the United States and the rest  of the world.  In addition, the United States 
provides in Exhibit US-71 a table and graph demonstrating the absolute levels of US exports and domestic consumption.  As the figures show, over the last seven years domestic consumption has 
declined by almost the same amount by which expor ts have increased, leaving US world market share 
largely unchanged. 
 
                                                     
 
58 Lin, W., P.C. Westcott, R. Skinner, S. Sanford, and D.G. De La Torre Ugarte. Supply Response 
Under the 1996 Farm Act and Implications for the US Field Crops Sector.  US Department of Agriculture, 
Economic Research Service, Technical Bulletin No. 1888 , Appendix table 21. WT/DS267/R/Add.2 
Page I-268  
 
179. Could Brazil comment on the argument that decoupled payments and other subsidies to 
upland cotton are largely being capitalized into  land values and that removing these subsidies 
would reduce the cost of production of upland cotton producers (US 7 October oral statement, 
para. 48).   What would be the net effect of these adjustments? BRA 
 
180. Please describe the precise formula as to how USDA determines the "adjusted world 
price" using the Liverpool A-Index, the NY futures price and any other relevant price indicators.  Please submit substa ntiating evidence.  BRA, US 
 
122. The Adjusted World Price (AWP) is equal to the Northern Europe (NE) price (the 5-day 
average of the 5 lowest-priced growths for Middling 1-3/32 inch cotton, cost, insurance and freight 
[CIF] northern Europe), adjusted to US base quality  and average location.  The AWP for individual 
qualities is determined using the schedule of loan premiums and discounts and location differentials.  
A "coarse count adjustment" (CCA) may be applicable  for cotton with a staple length of 1-1/32 inches 
or shorter and for certain lower grades with a st aple length of 1-1/16 inches and longer.  The AWP 
and CCA are announced each Thursday.
59 
 123. A Step 1 adjustment to the AWP may be ma de when the 5-day average of the lowest US 
growth quote for Middling 1-3/32 inch cotton, CI F United States-northern Europe (USNE) price, 
exceeds the NE price and the AWP is less than 115 pe r cent of the loan level.  The Secretary of 
Agriculture may lower the AWP up to the difference between the USNE price and the NE price.  A 
Step 1 adjustment has never been made, althoug h the conditions have been met many times.  
 
181. Please provide a side-by-side chart of the w eekly US adjusted world price, the Liverpool 
A-Index, the NY futures price, and spot market prices from 1996-present.  What, if anything, does this reveal? BRA, US 
 
124. Exhibit Q181 sets out weekly price movements for the Adjusted World Price, the Liverpool A Index, the nearby New York cotton futures pri ce and the spot market price from January 1996 to 
present.  
182. Please explain why the US can be taken to be  price leaders, or price setters, (and not just 
takers) when US producers receive large subsid y payment to support the difference between 
world prices and their own costs?   BRA  L. ARTICLE XVI OF GATT 1994  
183. Why does Brazil believe that the appropri ate "previous representative period" is the 
term of the previous Farm Bill, MY1996-2002?  (Brazil's further submi ssion, para. 282)  BRA 
 184. Why does Brazil believe that an "equitable share" is one which factors out all subsidies?  To the extent that domestic support and expo rt subsidies are permitted by the Agreement on 
Agriculture, why should they not be accepted as being normal conditions in analyzing an 
equitable market share?  (See Brazil's further submission, paras 288-289)  BRA 
 185. Please respond to the following questions  concerning the relationship between Article 
XVI:3 of the GATT 1994, the disciplines on export subsidies and domestic support in the Agreement on Agriculture and the disciplines on prohibited export subsidies and actionable 
subsidies in Articles 3, 5(c) and 6.3(d) of the SCM Agreement.    BRA, US 
 (a) Are agricultural domestic support progr ammes challengeable under Article XVI:3 of 
the GATT 1994?  How, if at all, is the title of  Section B of Article XVI ("Additional 
                                                     
 
59 See Exhibit US-72. WT/DS267/R/Add.2 
Page I-269 
 
 
provisions on export subsidies " (emphasis added)) relevant?  How, if at all, are Articles 
13 and 21.1, or any other provisions of the Agreement on Agriculture, relevant?  
 
