WT/DS267/R/Add.2 
Page I-440  
 
ANNEX I-12 
  
BRAZIL’S COMMENTS ON THE 22 DECEMBER 
US COMMENTS CONCERNING BR AZIL’S ECONOMETRIC MODEL 
 
20 January 2004 
  
TABLE OF CONTENTS
 
 
 
I. BRAZIL'S INTRODUCTORY COMMENTS................................................................ 441 
 II. PROFESSOR SUMNER'S COMMENTS CONCERNING THE US 
 CRITIQUE OF HIS MODEL........................................................................................... 447  
 
List of Exhibits 
 
Agricultural Outlook Tables, USDA, November 2003, Table 19 Exhibit Bra- 394 
“Trade Issues Facing the US Cotton Industry,” Speech by Dr. Mark 
Lange, President and CEO, National Cotton Council, 6 January 2004. Exhibit Bra- 395 
“Farm Groups Shocked at UC Economist’s Testimony in WTO 
Dispute,” Western Farm Press, 2 September 2003. Exhibit Bra- 396 
“Report of the Commission on the Application of Payment Limitations 
for Agriculture,” August 2003. Exhibit Bra- 397 
Western Farm Press, 7 January 2003  Exhibit Bra- 398 
Acreage Discrepancies.xls Exhibit Bra- 399 List of Publications of Professors  Babcock and Beghin Exhibit Bra- 400 
 WT/DS267/R/Add.2 
Page I-441 
 
 
I. BRAZIL’S INTRODUCTORY COMMENTS 
 
1. Brazil’s response to the US 22 December  2003 Comments Concerning Brazil’s Econometric 
Model (“US Critique”) is divided into two parts.  First, Brazil provides some introductory comments 
setting the US Critique into perspective.  And, second, Brazil offers Professor Sumner’s detailed 
response to the US critique.     
 2. The United States Critique initially focuses on pr oving a point that has never been contested 
by Brazil, i.e., that the Sumner model is not exac tly like the FAPRI model.  As Professor Sumner 
points out, he never claimed that his model was identical to the FAPRI model.  The United States 
points to no contradictions between what Professo r Babcock has stated and what Professor Sumner 
stated in Annex I or his other statements con cerning the links between his model and the FAPRI 
model.  Nevertheless, while there are differences  between the Sumner model and the FAPRI model, 
the record is undisputed that the core elements  of the FAPRI model – the hundreds of demand and 
supply equations – are identical.  The differences in  Professor Sumner’s model are primarily the result 
of his use of the CARD international cotton m odel and additions to th e FAPRI model made by 
Professor Sumner.  The additions were necessary to  enable the FAPRI/CARD modelling framework 
to respond to the questions before this Panel.   3. The United States Critique asserts that Professo r Sumner’s choice of baselines has prejudiced 
the outcome to such an extent that his results are not usable.
1  But the record shows that the significant 
acreage, production, export and price effects found in  Professor Sumner’s Annex I results using the 
CARD international cotton model and the am ended FAPRI US crops model based off the 
(recalibrated) FAPRI preliminary November 2002 base line are essentially the sa me even when used 
against other baselines.2  The United States first argued that Professor Sumner should have used the 
FAPRI 2003 baseline.3  Professor Sumner responded by running his model on that later baseline.4  
There were no significant changes between Annex I and those results for either the period from 
MY 1999-2002 or in the period from MY 2003-2007.5  The United States Critique raises a new 
argument that Professor Sumner manipulated the FAPRI preliminary November 2002 baseline.6  This 
allegation is wrong.  Any differences are the result of  a necessary recalibration of the model following 
the use of the CARD international cotton model rath er than the FAPRI international crops models and 
some update incorporating more  recent macroeconomic data.7  As Professor Sumner demonstrates 
below, there are no significant differences with his Annex I result by using this slightly modified 
baseline.8  Indeed, the fact that Professor Sumner’s simu lation model generates nearly identical results 
regardless of the baselines used demonstrat es the robustness of the Sumner model.   
 4. In criticizing Professor Sumner’s modelling of th e four different types of contract payments, 
the United States repeats its baseless arguments that th e contract payments have absolutely no effect 
on production decisions for upland cotton.  The notion that an estimated
9 $4.7 billion10 of amber box 
                                                      
1 US 22 December 2003 Comments on Brazil’s Econometric Model, para s. 35-38, especially para. 38. 
2 These other baselines include the original FA PRI preliminary November 2002 baseline and the 
official FAPRI January 2003 baseline. 
3 US 7 October 2003 Oral Statement, paras. 36-39. 
4 Exhibit Bra-325 (Results of Professor Sumner’s Modified Model Based on the January 2003 FAPRI 
baseline); Exhibit Bra-326 (Results of Professor Sumner’s Modified Model) and Exhibit Bra-331 (Description 
of Methodology Comparing the Analysis of US Upland Cotton Subsidies Under the January 2003 Baseline to 
Analysis under the November 2002 Baselin e, Daniel A. Sumner, November 2003). 
5 See Exhibit Bra-326 (Results of Professor Sumner’s Modified Model). 
6 US 22 December 2003 Comments on Br azil’s Econometric Model, para. 36. 
7 See Professor Sumner’s discussions be low, Response to Section III. 
8 See Professor Sumner’s discussions be low, Response to Section III. 
9 Brazil is still waiting the United States to provide the data that would permit the calculation of the 
exact amount of support to upland cotton from the contract payments.  Brazil hopes that the United States will 
produce the data on 20 January 2004. WT/DS267/R/Add.2 
Page I-442  
 
(presumptively trade- and production-distorting) subs idies paid to current producers of upland cotton 
and allocated as support to upland cotton had no ef fect on upland cotton production has been, and 
remains today, incredible.  The United States has never explained why upland cotton base acreage 
payments are so much higher than other programme  crops (except rice).  The obvious reason is that 
Congress and the NCC expected the bulk of acreage hi storically planted to upland cotton to continue 
to be planted to upland cotton, a high-cost crop.  Nor has the United States been able to explain how 
there could be no production effects when US upl and cotton producers would have lost $332.79 per 
acre over a six-year period if they  had received no contract payments.
11  NCC representatives stated 
that these payments were “critically needed”12 to “make ends meet”13, i.e., to cover their cost of 
production.  
 
5. In fact, Professor Sumner has been, in the vi ew of Brazil, probably ove rly conservative in his 
estimation of the effects of these contract payments on US upland cotton production.  Brazil notes that the nature of Professor Sumner’s modelling does not  permit an assessment of the cumulative losses 
such as the $332.79 per acre over a six-year period.  Even Professor Sumner acknowledges that his 
use of only $0.25 of each direct payment dollar as having production effects is  probably low in light 
of the obvious impact of this subsidy in supporti ng the continued survival of many US producers.
14  
Similarly, Professor Sumner’s use of only $0.40 of each counter-cyclical payment dollar as having production effects
15 is also low in light of the fact that $1 billion in payments in MY 2002 were 
crucial to the economic survival of many upland co tton producers.  In light of the evidence produced 
by Brazil, the US Critique that Professor Sumner’s analysis is fundamentally wrong for not 
concluding that these huge subsidies, filling almost ha lf of the cost-revenue gap, have no effects is 
completely unjustified.   6. The United States Critique also expresses amazement that Professor Sumner could attempt to model the effects of export credit guarantees.  The fa ct that FAPRI has not yet modelled this subsidy 
is completely irrelevant.  Nor is Professor Su mner blazing new economic ground by modelling export 
credit guarantees.  The NCC has a team of economists  working with the United States on this dispute, 
headed by Gary Adams, a former FAPRI ec onomist who worked on the FAPRI upland cotton 
model.
16  NCC economists concluded in 2001 that ma jor changes to the GSM 102 programme would 
result in 500,000 fewer bales being exported from the United States and result in a 3 cent per pound 
increase in prices.17  It is curious that the United States,  assisted by NCC economists, now seeks to 
contradict the conclusions of the beneficiari es of this GSM 102 programme by asserting that there 
were no production, export or price effects fro m this subsidy.  The NCC’s 2001 findings, which 
Professor Sumner used conservatively to estimate the production, export and price effects of the export credit guarantee programmes, was supported by the fact that $1.6 billion in US upland cotton 
exports between MY 1998-200 2 were covered by GSM 102 export credit guarantees.
18  F u r t h e r  
support for the NCC’s 2001 estimate comes from the US Congressional Research Service that 
concluded that guarantees have “mai nly benefited exports of wheat, wheat flour, oilseeds, feed grains 
                                                                                                                                                                     
10 This figure is based on Brazil’s estimates at paragraph 8 of its 9 September 2003 Further Submission 
as updated by the table at paragraph 8 of  its 22 December 2003 Answers to Questions. 
11 Brazil’s 2 December 2003 Or al Statement, para. 27.  
12 Brazil’s 22 July 2003 Oral Statement, paras. 52-54 and 58-60 and exhibits cited therein.  
13 Exhibit Bra-324 (NCC Chairman’s Report by Kenneth Hood, 24 July 2002, p. 2). 
14 Brazil’s 9 September 2003 Further Submission, Annex I (paras 48-51 setting out high and low 
estimates of production effects for the four contract payments). 
15 Brazil’s 9 September 2003 Further Submission, Annex I (paras 48-51 setting out high and low 
estimates of production effects for the four contract payments). 
16 See Exhibit Bra-395 (“Trade Issues Facing the US Cotton Industry,” Speech by Dr. Mark Lange, 
President and CEO, National Cotton Council, San Antonio, 6 January 2004), Lange noted that Gary Adams had 
spent “countless hours” working with USTR  on the Brazil upland cotton dispute. 
17 Exhibit Bra-41 (“The Future of Federal Farm Commodity Programmes (Cotton),” Hearings before 
the House of Representatives  Committee on Agriculture, 15 February 2001, p. 12). 
18 Brazil’s 9 September 2003 Further Submission, para. 188. WT/DS267/R/Add.2 
Page I-443 
 
 
and cotton”.19  Andrew Macdonald has also testified to the export-enhancing effects of the US GSM 
102 programme.20  In its evaluation of the US Critique’s claim that Professor Sumner – and the 2001 
NCC economists – incorrectly estimated the effects of removing the GSM 102 subsidies, the Panel must consider this uncontested evidence.   
7. The United States Critique also challenges Pr ofessor Sumner’s modelling of the effects of 
removing crop insurance subsidies.  The US Critique  focuses primarily on the fact that FAPRI has not 
yet modelled these subsidies.
21  But this is irrelevant.  What is relevant are the facts which show that 
$788 million in crop insurance subsidies were provided to upland cotton producers between 
MY 1999-2002.22  And it is relevant that USDA’s ow n economists found that lower pre-2000 ARP 
Act crop insurance subsidies had significant prod uction and price effects for upland cotton (as 
opposed to other programme crops).23  Current higher crop insurance benefits under the 2000 ARP 
Act would certainly have higher effects.  Prof essor Sumner’s crop insurance modelling is also 
consistent with USDA’s own econom ists’ conclusion that the “availability of subsidized crop 
insurance affects farmers’ current crop production d ecisions by creating a direct incentive to expand 
production”.24  It is uncontested that the amount of crop  insurance subsidies received by upland cotton 
producers is directly related to the amount of upland cotton they plant.25  Given this evidence, it was 
reasonable for Professor Sumner to conclude that ea ch dollar of crop insurance subsidies had direct 
effects on US production.    8. With respect to Professor Sumner’s modelling of  marketing loan payments, the US Critique is 
essentially silent.
26  This silence is no doubt due to the fact that Professor Sumner’s model uses 
exactly the same elasticities and estimates of effect s as the FAPRI model, for which the United States 
has indicated it has no objection.27  Further, Professor Sumner’s findings regarding the effects of 
marketing loan payments between MY 1999-2002 are very much consistent with those of 
Westcott/Price who found that in MY 2001 that mark eting loan payments caused 3 million additional 
acres to be planted to upland cotton with an imp lied price decline of 10 cents per pound (or 33 percent 
of the MY 2001 price).28  Brazil has already addressed the various  US critiques of the use of so-called 
“lagged prices” by noting that USDA, FAPRI, Professor Sumner and a host of other economists have used these prices in countless models and that an y use of futures market prices in large-scale 
simulation models is impossible.
29  Further, the faulty and primitive US futures methodology for 
estimating the production effects of marketi ng loan programmes is no substitute for the 
comprehensive models used by USDA, FAPRI and Professor Sumner.30  Most pointedly, the US 
futures methodology suffers from the fatal flaw that it does not even focus on the price that does get 
                                                      