125. As indicated in the US opening statement at the recent panel meeting60, GATT 1994 
Article XVI:3 applies only to export subsidies.  Para graph 3 is found in Part  B of Article XVI, entitled 
“Additional Provisions on Export Subsidies”, as oppo sed to Part A, which is entitled “Subsidies in 
General”.  Paragraph 2 (also in Part B) states that  “[c]ontracting parties recognize that the granting of 
a subsidy on the export  of any product may have harmful effects for other contracting parties” 
(emphasis added).  Paragraph 3 begins with the wo rd “[a]ccordingly”, the ordinary meaning of which 
is “[i]n accordance with the logical premises; correspondingly”61,  and follows with “contracting 
parties should seek to avoid the use of subsidies on the export  of primary products” (emphasis added).  
That is, “in accordance with” the recognition in paragraph 2 that e xport subsidies may have harmful 
effects, paragraph 3 address the use of “subsidies on the export of primary products”.  The second 
sentence of paragraph 3 follows this hortatory stat ement with the obligation not to apply subsidies 
“which operate[] to increase the export of any prim ary product” in a manner that “results in a 
contracting party having more th an an equitable share of world export trade in that product”.  
Paragraph 4 “[f]urther” addresses export subsidies fo r “any product other than a primary product”.  
Thus, the text and context of paragraph 3 indicate th at this provision is addressed to export subsidies 
and not domestic support programmes.  126. The Peace Clause provides further context suppor ting this interpretation.  Article 13(c)(ii) 
exempts export subsidies that conform fully with  Part V of the Agreement on Agriculture from, inter 
alia, “actions based on Article XVI of GATT 1994” – that is, including Article XVI:3 on export 
subsidies.  Article 13(b)(ii), on the other hand,  exempts conforming domestic support measures from, 
inter alia , “actions based on paragraph 1 of Article XVI of GATT 1994” but does not mention Article 
XVI:3.  Thus, Article 13 lends contextual support to  the notion that Article XVI:3 applies to export 
subsidies on primary products or commodities but does not apply to domestic subsidies on such 
products.   
(b) Are the requirements of Article XVI:3 of  the GATT 1994 reflected in, developed by or 
subsumed by the requirements in Article 6.3(d) of the SCM Agreement, or in any other provisions of the covered agreements?  Of what  relevance, if any, is the Appellate Body 
Report in US-FSC, para. 117  here? 
 
127. Article 6.3(d) of the Subsidies Agreement does not, by its terms, interpret or replace GATT 
1994 Article XVI:3.  In fact, the range of measures potentially actionable under Article 6.3 is broader 
than the export subsidies subject to GATT 1994 Artic le XVI:3.  In addition, the analysis under these 
two provisions is different.  Article 6.3(d) is con cerned with whether the effect of a subsidy is to 
increase the world market share of the subsidizing Member; GATT 1994 Article XVI:3 is concerned with whether export subsidies result in a Member having “more than an equitable share in world 
export trade” in a particular product.  However, an  important similarity between these two provisions 
is the scope of products covered by their r espective disciplines.  GATT 1994 Article XVI:3 is 
concerned with export subsidies on primary products; Article 6.3(d) is concerned with any subsidy on 
“a particular subsidized primary product or comm odity”.  This similar product coverage resulted 
because Members desired to provide more operationally  effective subsidies disciplines with respect to 
these products but had found the “more than equ itable share” language of GATT 1994 Article XVI:3 
to be unworkable.  For further discussion, please see the US response to Question 186 from the Panel. 
 (c) Of what relevance, if any, is the fact that the definition of "subsidy" in Article 1 of the 
SCM Agreement and the prohibition on subsidies contingent upon export in 
                                                     
 
60 US Opening Statement at the Second Sessi on of the First Panel Meeting, para. 60. 
61 The New Shorter Oxford English Dictionary , vol. 1, at 15 (1993 ed.) (third definition). WT/DS267/R/Add.2 
Page I-270  
 
Article 3.1(a) were introduced in the Uruguay Round, but did not exist at the time that 
the GATT 1947 was negotiated?    
 