19 Brazil’s 9 September 2003 Further Submission, para. 189. 
20 Brazil’s 9 September 2003 Further Submission, Annex II (Statement of Andrew Macdonald, 
paras 49-50). 
21 US 22 December 2003 Comme nts on Brazil’s Econometric Model, paras 25-30. 
22 Brazil’s 9 September 2003 Further Submission, Table 1, para. 8. 
23 Brazil’s 22 August 2003 Rebuttal Submission, paras. 62-66. 
24 Exhibit Bra-63 (C.Edwin Young, Randall D. Schnepf, Jerry R. Skees and William W. Lin: 
“Production and Price Impacts of US Crop Insurance Subsidies:  Some Preliminary Results, p. 4). 
25 Brazil’s 22 August 2003 Rebuttal Submission, para. 53. 
26 The United States points out a typo (US 22 December 2003 Comments on Brazil’s Econometric 
Model, paras. 73-74) that did not affect the act ual analysis undertaken by Professor Sumner ( see below, 
Comments on Section VI). 
27 See below, Comments on Section VI. 
28 Brazil’s 7 October 2003 Oral Statement, paras. 31-33 and the references contained therein. 
29 See Professor Sumner’s 9 October 2003 Closing Statement attached as Annex II to Brazil’s 
9 October 2003 Closing Statement, his 2 December 2003  Oral Statement (Exhibit Bra-342, paras. 24-28), 
Exhibit Bra-345 (paras . 6-14) as well as Brazil’s 22 December 2 003 Answers to Questions, paras. 37-42). 
30 See Brazil’s 2 December 2003 Oral Statement, paras. 42-55. WT/DS267/R/Add.2 
Page I-444  
 
the attention of US producers who depend on marketing loan payments – the adjusted world price (AWP).
31   
 9. Nor does the US Critique find any fault with  Professor Sumner’s analysis of the Step 2 
subsidies.
32  Brazil notes that Professor Sumner models the effects of Step 2 domestic and export 
subsidies in exactly the same manner as FAPRI.  Professor Sumner’s Step 2 analysis is also 
completely consistent with the overwhelming eviden ce that Step 2 export and domestic subsidies have 
significant production, export, and world price effects.  As with the GSM 102 subsidies, the NCC has been quite vocal in praising the production and export effects of the Step 2 subsidies.
33  There would 
simply be no basis for the United States to contradict these testimonies from the users and 
beneficiaries of the Step 2 programme.   
 10. The Panel must also assess the validity of the US critique in view of the overwhelming non-
econometric evidence that the US subsidies had significant production, export and price effects.
34  For 
example, the Panel must ask whether it is reasonable to conclude, as the United States argues, that 
$12.9 billion dollars in amber box, presumed tr ade-distorting subsidies had no effect on US 
production, US exports, and world prices.  It is fu rther uncontested that USDA’s own data shows that 
the average US upland cotton farm would have lost $872 per acre during MY 1997-2002 – but had a 
“profit” of $106 per acre when subsid ies are included in their revenue. 
 11. Further, the Panel must also examine the US Critique of Professor Sumner’s analysis in light 
of the evidence of other econometric studies examining the effects of removing US upland cotton 
subsidies.  The United States has argued that all these studies – including USDA’s studies – were wrong in finding significant production, export, and pr ice effects.  Would the United States also argue 
that all of these other economists analyzed the US  upland cotton subsidies and their effects on the 
(world) upland cotton market “for the express purpose of achieving pre-conceived results”?
35  Brazil 
submits that a common sense analysis of these other studies, including USDA’s own studies, shows 
that Professor Sumner’s results are both valid as well  as conservative.  They are certainly within the 
ranges of the other econometric studies in the reco rd and consistent with what would be expected 
given the non-econometric evidence in the record.    12. Finally, Brazil notes US suggestions that Professor Sumner made modelling choices “for the 
express purpose of achieving pre-conceived results”
36 and “in order to exaggerate acreage and 
ultimately price impacts”.37  These are offensive and inappropriate charges directed at one of the 
world’s leading agricultural economists.  Member s of the NCC admitted that “Dr. Sumner is a 
brilliant economist” who is “well-respected” and a “w idely recognized UC [University of California] 
economist” who is a “confidant to the administration on trade and other issues”.38  Personal attacks by 
the United States against Professor Sumner’s integrity are ironic given the fact that only seven months 
ago he was one of only two private US economists  to be asked by the Chairman of the US 
                                                      
31 See Brazil’s 2 December 2003 Oral Statement, paras. 42-55. 
32 The United States points out a typo (US 22 December 2003 Comments on Brazil’s Econometric 
Model, paras. 76) that did not affect the actual analysis undertaken by Professor Sumner ( see below, Comments 
on Section VI). 
33 For an example of the extensiv e evidence supporting this fact, see Brazil’s Further Submission, 
paras. 141, 178-180. 
34 See inter alia Brazil’s 9 September 2003 Further Submission, Sections 3.3.4.1-3.3.4.6;  Brazil’s 7 
October 2003 Oral Statement, Section 2;  Brazil’s 18 November 2003 Further Rebuttal Submission, Sections 
3.1-3.4, 3.7;  Brazil’s 2 December 2003 Oral Statement, Section 5. 
35 US 22 December 2003 Comments on Br azil’s Econometric Model, para. 9. 
36 US 22 December 2003 Comments on Br azil’s Econometric Model, para. 9. 
37 US 22 December 2003 Comme nts on Brazil’s Econometric Model, para. 1.  See also para. 38. 
38 Exhibit Bra-396 (“Farm Groups Shocked at UC Economist’s Testimony in WTO Dispute,” Western 
Farm Press, September 2, 2003)(quoting Earl Williams , President of California Cotton Ginners and Growers 
Association). WT/DS267/R/Add.2 
Page I-445 
 
 
Commission on the Application of Payment Limitations for Agriculture, Chief USDA Economist Keith Collins, to testify before that Commission.  In evaluating the effects of additional payment 
limitations, the Report of the Commission relies, inter alia, on the testimony and advice provided by Professor Sumner.
39  
 
13. While the US Government has attacked Prof essor Sumner’s professional integrity, the leaders 
and members of the US National Cotton Council have  gone further during this long dispute.  They 
have met with and pressured Professor Sumner to discontinue his work before the Panel.40  Moreover, 
NCC members have and continue to seek to cut off research and scholarship funds for the University 
of California at Davis, in protest of Pr ofessor’s Sumner’s work in this dispute.41  One NCC member 
representative even went so far as to be quoted as sa ying that “if this had been a military issue, what 
Dr. Sumner did would be called treason”.42  Recently, the President of the NCC threatened both 
Professors Sumner and Babcock with unspecified action following the end of the WTO proceedings, 
stating “[i]n another time and venue  there will be a full examination of the actions taken by these 2 
economists ”.43  This threat was elaborated in a recent an alysis in a leading Agricultural Newspaper, 
the Western Farm Press:  
 
In the trade issue with Brazil, NCC Preside nt and CEO Mark Lange remains incensed 
at [Brazil’s] WTO action.  More specifica lly, he is angry because two US economists 
hired on to Brazil’s payroll and prepared testimony against the United States in the 
WTO action .  University of California economist Dan Sumner, former assistant 
secretary of agriculture, was hired to assist  in the case.  Lange added that Sumner 
‘appears to have hired’ Professor Bruce Babcock, an agricultural economist at Iowa State University and director of the Center for Agricultural and Rural Development to attempt to modify the Food and Agricu ltural Policy Research Institute baseline 
projections for use by the Brazilians.  “Thi s action was taken without the knowledge 
of FAPRI,” said Lange of the University of Missouri-based facility.  Lange said 
Babcock receives federal funds for the CA RD programme and he pledged “a full 
examination of the actions of these two guys” once the WTO issue is settled .  
California cotton industry leaders and others have protested Sumner’s actions to the 
dean of U.C. Davis school of agriculture and have lobbied for private research and 
scholarship funds to be withdrawn from the University in protest of Sumner’s 
actions.44 
14. Over the past six months, NCC members have been instrumental in coordinating efforts to 
attempt to force officials of the University of Ca lifornia at Davis to require Professor Sumner to stop 
                                                      
39 Exhibit Bra-397 ( “Report of the Commission on the Application of Payment Limitations for 
Agriculture,” August 2003). 
40 Exhibit Bra-396 (“Farm Groups Shocked at UC Economist’s Testimony in WTO Dispute”, Western 
Farm Press, 2 September 2003)(“group of representatives from cotton, wheat and rice met with Professor 
Sumner in mid-August to express their displeasure over his testimony before the Panel”). 
41 Exhibit Bra-396 (“Farm Groups Shocked at UC Economist’s Testimony in WTO Dispute”, Western 
Farm Press, 2 September 2003)(Earl Williams, Presid ent of the California Cotton Ginners and Growers 
Associations was quoted as stating “A nd we are going to bring pressure to bear on the university that would 
allow someone from a public, taxpayer supported institution to have such latitude that can reap such harm on the 
supporters of the University”.). 
42 Exhibit Bra-396 (“Farm Groups Shocked at UC Economist’s Testimony in WTO Dispute”, Western 
Farm Press, 2 September 2003) quoting Earl Williams. 
43 Exhibit Bra-395 (“Trade Issues Facing the US  Cotton Industry,” Speech  by Dr. Mark Lange, 
President and CEO, National Cotton Council, San Antonio, January 6 )(underlining added); See also Exhibit 
Bra- 398 (Western Farm Press, 7 January 2004 , p. 3). 
44 Exhibit Bra-398 (Western Farm Press, 7 January 2004, p. 2). WT/DS267/R/Add.2 
Page I-446  
 
his work in this dispute.
45  To their credit, these U.C. Davis o fficials have refused to bend to the 
pressure.   15. As Dr. Lange’s statements quoted above indicates, the NCC now has focused on Professor 
Babcock for his very limited role in working with Pr ofessor Sumner in the application of parts of the 
FAPRI and CARD models.  Professor Babcock’s letter
46 is addressed to leading House and Senate 
staff members who have “relied on FAPRI and CARD to provide objective and high quality 
quantitative and qualitative assessment of US farm po licy alternatives”.  Professor Babcock’s letter 
states he is “prepared to do whatever it takes to mend this relationship, including disassociating 
myself from future official FAPRI analyses if so desi red”.  The letter provides the Panel with insights 
into the type of pressure imposed by the NCC on the economists providing the Panel with assistance 
in this dispute.  16. These efforts by the representatives of th e US upland cotton producers who are heavily 
dependent upon US subsidies and US Congressional support for their economic survival is perhaps 
understandable, but nonetheless deplorable.  Prof essor Sumner has demonstrated considerable 
courage and fortitude in continuing his work to assist the Panel and ultimately all WTO Members in 
this dispute.  Brazil has no doubts that the United Stat es is also appalled at the prospect that either of 
these two distinguished economists would suffer an y adverse professional consequences from their 
assistance to the Panel and the Parties in this disp ute.  Given the obligation of all WTO Members to 
cooperate and assist the Panel in making an objective assessment of the facts of a dispute, Brazil is 
certain the United States will unequivocally condemn  any such threats, including those now being 
made by the US National Cotton Council.    17. With these introductory remarks in mind, Br azil presents below Professor Sumner’s response 
to the US 22 December 2003 Comments Concerning Brazil’s Econometric Model. 
 
                                                     
 
45 Exhibit Bra-396 (“Farm Groups Shocked at UC Economist’s Testimony in WTO Dispute,” Western 
Farm Press,  2 September 2003). 
46 Exhibit US-114. WT/DS267/R/Add.2 
Page I-447 
 
 
II. PROFESSOR SUMNER’S COMMENTS CONCERNING THE US CRITIQUE OF HIS 
MODEL 
 
Response to “Comments from the United States of America  
Concerning Brazil’s Econometric M odel” dated December 22, 2003 
 
Daniel A. Sumner 
 
20 January 2004 
 
18. This response to the US critique of the modelling work on US cotton subsidies conducted by 
myself and my colleagues addresses each of the US co mments in the order in which they appear in the 
US critique submitted on 22 December 2003.  However,  let me start with some general comments I 
feel are in order. 
 
19. Much of the US critique repeats the descripti on of my adaptations to the FAPRI model, as 
provided in Annex I and subsequent documents.47  The model I developed was based on the core 
domestic crops model of FAPRI with several additions  and modifications to fit the questions before 
this Panel.  I stated in detail where my model made those additions and modifications.48  Thus, these 
US comments add nothing by reasserting that my model was not identical to the FAPRI model.  Since 
I never claimed that my model was the FAPRI mode l, I frankly do not understand the point of these 
repeated assertions that are written as t hough they were exposi ng some revelation. 
 20. Second, the United States at least three times asserts claims about my motivations for modelling choices.  Twice in the very first para graph the United States asserts that my modelling 
choices were made “in order to exaggerate” acreage and price impacts.  Then in paragraph 9, the 
United States asserts that my modelling choices were made, “for the express purpose of achieving pre-conceived results”.  I am puzzled how the Un ited States would claim to have any evidence about 
my motivation.  But more important, these statem ents suggest seriously immoral and unprofessional 
behaviour on my part.  This is a very serious charge  that I do not take lightly.  I submit that besides 
being simply wrong, such attacks have no place in these proceedings.
49 
 
21. Most of the substantive issues raised in the US critique are si mply re-statements of assertions 
that the United States disagrees with the modelling choices made in Annex I.50  My arguments for 
why I modelled the policies as I did have been prov ided to the Panel on several previous occasions 
and there is no reason to repeat t hose arguments in this document.  I will refer to those arguments as 
necessary in footnotes. 
 
                                                      
47 See my Closing Statement on 9 October 2003, attached as Annex II to Brazil’s 9 October 2003 
Closing Statement, and my statements  in Exhibits Bra-313 to 315, my 2 December 2003 Statement to the Panel 
in Exhibit Bra-342, as well as the detailed reactions to  US criticism of my model in Exhibits Bra-343-345. 
48 See Annex I to Brazil’s 9 September 2003 Further Submission and Exhibit Bra-313. 
49 Some of the economic material pr esented by the United States in this  case has been authored directly 
by Dr. Glauber.  I note that the 22  December 2003 “Comments” are not attributed to anyone by name, therefore 
I am unable to respond directly to any individual person with respect to these personal charges. 
50 However, the United States does not propose othe r methods for modelling the subsidy programmes 
in case they disagree with my model choices.  They simply state that these progr ammes should not cause any 
effects – a position that is clearly untenable given th e other economic evidence about the effects of the 
programs, including statements by the users and beneficiaries of the programmes. WT/DS267/R/Add.2 
Page I-448  
 
Section II 
 
22. Paragraphs 5 to 11 of the US critique are de voted to reasserting what I stressed in Annex I 
that was submitted many months ago, namely th at I made adaptations to the FAPRI modelling 
framework.  As I have explained, the FAPRI framew ork alone was not appropriate for the analysis of 
the questions before this Panel and therefore I m odified and supplemented the framework.  However, 
let us put these modifications and additions in pers pective.  Of the hundreds of equations used to 
compute the results, almost all are directly taken from the FAPRI domestic crops model.  The basic behavioural supply and demand e quations are taken directly from the FAPRI model as are the 
elasticities used to quantify those equations.  In Annex I, and in subsequent documentation
51, I tried to 
avoid taking credit for work that was not mine.  At the same time, I tried to be clear about the 
distinctions between my work a nd that of FAPRI and CARD.   
 23. Professor Bruce Babcock from CARD – with whom I worked together in his private capacity – provided a letter to Congressional staff economists
52 who are familiar with “official” FAPRI 
analysis of US policy questions, but who have not followed these proceeding closely.  In that letter, 
Professor Babcock explained to them what he and I have always been clear about and had already 
stated to this Panel.  My analysis used part of  the FAPRI modelling system, but was not conducted by 
the full FAPRI team and was not “official” FAPR I analysis.  These Congressional staff members had 
not had access to Annex I or other material submitted to this Panel and Professo r Babcock felt a need 
to clarify these facts.  There was no new information in the letter that he sent these staff members that 
was not already included in Annex I and in th e subsequent material provided to the Panel. 
 24. For example, Professor Babcock points out  that the baseline was the November 2002 
preliminary FAPRI baseline not the official 2003 FAPRI baseline that became available after I 
undertook my analysis.  He also points out that I used the CARD international cotton model rather 
than the FAPRI full international model in my analysis.
53  This is not new to those of us who have 
participated in this Panel proceeding, but Professo r Babcock decided to make these clarifications to 
the Congressional staff members.54 
 25. One point made in the Babcock letter – and emphasized in the US critique – is the obvious 
fact that if a different team of analysts with a different model had conducted the analysis the results 
would have been different.  That is always true.  Different analysts to whom the same question is 
posed would come up with at least a somewhat di fferent model.  Obviously  a FAPRI team conducting 
an official “FAPRI” analysis would have developed a model that is at least somewhat different from 
my adaptations.  In part this occurs because, w ith complex issues involved, the questions themselves 
may be interpreted slightly differently, and becau se, in many cases, there are a range of equally 
acceptable approaches to an economic modelling choice.  It is much less clear how the direction of the 
results would have changed if di fferent teams with different mode ls conducted analyses.  As the 
review of the independent literatu re and the independent models in this case suggests, most analyses 
of US cotton subsidies have found larger impacts than I found in my research.
55  It is not clear 
whether an “official” FAPRI analysis would have found larger or smaller impacts if FAPRI would 
have been posed the same questions as those posed in  Annex I, and if the FAPRI team analyzing these 
questions had considered all the evidence presented to this Panel. 
                                                      
51 See in particular Exhibit Bra-313. 
52 Exhibit US-114. 
53 I will discuss the latter issue in greater detail in my comment on Section VII. 
54 The letter responds a perception of concern among some in the United States about the participation 
of US economists and US based models providing eviden ce on behalf of Brazil.  In particular, Professor 
Babcock clarified that his FAPRI colleagues at the Univers ity of Missouri had not participated in the analysis 
and that this work was done in a private capacity not at a part of an “official” FAPRI project. 
55 See for example the review of independent studies in Exhibit Bra-344. 
 WT/DS267/R/Add.2 
Page I-449 
 
 
 
Section II. A. 
 
26. The heading of this section is oddly contradicted by its content.  The heading says the “Brazil Model Not Comparable to the FAPRI System”, yet the next three paragraphs proceed to compare 
these two models.  Several incorrect assertions are included here, but these are repeated in more detail 
in later sections and so are dealt with below.  Ho wever, one clarification is important to make both 
here and below.  Whereas the FAPRI system does not include separate explicit provisions for crop insurance and export credit guarantee programmes,  this does not imply that the FAPRI system 
assumes that there are zero supply impacts of these programmes.  Rather, effects of these programmes 
are imbedded in the baseline of the FAPRI framework. 
   27. If the FAPRI system had been posed questions  about the impacts of crop insurance or export 
credit guarantee programmes, the natural approach w ould be to proceed as described in Annex I and 
in subsequent submissions: to ask how a new scen ario with these programmes removed would differ 
from the baseline that includes these programmes.  Th is procedure was precisely what FAPRI analysts 
did when they analyzed payment limit rules for the Commission on Payment Limitation in analysis 
presented in June 2003.
56  The FAPRI framework also does not contain any explicit provisions on 
payment limitations.  These were added to the syst em for the analysis of the effect of payment 
limitations, much as I added equations on crop insu rance and export credit guarantees for purposes of 
my Annex I analysis.   
  
28. It is simply wrong to assert that, because a programme is not identified separately in the FAPRI framework, its effects must be assumed to be zero.  Furthermore, as discussed further below, in some cases the best evidence on the impact of a programme is from the users of that programme.  
This was my judgment about the impacts of the e xport credit guarantee programmes.  It certainly 
makes no sense whatsoever to assume that a programme has zero effect, simply because its impacts, 
which are known to be positive, are difficult to quantify precisely.  
Section II.B.1 
 
29. I explained in great detail the basis for my approach to PFC, DP, MLA and CCP payment 
programmes.
57  Clearly I disagree with the assertion made in paragraph 16 and 17.  There is no new 
content here and there is no reason to repeat my argument and evidence.  I note, however, that no “official” FAPRI analysis of these payment progr ammes has asked the question how acreage would 
respond if cotton programmes were removed while the payments for the other programme crops 
remained in place.  The FAPRI analysis is concerne d with the very different question of what would 
be the impact for all crops if the payment progra mmes were removed for all crops simultaneously.  
Therefore, I had to make some adjustments to the treatment of these programmes, as the question that 
faces this Panel could not be answered by the trad itional FAPRI framework.  In addition, as footnote 
                                                     
 
56 See for example, FAPRI analysis FAPRI-UMC Report #05-03 and #06-03 to be found at 
http://www.fapri.missouri.edu/FAPR I_Publications.htm and partly reproduced in Exhibit Bra-228. 
57 Annex I, paras. 37-51; and my oral statements on 22 July (Exhibit Bra-105, paras 20-33), 2 
December (Exhibit Bra-342, paras 31-37) and my closing statement on 9 Octo ber (Part 4); Exhibits Bra-280, 
Bra-313, and Bra-345 (paras 18-34).  Some of the key arguments I made can be summarized as follows: 
• none of the studies in the literature analyzes th e amount of payments made in connection with a 
specific crop that are received by current producers of that crop, 
• none of the studies in the literature focuses on the specific effects of these payments for cotton due to 
o the high per-acre payments for cotton reflecting higher costs of production, 
o the restrictions on planting fruits and vegetables affect particularly cotton production, 
• direct and counter-cyclical payments give farmers an incentive to produce the crop for which they have 
base acreage, 
• future updates of base induce farmers to plant their base acreage to the programme crop or even expand 
the area planted to the programme crop. WT/DS267/R/Add.2 
Page I-450  
 