128. The United States notes the Appellate Body’s discussion of relevant differences between the 
provisions of the Subsidies Agreement and those of GATT 1994 in United States – FSC.  
 
186. Could the United States please expand upon its statement that "[t]hese are the types of 
considerations that led to the negotiation of the Subsidies Agreement...." (US further submission, para. 109)?  Is there any relevant mat erial, including, for example, drafting history 
that might support this statement? US 
 
129. Dissatisfaction with the difficulties in applying  the “more than equitable share” standard of 
GATT 1994 Article XVI:3 was an important motiva tion for the negotiation of stronger and more 
operational disciplines in the WTO Subsidies Agreem ent.  In two separate challenges in 1979 and 
1980 to the sugar export subsidy programme of th e European Communities by Australia and Brazil, 
panels were unable to find that the export ref unds provided by the Communities resulted in a “more 
than equitable share” of world export trade.
62  Similarly, in the 1983 US challenge to export subsidies 
on wheat flour by the European Communities (quoted in the US further submission), “[t]he [p]anel found that it was unable to conclude as to whether the increased [EC] share [of world exports of 
wheat flour] has resulted in the EEC ‘having more than  an equitable share’ in terms of Article 10 [of 
the Subsidies Code], in light of the highly artificia l levels and conditions of trade in wheat flour, the 
complexity of developments in the markets, including  the interplay of a number of special factors, the 
relative importance of which it was impossible to assess, and, most importantly, the difficulties 
inherent in the concept of ‘more than equitable share’”.
63 
 130. Significantly, the latter two of these pane l reports explicitly considered the 1979 Tokyo 
Round Subsidies Code and its interpretive gloss on th e “more than equitable share language”. Article 
10.2 of the 1979 Subsidies Code (of which both Braz il and the United States were signatories) stated, 
in pertinent part:   For purposes of Article XVI:3 of the Ge neral Agreement and paragraph 1 above: 
 
(a) "more than an equitable share of wo rld export trade” shall include any case in 
which the effect of an export subsidy granted by a signatory is to displace the exports of another signatory beari ng in mind the developments on world 
markets; 
(b) with regard to new markets traditi onal patterns of supply of the product 
concerned to the world market, region or country, in which the new market is 
situated shall be taken into account in  determining ‘equitable share of world 
export trade’[.] 
 
That is, the 1979 Subsidies Code represented an e ffort to make operational the discipline provided in 
GATT 1994 Article XVI:3 by giving additional meaning to the phrase “more than an equitable share 
of world export trade”.  Despite that effort, howev er, the panel considering the Brazilian challenge to 
EC sugar export subsidies and the panel considering the US challenge to EC wheat flour export 
subsidies remained unable to find any inconsiste ncy with GATT 1994 Article XVI:3 (in the words of 
                                                     
 
62 European Communities – Refunds on Exports of Sugar , L/4833, 26S/290 (adopted 6 November 
1979) (complaint by Australia); European Communities – Refunds on Exports of Sugar , L/5011, 27S/69 
(adopted 10 November 1980). 
63 European Economic Community – Subsidies on Export of Wheat Flour , SCM/42, para. 5.3 
(unadopted 21 March 1983). WT/DS267/R/Add.2 
Page I-271 
 
 
the Wheat Flour panel) “in light of . . . , most im portantly, the difficulties inherent in the concept of 
‘more than equitable share’”.  131. Thus, there was a recognition in the Uruguay Ro und subsidies negotiations that the effort in 
the 1979 Subsidies Code to make GATT 1994 Article  XVI:3 more operationally effective had not 
succeeded.  For example, a reference paper on GA TT subsidies rules and the existing status of 
discussion of these rules prepared by the GATT Secr etariat for the Negotiating Group on Subsidies 
and Countervailing Measures states:  
The most pronounced difficulties have occu rred in connection with the concept of 
“more than an equitable share” embodied  in Article XVI:3 of the GATT.  The 
Agreement on Subsidies and Countervailing Measures (Article 10) attempted to bring precision to Article XVI:3 but it has not always been found to give clear guidance on its interpretation.  Consequently a number of disputes involving the concept of “more 
than an equitable share” have not found a satisfactory solution and in some cases 
have provoked retaliatory subsidization.  Th e case-by-case application of this concept 
has revealed its imprecisions and the fact th at it largely refers to notions which escape 
objective criteria.  There is, for example, sufficient imprecision in this concept to 
allow countries using export subsidies to argue that these subsidies do not result in obtaining more than equitable share.  On the other hand it is not always possible to provide causality between the subsidy and the increase share.  Furthermore, it is 
impossible to derive a general line of case law from the decisions of panels, some of 
which have given divergent interpretations.
64 
132. A checklist of issues for the negotiations b ased on Contracting Parties’ written submissions 
and oral statements prepared by the Secretariat de monstrates that Contracting Parties were well aware 
of these difficulties and the need to move away fro m the “more than an equitable share” concept: 
 
There is a need for review, with a view to improving GATT disciplines, of the provisions of Article XVI:2 and 3.  Notably there is a need to build on the recognition 
embodied in Article XVI:2 and the exhortation in the first sentence of XVI:3 in the direction of improving the conditions of competition on world markets for primary products currently covered by the equitabl e share criterion in the second sentence of 
Article XVI:3. 
The review should examine the application of  the “more than an equitable share” rule 
for primary products.  This rule has serious conceptual flaws and in practice has failed to provide clear guidance as to the permissible scope of primary product 
subsidization. . . . . 
The Negotiating Group should consider negotia ting a similar prohibition to that of 
Article 9 of the Code on the use of export subsidies for forest, fishery and farm products. 
The prohibition on export subsidies for products other than basic or primary products 
under Article XVI:4 and Article 9 of the C ode should be extended to agricultural, 
forestry and fishery products, in other words to all basic or primary products. 
A major objective of these negotiations shoul d be to extend the existing prohibition 
on export subsidies to cover all products, primary as well as non-primary. 
                                                     
 
64 Subsidies and Countervailing Measures: Note by the Secretariat , MTN.GNG/NG10/W/4, at 79 (28 
April 1987) (Section VI.3). WT/DS267/R/Add.2 
Page I-272  
 
There are serious deficiencies in Article XVI:3 of the GATT and in Article 10 of the Code, notably the fundamental problems c onnected with the ‘more than equitable 
share’ concept.  However, these problems arise from the basic fact that current disciplines for primary products are significantly weaker than those which apply to manufactured goods.  They cannot be resolv ed merely by making minor adjustments 
to rules which are intrinsically defective.  The only genuine, long-term solution is an 
effective prohibition on all export subsidies.  Accordingly at this stage of the 
negotiating process, there is little value in tr ying to improve the “more than equitable 
share” rule, which is only relevant so long as there is no general prohibition on export 
subsidies.
65 
133. Reflecting the desire of Members to move away from the “more than an equitable share” 
concept which had repeatedly been found by pane ls to be incapable of application, the WTO 
Subsidies Agreement does not provide any further definition or interpretation of GATT 1994 Article 
XVI:3.  Instead, it contains the general prohibitio n on export subsidies in Article 3 and rules on 
adverse effects, including serious prejudice. 
 
M. THREAT CLAIMS 
 187. Please provide USDA's projections of mark eting loan/LDP payments, direct payments 
and counter-cyclical payments to be made during MY2003 through 2007 based on the most 
recent USDA baseline projection.  US  
 
134. The following table shows projections for cotton marketing loan/LDP payments, direct 
payment and counter-cyclical payments for crop years 2003 through 2008, as published in the 
FY2004 Mid-Session Review on 15 July 2003.  We note that projected outlays for marketing year 2003 are likely to be significantly overstated given the increase in prices and futures prices over the 
course of this marketing year.  For example, no ma rketing loan payments are currently being made 
because the adjusted world price is  above the marketing loan rate. 
 
Projected outlays (million dollars) 
Item 2003 2004 2005 2006 2007 2008 
Direct payments 587 587 587 587 587 587 
Counter-cyclical 
payments 929 602 521 521 521 521 
Loan deficiency 
payments 420 298 193 137 137 82 
Marketing loan gains 22 13 8 6 6 3 
Certificate gains 1/ 196 114 75 55 52 29 
1/ Includes value of non-cash marketing loan transactions. 
 