57 highlights, my judgment is that the programmes all have some commodity-specific acreage impact 
for cotton.  30. The table referred to in paragraphs 21 through 24 simply shows that when the planting impact 
of these payment programmes for cotton are assumed to have no specific impact on cotton acreage, 
but only a broad and diffuse effect on all programme  crops,  then the resulting acreage impact will 
indeed be nearly zero.  
Section II.B.2 
 31. Annex I as well as subsequent submissions and oral discussions with the Panel have 
explained in detail my approach to the productio n impacts of crop insurance and why my approach, 
for example by leaving out risk reduction impacts, is conservative.
58  The approach is straightforward.  
The crop insurance subsidy lowers costs to cotton gr owers and the acreage impact of lower costs in 
percentage terms may be calculated by multiplying the lower per acre costs by the elasticity of supply.  
The FAPRI framework has not been used to assess the production impacts of crop insurance.  But the 
impacts of crop insurance subsidies are implicit in the FAPRI baseline.59  My approach made the 
impacts explicit so that I could assess the acreage effects of removing the subsidy.  This is discussed in somewhat more detail below.    32. Paragraphs 25 through 30 and the table referre d to there simply repeat the US claim that 
hundreds of millions of dollars of crop insurance subs idies for cotton producers has had zero effect on 
farmers’ choices to grow cotton.  I disagree and my model has quantified these impacts using FAPRI 
elasticities and other features of the FAPRI US crops model.  33. Not withstanding the “intuition” of the United States, the analysis that underlies paragraph 29 
of the US critique is evidence of faulty economic reasoning.  Furthermore, the US claim about how 
the FAPRI model treats crop insurance subsidies is misleading at best.
60  As noted above, the FAPRI 
framework includes the value of crop insurance subsid ies implicitly and has not previously been used 
to analyze the impact of eliminating crop insurance for cotton.  Crop insurance for cotton is a service 
purchased by farmers on a per-acre basis in their business of producing cotton.  The subsidy provided by the US government lowers the cost of this serv ice.  It is a principle of basic economics that a 
subsidy that lowers marginal costs results in the same impact as a direct price subsidy on output.  
Following this principle, I first calculate the regi onal cotton crop insurance subsidy rate per acre of 
cotton as a percentage of net revenue and then mu ltiply those subsidy ratios times the elasticity of 
cotton acreage response applicable to that region.  The United States is right that there are more 
complex ways to model the impact of crop insuran ce, for example, by noting that crop insurance has 
an additional acreage impact due to risk reduction.  But, the methodology I apply is straightforward, 
conservative and based on intuitive econo mic logic and basic principles.   
 
Section II.B.3 
 
34. Paragraphs 31 through 34 and the table to which they refer again simply repeat the US 
assertion that billions of dollars of subsidized export credit guarantees for cotton exports have zero 
effect on US production and exports.  I find this implausible on its face and based my quantification 
of the impact on estimates provided by representative of  users of the programme.  This seems to me to 
be a reasonable approximation.  My use of that estimate was conservative relative to the National 
                                                     
 
58 See also Exhibit Bra-313. 
59 While there is no specific equation modelling the effect s of crop insurance, its effects are part of the 
baseline that projects a level of planted acreage against the background of the continuation of the crop insurance 
programme. 
60 Paragraph 29 of the US Critique. WT/DS267/R/Add.2 
Page I-451 
 
 
Cotton Councils estimates, as explained in deta il in response to questions from the Panel61, and as the 
US acknowledges in footnote 17 to paragraph 32 of its critique.  The National Cotton Council testified 
that the impact on export was 500,000 bales and the imp act that I estimate is considerably smaller.  I 
use my model, based significantly on FAPRI elasticities and other parameters to calculate the price, acreage and other impacts of the initial shift of 5 00,000 bales.  This resulted in much lower net 
impacts on price and export quantities than estimated by the National Cotton Council.
62   
 
Section III 
 
35. In paragraphs 35 through 38 of the US criti que, the United States points out that the baseline 
prices reported in Annex I are not the same as baseline prices provided to the United States by 
Professor Babcock on November 26 as part of the model documentation.63  The United States implies 
that I have manipulated the base line to generate higher effects.64  This allegation has no basis 
whatsoever.  
36. The documentation deliv ered by Professor Babcock
65 was the FAPRI US crops model that 
was calibrated with the system of FAPRI inte rnational crops models to reproduce the FAPRI 
November 2002 preliminary baseline projections.  The Annex I analysis began with these FAPRI 
November 2002 preliminary baseline projections.  Ho wever, the Annex I results were developed by 
linking the FAPRI US crops model with the CARD international cotton model that was developed by 
researchers at Iowa State University.  Unfortunate ly, the description of the baseline in Annex I and 
subsequent submissions was imprecise by not making this distinction explicit.  Instead, I labelled the 
baseline as an (unpublished) FAPRI November 2002 preliminary baseline rather than a slight 
modification thereof.  This slight modification was required for internal consistency reasons, as 
explained below.  
37. The table below provides a full comparison of  the differences in the baseline reported in 
Annex I and the FAPRI November of 2002 preliminary baseline.  As can be seen, they are different but those differences are very small overall.   38. There are two reasons for the small difference s between the baseline projections used in the 
Annex I analysis and reported in Annex I a nd the November 2002 FAPRI preliminary baseline 
projections.  The first was caused by the need to calibrate the CARD cotton model rather than the 
FAPRI international model with the US crops mode l.  Consistency with the CARD international 
cotton model implied very small changes in the b aseline.  The second source of difference was that 
new macroeconomic projections became ava ilable in late November, 2002.  These new 
macroeconomic projections were inco rporated into the CARD international cotton model.  I stress that 
the equations of the FAPRI US crops model were not changed in any way.  Again, the slight changes 
between the baseline projections are solely a result  of the calibration of the model, once with the 
FAPRI international crops models (FAPRI prelim inary November 2002 baseline) and once with the 
CARD international cotton model (Annex I model), as well as the updated macroeconomic data used. 
 39. To put this baseline issue in perspective, Brazil has provided the Panel with several sets of 
results from similar models on sev eral alternative baselines, including the official FAPRI 2003 
                                                     
 
61 Brazil’s 27 October Answers to Questions, paras. 104-107. 
62 In table 5.Ig of Annex I, I report an average expo rt effect of 300,000 bales and an average US price 
effect of about 0.5 cents per pound, as opposed to the NCC estimate of 500,000 bales and 3 cents per pound. 
63 See Exhibit Bra-346. 
64 Paragraph 38 of the US critique. 
65 Exhibit Bra-343, para. 11 and Exhibit Bra-346. WT/DS267/R/Add.2 
Page I-452  
 
baseline.
66  The bottom line is that these results are ex tremely robust to those alternative baselines and 
slight modifications to modelling specifics.    40. The same robustness applies to the results using the FAPRI November 2002 preliminary 
baseline and the modification applied.  The Un ited States assertion that the Annex I baseline 
meaningfully affects (“exaggerate[s]”
67) the effects of removing US cotton subsidies is, therefore, 
unfounded.    41. To analyze the validity of the US assertion,  we have recalibrated the CARD international 
cotton model (used to generate the Annex I results ) to replicate exactly the FAPRI November 2002 
preliminary baseline.  We also used the m acroeconomic projections used by FAPRI in 
November 2002.
68  Rerunning the model of Annex I yields results that are nearly identical to those 
reported in Annex I.  Removal of  US cotton subsidies would decrease US production by an average of 
24.9 per cent from 2003 to 2007.69  Mill use would decrease by 6.4 per cent.70  US exports would 
decrease by 41.5 per cent.71  The US Season average price would increase by 15.1 per cent.72  
Importantly, the A index price would increase by 10.6 per cent.  In Annex I, I reported a change in the 
A index price of 10.8 per cent relative to the baseline.73  This difference of less than 0.2 percentage 
points is simply not material.    42. In sum, it is unfortunate that this confusi on occurred in the labeling of the baseline used in 
Annex I.  The important point, however, is that it ha s not affected the results of my analysis.  Indeed, 
having run the Annex I model off the non-modi fied version of the FAPRI November 2002 
preliminary baseline projections provides one more  indication of the robustness of those results.  
 
                                                     
 
66 This includes my Annex I model based off the FAPRI preliminary November 2002 baseline, my 
cotton-focussed model based off the FAPRI preliminary November 2002 baseline and the FAPRI January 2003 
baseline, as well as a number of independent third party studies (Exhibit Bra-344). 
67 Paragraph 38 of the US critique. 
68 Both of these modifications result in an Annex I modelling system that is calibrated to exactly 
generate the FAPRI preliminary November 2002 baseline.  It no longer contains any modifications that the United States criticizes as generating overstated resu lting effects (paragraphs 36-37 of the US critique). 
69 The Annex I result was 26.3 percent (paragraph 65). 
70 The Annex I result was equally 6.4 percent (Table I.5a). 
71 The Annex I result was 44 percent (paragraph 68). 
72 The Annex I result was 15.3 percent (paragraph 69). 
73 The Annex I result was 10.8 percent (paragraph 70). WT/DS267/R/Add.2 
Page I-453 
 
 
Comparison between baseline projections 
  
 2003 2004 2005 2006 2008    Planted Area (million acres)   Annex I baseline 13.7802 14.8798 14.7722 14.6525 14.2744 
FAPRI baseline 13.7820 14. 7205 14.7716 14.6584 14.2519 
 Harvested Area (million acres)   Annex I baseline 12.0444 13.0666 12.9761 12.8739 12.5282 FAPRI baseline 12.0462 12. 9164 12.9751 12.8791 12.5068 
 Yield (bales per acre)    
Annex I baseline 1.3325 1.3328 1.3410 1.3494 1.3579 
FAPRI baseline 1.3325 1. 3328 1.3408 1.3492 1.3578 
 Production (million bales)    Annex I baseline 16.0497 17.4157 17.4010 17.3715 17.0121 FAPRI baseline 16.0519 17. 2152 17.3974 17.3769 16.9818 
 Free Stocks (million bales)   
Annex I baseline 4.9155 4.6527 4.3863 4.3458 4.0330 FAPRI baseline 4.8188 4. 4349 4.2145 4.1920 3.8837 
 Imports (millions bales)    Annex I baseline 0.0050 0.0050 0.0050 0.0050 0.0050 FAPRI baseline 0.0050 0. 0050 0.0050 0.0050 0.0050 
 Mill Use (million bales)    
Annex I baseline 7.7825 7.7018 7.6339 7.5896 7.5245 FAPRI baseline 7.7429 7. 6547 7.5968 7.5532 7.4927 
 Exports (Million bales)    Annex I baseline 9.7667 9.9817 10.0384 9.8275 9.8054 
FAPRI baseline 9.9042 9. 9495 10.0260 9.8513 9.8024 
 Season Average Price ($/lb)   Annex I baseline 0.450 0.477 0.503 0.512 0.539 FAPRI baseline 0.457 0. 488 0.512 0.520 0.547 
 A Index Price ($/lb)    Annex I baseline 0.507 0.534 0.558 0.576 0.596 
FAPRI baseline 0.524 0. 547 0.568 0.587 0.605 
 Adjusted World Price ($/lb)   Annex I baseline 0.372 0.398 0.419 0.436 0.455 FAPRI baseline 0.387 0. 410 0.428 0.446 0.463 
 Step 2 Payments ($/lb)    
Annex I baseline 0.057 0.060 0.063 0.047 0.052 
FAPRI baseline 0.054 0. 060 0.063 0.047 0.052 
 
Section IV 
43. In section IV of the US critique, the United States claims that my model does not forecast 
future or explain historical outcomes of cotton pl antings and that variables, such as the ratio of 
soybean to cotton futures prices, are more highly co rrelated to acreage variations in the seven years 
from 1996 to 2002.
74  The United States claims that this has some relevance for the validity of my 
model and its simulation results.  These claims are seriously flawed.   
 44. Section IV of the US critique demonstrates a complete lack of understanding of the role of 
policy simulation models.  A policy simulation m odel is not designed to and does not have the 
capability of forecasting.  Policy simulation models are designed to ask “but for” counterfactual 
questions not to attempt to replicate a specific histor y or forecast the future.  Specific statistical tools 
                                                     
 
74 See inter alia paragraphs 39-42 of the US critique.  Th is is the entire theme of section IV. WT/DS267/R/Add.2 
Page I-454  
 
apply to forecasting economic time series – generall y based on some variant of regression analysis – 
to forecast/predict future or explain historic outco mes of, for instance, cotton plantings.  Contrary to 
the assertion of paragraph 39 of the US critique, no professional economist would ever propose a simulation model designed to consider the impacts of  policy alternatives as the appropriate tool for 
forecasting the future or for explaining historical da ta for an industry.  I certainly would never propose 
the use of a policy simulation model for forecasting purposes.
75 
 45. I begin my response to the US critique in section IV by noting that – as I understand it – the 
questions before the Panel relate to the analysis of the effects of the US cotton subsidies, not to predict 
cotton plantings for future marketing years.
76  The simulation model that I have presented in Annex I 
and in later submissions to the Panel addresses exactly that first question before  the Panel.  Given the 
baseline that covers historical data for marketi ng years 1999-2001 and projections for marketing years 
2002-2007, my simulation model asks what would ha ve been or what would be the effects of 
removing the US subsidies on US acreage, use and exports of cotton as well as on cotton prices and 
other variables.   
 
46. The United States is wrong when it implicitly claims that the ability of a policy simulation model to forecast or account for variations in a tim e series provides any useful guide to its reliability 
in terms of the simulation results that it generates – for example in assessing what may happen if policy variables were to change.    
47. Forecasting models are typically based on multiv ariate time series regression analysis that 
accounts for short-run and long-run trends, serial correla tion of times series and exogenous factors.  In 
agriculture, projecting acreage choices would likely i nvolve projecting climate variations, pest trends, 
and many other variables.  (Any standard ec onometrics textbook provides the basics for forecasting 
economic time series.
77)   
 
48. Neither my Annex I model nor the FAPR I policy model (nor the USDA policy models) 
provides an appropriate framework for statistical anal ysis explaining historical variations in acreage 
or for forecasting future acreage.78  The purpose of simulation models is to isolate the effects of, for 
instance, subsidy programmes as they occur against the baseline results.  Policy simulation models do 
not claim to be useful for forecasting purposes and they are not.  But this is irrelevant to their stated 
purpose as “but for” (counterfactual) policy analysis tools.   
 49. My simulation model assumes “average” trends for many variables that change in real world 
situations, but are set at averages in the baseline (o r at historical outcomes).  For example, my model 
assumed average weather conditions for marketing years 2002-2007.  However, no doubt, there will 
be years with weather better than the average and years with weather worse than the average.  The 
model cannot predict this, and, therefore, any deviatio ns in the real world that impact on, for instance, 
planting decisions, would result in “projections” by the model to be necessarily wrong – to the extent 
that important outcomes of variables, such  as weather, deviate from the baseline.   
 
                                                     
 
75 I note that the claims made by the United States about the “Sumner model” apply with equal (lack 
of) force to the FAPRI models themselves.  No one uses these models to forecast, nor should they.  The models 
are used and useful to as k “but for” questions, which forecasting models are not in a position to do. 
76 Thus, any assertions of the United States that my model cannot predict future or explain past 
outcomes of cotton planting is not a relevant factual statement that helps this Panel determine the effects of the 
US cotton subsidies. 
77 See for example, William H. Greene, Econometric Analysis  Prentice Hall; 5th edition (2002)   (cited 
in Brazil’s 22 December Answers to Qu estions, para. 42)  A classic and still useful reference is Charles R. 
Nelson, Applied Time Series Analysis for Managerial Forecasting, Holden Day, San Francisco. (1973). 
78 Running the same correlation calculations that the United States applied to my model off the FAPRI 
or USDA’s FAPSIM model would very likely not reveal significantly higher correlations  as these simulations 
models are – like my adaptation of the FAPRI model – not designed for that purpose.   WT/DS267/R/Add.2 
Page I-455 
 
 
50. A simple illustration may clarify the point  that statistical regression models and policy 
simulation models serve different purposes. Consid er a period in which a large direct production 
subsidy was in force, but the parameters of the pr ogramme did not change.  Given changes in climate, 
agronomic factors or other economic incentives, pl anted acreage would change over the period, but 
none of the changes in acreage would be due to chan ges in the subsidy, because there were none.  The 
result of any time-series regression analysis of a limited number of data points is incapable of 
isolating the effects of variables, such as subsidy programmes, that do not change considerably during 
the period under analysis.  Other variables would ex plain the variation in acreage over the period and 
would be better predictors of future acreage shif ts so long as the large s ubsidy programme remained 
unchanged.  
 
51. But does this mean that the large direct produc tion subsidy is irrelevant to planted acreage?  
No, of course not.  Does this mean that a model to  consider the amount of acreage that would be 
planted, but for the subsidy, shou ld assume the subsidy was irrelevant?  No, of course not.  Therefore, 
a statistical regression (or correlation) model appl ied to analyze the effects of such “constant 
variables” would fail to capture their importance.  In sum, only a policy simulation model, of the 
general sort that I have provided in Annex I will adequately isolate the effects from the cotton subsidy 
programme hidden in the regression analysis.  52. Similarly, policy simulation models are not usually very good at forecasting future or 
explaining past events, as explained above.  Does this  mean that the simulation analyzed the effects of 
the subsidy programmes incorrect?
79  No, of course not, if they are properly designed. 
 53. The United States further claims that there are small positive or negative correlations between 
the expected net revenue and planting decisions, as a result of my model.
80  The table referred to in 
paragraphs 43 though 52 of the US  critique and the discussion in tho se paragraphs also illustrate the 
misunderstanding that the United States evidently has about model evaluation and the meaning of the 
statistics they produce.  The table at paragraph 49 reports simple correlations coefficients based on 
seven observations for a few variables.  First, I not e that the sample size for these variables is simply 
too small for any meaningful statistical analysis.  Second, simple (univariate) correlation coefficients 
are not measures of explanatory power as the United States implies, for example, in paragraph 42 of its critique.
81  Simple correlation coefficients tell us nothing of interest when many variables affect an 
outcome.82  This again highlights the difference between  forecasting or explanatory models and policy 
simulations models that ask “but for” counterfact ual questions.  Nothing in this section of the US 
critique relates in any way to the usefulness of models for policy analysis.  54. Correlation coefficients measure linear statis tical relationships between two variables in 
isolation from all other influences.  They do not indicate causation and they do not even indicate a 
statistical relationship between variables that tak es place in the real-world situation when there are 
many simultaneous statistical and causal relationships in place.  It follows that the figures presented in 
the table at paragraph 49 are not indicative of cau sation or even of the contribution to statistical 
explanatory power in the current case where many va riable are interrelated.  Whether the figures are 
                                                     
 
79 The United States implies this in paragraphs 40-50 of its critique. 
80 Paragraphs 43-46 and table at paragraph 49 of the US critique 
81 Paragraphs 41-42 and 45-49. 
82 The case of cotton plantings is a good example.  Plan ting decisions are a function of expected 
revenue itself determined by expected market revenue and expected government payments.  It is further a function of expected revenue for other crops, of weather conditions at planting time, of expected demand for the 
crop, expected weather during the grow ing season and so forth.  Simple univariate correlation measures linear 
statistical relationships, not causation or even statistical  relationships if there are many factors that potentially 
affect the outcome of a variable.  This explains that there may be a negative correlation where one intuitively 
expects a positive correlation as a re sult of ignoring the effects of all other factors on the variable to be 
explained. WT/DS267/R/Add.2 
Page I-456  
 
positive or negative, large or small, they have no  statistical significance and provide no meaningful 
information.  55. In sum, the US statement at paragraph 50 of its critique has no basis whatsoever.  As with all 
policy simulation models, including the FAPRI a nd USDA simulation models, any single factors or 
set of variables in my model are not necessarily expected to “explain” the time series data.  The model 
was not designed to explain historic events or pred ict future outcomes.  Instead my model is designed 
to simulate what would be expected to happen if US subsidies were removed.  A test of the model 
would be to observe responses if subsidies were removed and other factors were held constant.  
Presenting a set of simple correlation coefficients on seven years of historical data over which 
subsidies remained in place provid es no evidence of any relevance. 
 56. Finally, I refer the Panel to the many in stances in which I have addressed the question of 
lagged prices used to model farmers’ price expectations at planting time.
83  I will not repeat these 
arguments here to respond to the US criticism that I should have used futures market prices.84  I would 
note that Brazil’s submissions have thoroughly addressed the US arguments that US farmers planting 
decisions are made in accordan ce with futures market prices.85  
 
Section V 
 
57. This section of the US critique repeats again that my model differs from the FAPRI US crops 
model.  It also asserts that the United States had di fficulties in replicating results of my analysis from 
the electronic files.  This section also reveal s that the United States made several mistaken 
“assumptions” about how certain variables entered the model.  As indicated before, given the complexities of working with these models, both Prof essor Babcock and I have repeatedly offered to 
work with the United States to replicate my results.
86  US government or ot her economists working on 
the US critique of my model could have contacted  either Professor Babcock or myself requesting any 
needed information or assistance with any problems they have had.  If they would have done so, we 
could have clarified any ambiguities and the United St ates could have avoided the evident errors made 
in applying my model.  However, they did not contact either of us.  As a result they made inappropriate assumptions and have faile d to apply the model correctly.   
 