188. Can the United States comment on the FAPRI projections for cotton provided in Exhibit 
BRA-202?  US 
 
135. The FAPRI projections presented by Brazil in Exhibit BRA-203 reflect the January 2003 
FAPRI projections.  These projections were publishe d by Iowa State University in January 2003.66  
The same projections were published by FAPRI at  the University of Missouri in March 2003 and 
were referenced by the United States in Exhibit US-52. 
                                                      
65 Checklist of Issues for Negotiations: Note by the Secretariat , MTN.GNG/NG10/W/9/Rev.4, at 26-28 
(12 December 1988). 
66 Food and Agricultural Policy Research Institute. FAPRI 2003:  US and Worl d Agricultural Outlook .  
Iowa State University Staff Report 1-03.  January 2003. WT/DS267/R/Add.2 
Page I-273 
 
 
 136. Of significance is the difference between the January 2003 baseline and the preliminary 
baseline of November 2002 utilized by Dr. Sumner in  his analysis.  Under the January 2003 baseline, 
the Adjusted World Price (AWP) forecasts for 2002/ 03 to 2007/08 are considerably higher than the 
forecasts made in the preliminary November 2002 b aseline.  Because loan de ficiency payments and 
marketing loan gains are calculated based on the diffe rence between the loan ra te and the AWP, this 
means that expected marketing loan subsidies under the November 2002 baseline are far higher than 
expected marketing loan subsidies under the January  2003 baseline.  Thus, the effects of eliminating 
marketing loans would tend to be biased upwards  using the preliminary November 2002 baseline. 
 Differences in the Adjusted World Price foreca st between the November 2002 and January 2003 
FAPRI baseline ($/lb) 
 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 
November 2002 
baseline  1/ 0.3597 0.3722 0.3983 0.4194 0.436 0.4548 
January 2003 baseline  
2/ 0.448 0.454 0.46 0.46 0.467 0.48 
Difference 0.0883 0.0818 0.0617 0.0406 0.031 0.0252 
1/ As presented by Dr. Sumner in Annex I and oral statement of 7 October 2003. 
2/ As reported in Exhibit BRA-203 and Exhibit US-52 
 
N. CLARIFICATIONS 
 189. Please indicate whether the correct figure in paragraph 37 of Brazil's 7 October oral 
statement is 38.1% or 38.3%? BRA  
190. Please confirm that the figure "17.5" in paragraph 43 of Brazil's 7 October oral 
statement, is "percentage point".  BRA  191. Could Brazil clarify its statement in para. 12 of its 9 September further submission:  "Alternatively crop insurance is  not specific because the 2000 ARP Act denies benefits to 
commodities representing more than half of th e value of US agriculture.  Further US crops 
represent only 0.8 per cent of total US GDP." (emphasis added) BRA  WT/DS267/R/Add.2 
Page I-274  
 
List of Exhibits 
 
64 Lin, W., et al.. Supply Response Under the 1996 Farm Act and Implications for the US Field 
Crops Sector. US Department of Agriculture, Economic Research Service, Technical Bulletin No. 1888, Appendix table 21 
 
65 Amount and percentage of upland cotton acreage coverage by crop insurance policy 
 66 Premiums paid by upland cotton producers   
67 Insurance indemnity payments to upland cotton producers 
 68 New York Cotton Futures, Average Daily Cl osing Prices for Decembe r 2003 Contract (chart 
and data) 
 
69 US Department of Agriculture, Economic R esearch Service, Cost of Production Estimates; 
Commodity-Weighted Exchange Rate Estimates 
 70 US and Rest of World Exports of Upland Cotton, Year-Over-Year Per cent Change, 1996-
2002 
 
71 US Exports and Domestic Cons umption of Upland Cotton, 1996-2002 
 72 US Department of Agriculture, Press Release on Adjusted World Price (18 October 2003)  73 Weekly Price Movements: Adjusted World Price, Liverpool A-Index, New York cotton 
futures, spot market price, January 1996 to present 
 74 National Agricultural Statistics Service, Plan ted Acreage of Selected Crops by Region and 
State