58. Let me begin by addressing the US statemen ts about the differences between the Annex I 
model and the FAPRI model.
87  The essence of those differences was explained in Annex I while the 
operational details were specified more precisely in Exhibit Bra-313.  Annex I attempted to provide a 
relatively simple heuristic discussion of the m odelling approach.  Exhibit Bra-313 provided the 
operational equations.  These operational specification ar e made explicit in equations (4), (5) and (6) 
in Exhibit Bra-313.  As explained in Exhibit Bra-313, my approach to the PFC, MLA, DP and CCP 
payment programmes and for crop insurance was to use a constant regional acreage elasticity (taken 
from the FAPRI crops model publications).88  These elasticities were the averages of the time-varying 
elasticities used over previous periods, as reported by the FAPRI US crops model that I adapted.  I 
                                                      
83 See my 9 October Closing Statement attached as An nex II to Brazil’s 9 October Closing Statement, 
my 2 December Oral Statement (Exhibit Bra-342, paras. 24 -28), Exhibit Bra-345 (paras .6-14) as well as Brazil’s 
answers to question 213 from  the Panel on which I have provided input (Brazil’s 22 December Answers to 
Questions, paras. 37-42). 
84 See paragraphs 51-52 of the US critique. 
85 Brazil’s 2 December Oral Statement, Section 5.2 and the accompanying exhibits, as well as my oral 
explanations on 3 December, including Exhibit Bra-371. 
86 See my oral statement on 2 December (Exhibit Bra-342, para. 5 and 8) , Exhibit Bra-331 (para. 10), 
letter of Professor Bruce Babcock attached to Brazil’s 5 November letter to the Panel 
87 See section V 
88 The regional supply elasticities used for the cons tant elasticity calculations to determine the PFC, 
DP, MLA and CCP effects and the crop insurance effects are as follows:  Corn Belt, 0.219; Central Plains, 
0.942; Delta, 0.544; Far West, 0.041; South East, 0.615; and Southern Plains, 0.362. WT/DS267/R/Add.2 
Page I-457 
 
 
then apply this constant elasticity to the percenta ge effects of the subsidy on net revenue.  This 
constant elasticity modelling is we ll established in the literature.89  Paragraphs 53-56 of the US 
critique misstate the operational model I used a nd ignore the information in Exhibit Bra-313 that 
explains how the heuristic explanati on in Annex I was operationalized.   
 Sections V.A to V.C 
 
59. In sections V.A and V.B, the Unites States fa ils to acknowledge that, because the level of net 
returns vary from year to year, the constant el asticity specification explained in Exhibit Bra-313 
means that the impacts of the PFC, MLA, DP, CCP and crop insurance programmes will vary as well.  
When one recognizes this commonly applied feature of my specification, there is no inconsistency 
whatsoever between the acreage impacts in the periods 1999 through 2002 and 2003 through 2007.   60. In fact, the United States acknowledges its  understanding of the operational specifications 
explained in Exhibit Bra-313 in pa ragraphs 63 through 66 of section V. C.  And they acknowledge that 
with constant percentage effect, the number of acr es shifted will depend on th e percentage impacts of 
the subsidies on net revenue, not the absolute do llar impacts.  The US observations about the 
programme effects in section V.A (paragraphs 57-60) , section V.B (paragraphs 61-62) and in the table 
that follows paragraph 62 of the US critique are explained by my explicit description of the operational specifications of the Annex I model in equa tions (4) through (6) in Exhibit Bra-313.  It is 
therefore puzzling why the United States included S ection V.A and V.B in the document at all, since 
they provide no new information.  The United Stat es first simply mischaracterizes my approach as 
linear, and then states that the results are not in line  with that linear characterization.  As I explained 
in Exhibit Bra-313 (equations (4) through (6)) and as repeated by the United States in section V.C, my 
model uses a constant elasticity, constant percentage effect for these impacts.
90  
 
61. Let me clarify this a little further.  The FAPRI US crops model applies a constant linear 
response to any added revenue.  My Annex I model takes the same approach for all variables that are 
included from the standard FAPRI US crops model.   This refers to all variables for which no 
modifications are reported in Exhibit Bra-313.  The FAPRI linear system means that a $100 increase in subsidy has the same effect on acreage whether the base revenue is $200 or $1,000.  My alternative 
approach is used for PFC, MLA, DP and CCP paymen ts as well as crop insurance.  It implies that a 
subsidy that is a constant 10 per cent of net revenue has a constant percentage effect on acreage.  
Hence, a $100 increase in subsidy has a bigger per centage effect on acreage if base revenue were 
$200 (a 50 per cent increase) than if base revenue were $1,000 (a 10 per cent increase).  Constant 
percentage impacts and constant elasticity models  are far more common in the economics literature 
than are strictly linear models.  Constant percentage effects do not imply larger impacts in general.  In 
effect, a constant percentage effect says that subs idies have a bigger acreage effect when they are a 
bigger share of net revenue than when they  are a smaller share of net revenue.   
 62. Section V.B on crop insurance contains some additional US mistakes in applying my model.  
The United States seems to apply a constant per-acre crop insurance benefit for all regions.  This is 
inconsistent with my approach and with reality.  As explained in paragraphs  54 and 55 of Annex I, 
crop insurance subsidy rates differ substantiall y by region and my model incorporates those 
differences.  When the constant percentage effects are incorporated and when one applies the different 
regional subsidy rates, there is absolutely no in consistency between the results in the period from 
1999 through 2002 and the period 2003 through 2007.
91  
                                                      
89 See Sumner, Daniel A., and Michael Wohlgenant, “Eff ects of an Increase in the Federal Excise Tax 
on Cigarettes,” American Journal of Agricultural Economics, 1985, vol. 67, 235-242. 
90 I note that contrary to the US assertion in paragraph 66, my methodology has not changed between 
Annex I and Exhibit Bra-313. 
91 The United States claims in paragraph 62 that th e existence of crop insurance had a negative impact 
in the acreage in the Corn Belt and that this would be an implausible result (paragraph 62 of the US Critique and WT/DS267/R/Add.2 
Page I-458  
 
 
Section V.D. 
 
63. The point of paragraphs 67 and 68 and th e table to which they refer, which follows 
paragraph 70 (“Example of Southern Plains Acreage Impact”), are not at all clear.  Most importantly, 
the United States is simply incorrect that I used onl y market revenue plus marketing loan gains as the 
basis for the percentage calculation.
92  The full net revenue including all programme payments are 
included in the model specification.  It is not clear why the United States made this mistaken 
assumption.    
64. In addition, the labelling of the table itself is  not clear.  For example, neither Annex I nor my 
other submissions include regional acreage effects of  subsidy programmes.  This is because the focus 
of this case is on national and international impacts.  It appears that it was the United States which calculated the figures reported in the table following paragraph 70 (“Example of Southern Plains Acreage Impact”).  I note that the marketing year 2005 planting effect of crop insurance in the 
Southern Plains that the United States labels “Sum ner Impact” exceeds the effect I report in Annex I 
for the entire United States.
93  This reason for this seems to be that the United States presents first 
round effects, i.e., effects before any feedback e ffects (second-round effects) from both the US crops 
model itself as well as before any feedback from th e CARD international cotton model.  To be clear, 
these US figures are not the equilibrium figures that I re ported in Annex I.  They are also not the first-
round effects that were intermediate for the resu lts reported in Annex I because of mistaken US 
assumptions, as discussed below.   
 65. Further, the column (2) of the US table at paragraph 70 (“Example of Southern Plains 
Acreage Impact”) is labelled “Programme Revenue,” yet includes crop insurance.  I assume this refers 
to the total subsidy per acre, not programme reve nue.  Also, the “programme revenue” only includes 
revenue from DP and CCP payments as well as crop in surance.  No revenue from the marketing loan 
programme (10.06 cents per pound in MY 2005 pu rsuant to an AWP of 41.94 cents per pound 
reported in the baseline)
94 is included in the calculations.  By not including marketing loan payments 
in its calculations, the United States does not follo w its own proposition of what the right approach 
is.95  Rather, it has excluded marketing loan revenue  entirely from its calculations in the table at 
paragraph 70 of its critique (“Ex ample of Southern Plains Acreage Impact”), leading to distorted 
elasticity calculations. 
 66. There are a number of further problems in the examples the United States provides in the 
tables at paragraph 70 of the US critique (“Example of Southern Plains Acreage Impact”) that seem to 
account for the differences they have created by misapplying my model.  Let us use the crop 
insurance calculations as an example.  I calculate th at the Southern Plains crop insurance subsidy is 
$26.14 per acre, not $24.67 per acre
96, as the United States enters into  its table in the “programme 
revenue” column.  Furthermore the acreage elasticity th at I use is not 0.28, but rather 0.362.  These 
                                                                                                                                                                     
the accompanying table).  This is, however, not true.  Net crop insurance subsidie s in the Corn Belt were 
negative over time, with indemnity payments being below premium payments.  Therefore, the program provided farmers with a net negative return causing negative acreag e impacts.  This is an entirely plausible result.  See 
below the discussion on the amount of crop insurance subsidy payments (at paragraph 66, note 96 below).  I also 
note that cotton is not an important crop in the Corn Belt and that crop insurance benefits in the more important 
regions in the Southern Plains and in the Southeast are much higher. 
92 See paragraph 68 of the US Critique.   
93 Compare  the 0.446 million acres reported by the United States without offering any source with the 
results I have reported in Annex I, Table I.5d, which is 0.420 million acres. 
94 See Annex I, Table I.5a. 
95 See paragraph 68 of the US Critique. 
96 The regional crop insurance subsidy rates that I use are as follows:  Corn Belt: -$0.70;  Central 
Plains: $28.24;  Delta: $7.37;  Far West: $13.62;  Southeast: 15.71;  Southern Plains: 26.14. WT/DS267/R/Add.2 
Page I-459 
 
 
two further obvious errors in the US application of  my model account for the bulk of the differences 
that the United States seems to imply (incorrectly) were errors on my part.     67. Besides this, the table following paragraph 70  of the US critique (“Example of Southern 
Plains Acreage Impact”) not only contain numbers th at are not my reported impacts, they also make 
the serious conceptual error of simply adding the impact of each programme across the columns to get 
a “total” effect.  This is an error because the eff ects of the programmes are not independent.  In order 
to estimate the impacts of removing these three sets of programmes together, one must simulate that scenario explicitly.  The resulting impacts will be sm aller than the sum of the impacts of removing 
each programme one at a time.  For example, if  one removed the crop insurance programme for 
cotton, supply would fall and the market price of cotton in the United States would rise.  This would 
imply that the CCP programme would have a smaller s ubsidy element and its eff ect would be smaller.  
The fact that the United States reported the simple  sum of impacts across programmes and represented 
that as the impact due to the three sets of programmes together seems to demonstrate either an inadvertent error or a basic lack of understanding of how the programme and the model operates.  
 
Section V.E 
 
68. There are several problems and inconsistencie s in the discussion and tables included in this 
section.  These problems also apply to the calculations in section V.D.
97  The United States 
improperly applied my model and, therefore, it is not  surprising that they found different results.  I 
note that the United States in paragraphs 71 of its critique states that “reasonable assumptions were 
made to facilitate the calculations”.  I repeat again that Professor Babcock and myself offered the United States our assistance in replicating the resu lts.  Any request for assistance would have avoided 
these problems and the need for the United States to  make “reasonable assumptions … to facilitate the 
calculations”. 
 
69. One important problem that vitiates any claims  in this section is that the numbers that are 
labeled “Sumner’s Reported Impacts” in the three charts that follow paragraph 72 are not what I reported in Annex I Tables I.5.b, I.5.c and I.5.d. 98  The United States compares two sets of numbers 
that were evidently generated by the United States , neither of which is the result that I actually 
reported to this Panel. 
 
70. As noted above, it seems that the United Stat es provides direct acreage effects (so-called first-
round effects) that do not take into account feedback  effects from either the US crops model or the 
CARD international cotton model.  These feedback adjustments are very large and the US figures do 
not represent the new, much smaller, equilibrium effects.   
 
71. With this in mind, I will address the US arguments in section V.E.  The United  States claims that my approach to estimating the acreage impacts of removing PFC/DP, CCP/MLA, and crop 
insurance subsidies is deeply fl awed because their  attempted replication of the my methodology 
showed sharply lower impacts in 2002 – 2007 than  what they claim were my estimated impacts.
99  As 
I will demonstrate, the difference between the two se ts of estimates of the United States is primarily 
due to differences in the magnitude of elasticities of supply the United States used, as compared to the 
elasticities that I actually used.  The United St ates applied time-varying, linear elasticities100 because 
this is what is suggested by the FAPRI linear m odelling framework.  My Annex I results of the effects 
                                                      
97 I have combined the discussion of these points to avoid any repetition in an already lengthy and 
technical document. 
98 Nor are these the figures that I have reported using the FAPRI January 2003 baseline (Exhibit Bra-
325) 
99 Paragraph 69 of the US Critique and second set of  tables following paragraph 70 of the US Critique, 
as well as the three charts followin g paragraph 72 of the US Critique. 
100 I have explained that in my comments on section V.A-V.C. WT/DS267/R/Add.2 
Page I-460  
 
of these listed programmes are, however, based on a cons tant elasticity structure.  As I will show, the 
US implementation of the United States’ method us ing time-varying, linear elasticities is deeply 
flawed and leads to a dramatic underestimation of the e ffects.  To clarify this step by step, I take as a 
starting point the US implementation of my Annex I methodology.
101   
 
72. The United States calculates time-varying,  linear elasticities by multiplying the slope 
coefficient in the FAPRI US crops model by real ne t revenue (net revenue divided by a GNP deflator) 
and dividing the result by base acreage.102  Net revenue used in this calculation is expected market 
revenue plus marketing loan gains.  Contrary to th e US approach and as discussed above, I use a set of 
elasticities that does not vary with time.  The fi rst chart below shows how the different elasticity 
estimates change the estimated acreage effects of removing PFC/DP, CCP/MLA, and crop insurance 
subsidies.103 
 
Chart 1 
Estimated Direct Acreage Effects of the Removal of Selected U.S. 
Subsidies Using U.S. Elasticity Estimates and Constant Elasticity 
Estimates (taking into account interaction effects)
00.511.522.53
1999 2000 2001 2002 2003 2004 2005 2006 2007
YearDirect Acreage Effect s
US Time-varying Estimates
 Constant Elasticity
 
 
73. I note again that these acreage effects are “fir st-round” effects that represent an intermediate 
calculation step towards estimating the new equili brium results.  Therefore, these figures are 
conceptually different from the equilibri um acreage effects reported in Annex I.104   
 
74. These effects are also not the same as the fi rst-round acreage effects that I have estimated 
using the Annex I model because of differ ing subsidy levels, as explained below. 
                                                      
101 All calculations are presented in  Exhibit Bra-399 (‘AcreageDiscrepancies.xls’) attached to the 
electronic version of this document. 
102 Base acres are the acreage planted under the baseline scenario. 
103 The chart presents total effects from all thr ee subsidy programs (PFC/DP, MLA/CCP and crop 
insurance) and controls for interaction effects. 
104 The Annex I effects take into account second round effects on price and quantities resulting from 
the first round effects and also the feedback from the CARD international cotton model leading to an 
equilibrium effect. WT/DS267/R/Add.2 
Page I-461 
 
 
  75. I note that the effects reported in chart 1 are qu ite similar to the pattern of effects presented by 
the United States, as reported in the charts  following paragraph 72 of the US critique.
105  I  h a v e  
included the aggregate effects from these three pr ogrammes, controlling for interaction effects 
between them, which accounts for the differences  between my figures and the sum of the figures 
presented by the United States. 
 76. I also note that, in chart 2, the pattern of acr eage effects estimated by my use of a constant 
elasticity model specification
106 is consistent with the pattern of the importance of these subsidies, i.e., 
the share of the total net revenue presented by these subsidies.   
Chart 2 
Reduction in Net Revenue from Elimination of AMTA/DP, 
MLA/CCP, and Crop Insurance Subsidies
0%5%10%15%20%25%30%35%40%
1999 2000 2001 2002 2003 2004 2005 2006 2007
YearPercentage
 
 
77. The results in chart 1 would suggest that mo st of the discrepancy between the first-round 
effects that lead to my Annex I results and those first-round effects calculated by the United States is 
due to different assumptions regarding elasticities.    
78. However, it is not true that the difference in the assumptions regarding the elasticities does 
primarily account for the difference.  First, there is  much less difference betw een the results from the 
two assumptions regarding the elasticities once an er ror in the United States’ method for calculating 
its time-varying, linear elasticities is corrected.
107  As documented in the Final USCROPS2003.xls 
file108, the United States calculates the supply elasticity by multiplying the slope parameter by real net 
revenue and then dividing it by base acreage.  Net revenue in this calculation includes marketing loan 
                                                      
105 They are not identical, as the United States used  the FAPRI January 2003 baseline provided with my 
cotton-focused model for these calculations.  The similarity  of the figures demonstrat es again the robustness of 
the model if different baselines are used. 
106 I have discussed this feature of a constant elasticity model in my comments on section V.A-V.C 
above. 
107 As discussed below, the United States also uses compares results from two different baselines. 
108 Exhibit US-115. WT/DS267/R/Add.2 
Page I-462  
 
gains and expected market revenue, but it does not  include crop insurance subsidies and the other 
government subsidies that are to be removed in this simulation.
109  As the United States correctly 
points out when they question whether I included th ese subsidies for the calculation of the percentage 
change in net revenue from subsidy removal110, these subsidies should also be counted towards net 
revenue when calculating the elasticity of supply.111  The mistaken assumption by the United States 
that I have not done so seems to have let the Un ited States to also leave these revenue components out 
of their calculation, thereby generating misleading results.  79. The following chart 3 shows that when the time-varying, linear elasticities are correctly 
calculated, then the choice of time-varying, linear elasticities or constant elasticities makes much less 
difference to the estimated impacts of subsidy re moval than suggested by the United States in the 
three charts following paragraph 72 of the US critique.   
Chart 3 
Estimated Acreage Effects of the Removal of Selected U.S. 
Subsidies  Using Corrected U.S. Elasticity Estimates and 
Constant Elasticity Estimates
00.511.522.53
1999 2000 2001 2002 2003 2004 2005 2006 2007
YearDirect Acreage Effect s
Corrected Time-varying
Estimates
Constant Elasticity
 
 
80. Finally, one last source of difference is that  the United States uses the model calibrated to the 
FAPRI 2003 baseline112 rather than the baseline used to estimat e the effects reported in Annex I.  The 
next chart (4) compares the actual direct acreage effects (first round effects) from removal of PFC/DP, 
CCP/MLA, and crop insurance subsidies based off the b aseline used to generate the Annex I results to 
those that would have resulted from using the correct  US time-varying, linear elasticity approach, the 
correct net revenue estimates and the same baseli ne.  As shown below, adopting the corrected 
United States procedure compared to my constant  elasticities approach would have resulted in a 
dramatic increase in the estimated impacts of remo ving these subsidies in 1999, somewhat higher 
estimates in 2000 and 2001, and a bit lower estimates in 2003 to 2007.   
 
                                                      
109 I note that I also made this point in my comments on section V.D above. 
110 See paragraph 68 of the US Critique. 
111 I note that I correctly included these subsidies. 
112 Provided by Brazil as an attachment to its 18 November 2003 Further Rebuttal Submission. WT/DS267/R/Add.2 
Page I-463 
 
 
Chart 4 
A Comparison of "First-Round" Acreage Effects Used to Generate 
Annex I Results and Those Supported b y United States-Su ggested 
Methodology
00.511.522.5
1999 2000 2001 2002 2003 2004 2005 2006 2007
YearDirect Acreage Effect s
Corrected Time-varying
Estimates
Direct Effects Used in Annex ISimulations
 
 
81. In sum, the bottom line of these calculations is that, if the United States had followed the 
approach that they and I agree would be correct  for calculating total net revenue and resulting time-
varying, linear elasticities, the resulting effects woul d not be significantly different whether simulated 
using constant elasticities or time-varying, linear el asticities.  I used the constant elasticity method 
because it makes the common sense as sumption that equal percentage changes in net revenue should 
give rise to similar changes in acreage.113  As noted above, this is also a standard approach in 
economic literature. 
 
82. Finally, I would like to stress that any rema ining differences from using different elasticity 
approaches are still on the level of “first round” e ffects, not equilibrium effects.  The resulting 
equilibrium effects would show results that ar e even less different based on the choice of time-
varying, linear versus constant elasticities.  In short, this choice does not meaningfully affect my 
Annex I results. 
 
Section VI. 
 
83. In paragraphs 73-74 of the US critique, the United States calls into questions my modelling 
approach for the marketing loan programme by d escribing it as revealing a “lack of knowledge of the 
programme, a broader deficiency in economics or some previously unknown modification of the 
FAPRI or CARD models”.  These allegations are baseless.  Indeed, the United States simply identified a typo in the transcription of equation 2 in  Exhibit Bra-313.  This transcription typo was not 
made in the electronic model and, therefore, does not affect the results of my Annex I model.  In the 
Annex I model, as in the FAPRI US crops model, the acr eage in year ‘t’ is affect ed by the loan rate in 
year ‘t’ (not the loan rate in ‘t-1’ as errone ously reported in Exhibit Bra-313).  I regret the 
inconvenience if this typo caused some confusion.    
                                                     
 
113 I have discussed this above providing the example of a $100 payments and base revenues of $200 
and $1000. WT/DS267/R/Add.2 
Page I-464  
 
84. It turns out that, contrary to what the United States implies in paragraph 74 of its critique, this 
typo introduced no ambiguity at all and would not have affected the results in any significant way.  The fact is that the loan rate for cotton is essentially constant over the full period  of analysis and, thus, 
the loan rate in period ‘t’ is equa l to the loan rate in period ‘t-1’.
114  Despite the tone of the paragraph, 
the model was clear, and the subscript ‘t’ or ‘t-1’ make no difference at all in this case.  Yet, I stress 
again that this typo only occurred in the transcript of equation (2) in Exhibit Bra-313, and not in the 
electronic versions of the Annex I model itself.  85. In paragraph 74 the United States makes a major issue of what amounts to their own semantic 
confusion.  The model that I use for the marketing loan benefits for cotton is as specified in equation 
(2) (noting the typo discussed above).  As noted by  the United States, the electronic versions of the 
models show that the marketing loan effect is b ased on the difference between the loan rate and what 
is labeled as the loan repayment ra te.  For crops other than rice and cotton the loan repayment rate is 
the US market price of the crop (a local market pric e).  For cotton and rice the loan repayment rate is 
an international price and, for cotton specifically, it is  the adjusted world price (AWP).  Thus, there is 
no discrepancy between Exhibit Bra-313 and the el ectronic documentation provided.  The formulation 
that I use for the marketing loan impacts is the same as the FAPRI US crops model.   
 86. Paragraph 75 of the US critique simply repeats their discussion from the section V.C., which I have addressed above.    
87. Finally, in paragraph 76 of its critique, th e United States alleges that I have taken an 
“illogical” approach on specifying the export effect of Step 2 payments that constitutes “a departure from the specifications in the FAPRI framework.”  Similar to my response to the US critique at 
paragraph 73, I regret that I made another typo in the subscript in Exhibit Bra-313 that was not 
included in the electronic version of the model and, therefore, does not affect my results.  Of course 
exports in period ‘t’ market the crop produced in th at period.  The US marketing years are calibrated 
so that this is generally true.  The United States is correct that, with the typo, equation (7) obviously makes no sense.  The subscript should have referred to production in period ‘t’ rather than ‘t-1’, 
which, of course, is the equation contained in my model as well as in the FAPRI US crops model.  
Despite the US tone in paragraph 76, I expect th e United States is aware that the specification of 
equations (7) and (8) follow the FAPRI model, as pr ovided in the electronic verification of both the 
FAPRI US crops model as well as my cotton-focuse d model.  Removal of the export step-2 and 
domestic step-2 subsidies increase effective demand for US cotton by lowering the effective net price paid by buyers.    
Section VII 
 
88. In paragraphs 77 through 80 of the US critique, the United States notes that the CARD international cotton model used different supply and demand elasticities than found in a paper by 
FAPRI-Missouri economist Seth D. Meyer.  In fact there are several sets of such elasticities in the 
literature.    
89. I relied on the CARD model and the CARD elast icities for four simple reasons.  First, the 
authors of the published studies that underlie the CARD international cotton model include Professors 
Babcock and Beghin, who are two of the most  widely-published and respected agricultural 
economists in the field.  The scholarly credibility of  their work and that of their CARD colleagues has 
been reinforced by scores of professionally-refereed  academic articles to their credit as well as awards 
and other accolades.
115  In terms of quality objective resear ch in agricultural commodity market 
economics and related areas, the CARD team has a long distinguished track record and a top notch 
                                                      
114 I note that the loan rate was 51.92 cents per pound in marketing years 1999-2001 and 52 cents per 
pound in all later marketing years, so ther e is a tiny difference between 2001 and 2002. 
115 Exhibit Bra-400 (List of Publications of Professors Babcock and Beghin). WT/DS267/R/Add.2 
Page I-465 
 
 
professional reputation.  By contrast, I do not know the professional work of Seth D. Meyer, and have 
not been able to locate any of his work in professionally-refereed publications.   
 90. Second, the CARD international cotton model w as the model that had been used by CARD in 
its respected work on other international commodity  analysis.  I would note that the various CARD 
international commodity models developed by Pr ofessors Babcock and Beghin and their colleagues 
have been used and relied upon in a number of diffe rent studies and been published in professionally 
referred publications.
116  
 91. Third, the elasticity parameters incorporated in the CARD model are well within the range of 
estimates found and applied for many agricultural co mmodities.  Finally, the United States provides 
no evidence to support a suggestion that the Meyer est imates are in any way more appropriate for the 
questions posed by this Panel than the estimat es imbedded in the CARD model.  Therefore, 
United States assertion that use of the CARD model somehow “exaggerates” impacts is simply unfounded.
117 
 
Conclusion 
 
92. The Annex I model adapted from the FAPRI US crops model and th e CARD international 
cotton model is an appropriate tool for both forw ard- and backward-looking “but for” counterfactual 
US agricultural policy analysis questions, such as those facing this Panel.  The conservative results 
from my Annex I model are well within any plau sible range and supported by other economic and 
econometric evidence.   93. Over the past months of this lengthy proceed ing, I have responded to each criticism raised by 
the United States at various occasions
118 and have explained why none affects the validity of my 
model or its results.   
 94. Professor Babcock and I have been fully transp arent about the manner in which the effects of 
the US subsidies have been simulated and I have  rebutted any US allegations that I made my 
modelling choices to achieve pre-conceived results.  To that end, I have explained each of my 
                                                     
 
116 Refereed articles using CARD international models: 
Fuller F., J. Beghin, J. Fabiosa, C. Fang, H. Matthey, and S. De Cara. “China’s Accession to the WTO. What Is 
at Stakes for Agricultural Markets?”  Review of Agricultural Economics  25(2) (2003): 399-414.  
Beghin J., B. El Osta, J. Cherlow, and S. Mohanty. “The Cost of the US Sugar Program Revisited,” Contemporary Economic Policy  21 (1) (2003): 106-116.  Reprinted in International Sugar Journal  105 (2003): 
293-303. 
Fuller F., J. Beghin, S. Mohanty, J. Fabiosa, C. Fang, and P. Kaus. " Ac cession of the Czech Republic, Hungary, 
and Poland to the European Union: Impacts on Agricultural Markets,” The World Economy  25(3) (2002): 407-
428. 
Fang C., and J. Beghin. "Urban Demand for Edible Oils and Fats in China. Evidence from Household Survey Data," Journal of Comparative Economics , 30 (4) (2002): 732-753. 
Fabiosa, J.F., D.J. Hayes and H.H. Jensen. 2002. "Technology Choices and the Economic Effect of a Ban in the 
Use of Over-the-Counter antibiotics in US Swine Rations." Food Control 13(2), 97-101. 
Hayes, D.J., H.H. Jensen, L. Backstrom, and J.F. Fabi osa. 2001. "Economic Impact of a Ban on the Use of 
Over-the-Counter Antibiotics in US Swine Rations." International Food and Agribusiness Management Review 
Vol 4., p 81-97. 
Fuller F., J. Beghin, S. Mohanty, J. Fabiosa, C. Fang, and P. Kaus. " The Impact of the Berlin Accord 
and European Enlargement on Dairy Markets," Canadian Journal of Agricultural Economics, 47 (5) (1999 –
appeared in 2000): 117-130. 
117 It is also useful to remind ourselves that larger  elasticies may mean smaller price impact, but also 
imply larger impacts on quantities and in particular la rger acreage elasticities mean more acreage in the non-
subsidized countries that is driven out of  cotton by the US cotton subsidy programmes. 
118 See inter alia US 7 October 2003 Oral Statement, paras. 26-50 and US 22 December 2003 
Comments on Brazil’s Econometric Model. WT/DS267/R/Add.2 
Page I-466  
 
modelling steps and offered my assistance to the Panel and the United States to facilitate the understanding of this complicated econometric model and its results.  95. The United States has criticized my choice of  baseline and I have provided analysis under 
various other baselines, demonstrating the robustn ess of my results.  The United States has also 
criticized my modelling choices for PFC, MLA, DP  and CCP payments, crop insurance and export 
credit guarantees.  I have provided evidence that  these choices were reasonable and, in fact, 
conservative.  Concerning the largest US subsi dy, the marketing loan programme, I note that the 
United States has not criticized its modelling.  I have explained that the use of lagged prices for a large-scale policy simulation analysis is standard and does not generate biased or exaggerated results 
– in fact, no futures prices could or  have been used in such models. 
 96. In sum, I stand by my conclusions in Anne x I “that very large subsidies provided to US 
producers and users of upland cotton have had and w ill continue to have large impacts on quantities of 
US cotton produced, used and traded and on both US and world prices of cotton”. WT/DS267/R/Add.2 
Page I-467 
 
 
ANNEX I-13 
  
COMMENTS ON US ANSW ERS TO QUESTIONS 
POSED BY THE PANEL FOLLOWING THE 
SECOND SUBSTANTIVE ME ETING OF THE PANEL 
 
28 January 2004 
  
TABLE OF CONTENTS 
 
I. TERMS OF REFERENCE ............................................................................................... 472 
 II. ECONOMIC DATA .......................................................................................................... 474  III. DOMESTIC SUPPORT .................................................................................................... 497 
 
IV. EXPORT CREDIT GUARANTEES................................................................................ 500  V. SERIOUS PREJUDICE .................................................................................................... 518  
VI. STEP 2 ..................................................................................................................... ........... 539 
 VII. REMEDIES .................................................................................................................. ...... 540 
 VIII. MISCELLANEOUS .......................................................................................................... 54 0 
 
IX. ADDITIONAL QUESTIONS POSED ON 23 DECEMBER 2003 AND 
 12 JANUARY 2004 ............................................................................................................ 545  WT/DS267/R/Add.2 
Page I-468  
 
Table of Cases 
 
Short Title Full Case and Citation 
EC – Sugar Exports I 
(Australia) GATT Panel Report, European Communities – Refunds on Exports of 
Sugar Complaint by Australia, L/4833 – 26S/290, adopted 
6 November, 1979 . 
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 . 
US – Gasoline Appellate Body Report, United States – Standards for Reformulated and 
Conventional Gasoline , WT/DS2/AB/R, adopted 20 May 1996. 
EC – Hormones Appellate Body Report, European Communities - Measures Concerning 
Meat and Meat Products (Hormones),  WT/DS26/AB/R, adopted 
13 February 1998. 
Australia – Salmon Panel Report, Australia – Measures Affecting Importation of Salmon, 
WT/DS18/R, adopted 6 November 1998. 
EC – Bananas Panel Report, European Communities – Regime for the Importation, Sale 
and Distribution of Bananas – Recourse to Arbitration by the European 
Communities under Article 22.6 of the DSU , WT/DS27/ARB, adopted 
9 April 1999. 
Brazil – Aircraft Panel Report, Brazil – Export Financing Programme for Aircraft, 
WT/DS46/RW, adopted 28 August 2000. 
Indonesia – Automobiles Panel Report, Indonesia – Certain Measures Affecting the Automobile 
Industry,  WT/DS54/R, adopted 23 July 1998.- 
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 Panel Report, Canada – Measures affecting the Exports of Civilian 
Aircraft,  WT/DS70/R, adopted 20 August 1999. 
Canada – Aircraft Appellate Body Report, Canada – Measures affecting the Exports of 
Civilian Aircraft,  WT/DS70/R, adopted 20 August 1999. 
Japan – Agricultural 
Products Appellate Body Report, Japan – Measures Affecting Agricultural 
Products, WT/DS76/AB/R, adopted 19 March 1999. 
Korea – Dairy 
Safeguards Appellate Body Report, Korea – Definitive Safeguard Measure on 
Imports of Certain Dairy Products , WT/DS98/AB/R, adopted 
12 January 2000. 
Canada – Dairy Appellate Body Report, Canada – Measures Affecting the Importation of 
Milk and the Exportation of Dairy Products, WT/DS103/AB/R, adopted 
27 October 1999. 
Canada – Dairy (21.5) (II) Appellate Body Report, Canada – Measures Affecting the Importation of 
Milk and the Exportation of Dairy Products, WT/DS103/AB/RW, 
adopted 17 January 2003.  
US – FSC Appellate Body Report, United States – Tax Treatment for “Foreign 
Sales Corporation”, WT/DS108/AB/R, adopted 20 March 2000. 
Australia – Leather Panel Report, Australia – Subsidies Provid ed to Producers and Exporters 
of Automotive Leather, WT/DS126/R,  adopted 16 June 1999. 
Australia – Leather 
(21.5) Panel Report, Australia – Subsidies Provid ed to Producers and Exporters 
of Automotive Leather, WT/DS126/RW,  adopted 11 February 2000. 
US – 1916 Act Appellate Body Report, United States – Anti-Dumping Act of 1916,  
WT/DS136/AB/R, adopted 26 September 2000. WT/DS267/R/Add.2 
Page I-469 
 
 
 
US – Wheat Gluten Panel Report, United States – Definitive Safeguard Measures on Imports 
of Wheat Gluten from the European Communities,  WT/DS166/R, adopted 
19 January 2001. 
US – Wheat Gluten Panel Report, United States – Definitive Safeguard Measures on Imports 
of Wheat Gluten from the European Communities,  WT/DS166/R, adopted 
19 January 2001. 
Chile – Agricultural Products (Price Band) Appellate  Body Report, Chile- Price Band System and Safeguard 
Measures Relating to Certain Agricultural Products, WT/DS207/AB/R, 
adopted 23 October 2002. 
US – CVD’s on EC Products  Appellate Body Report, United States – Countervailing Duties on EC 
Products,  WT/DS212/AB/R, adopted 8 January 2003. 
Canada – Aircraft II Panel Report, Canada – Measures Affecti ng the Export of Civilian 
Aircraft,  WT/DS222/R, adopted 19 February 2002. 
EC – Sardines Appellate Body Report, European Communities – Trade Description of 
Sardines,  WT/DS231/AB/R, adopted 23 October 2002. 
EC – Sardines Panel Report, European Communities – Trade Description of Sardines,  
WT/DS231/R, adopted 23 October 2002. 
Japan – Apples Appellate Body Report, Japan – Measures affecting the Importation of 
Apples, WT/DS245/AB/R, adopted 10 December 2003. WT/DS267/R/Add.2 
Page I-470  
 
List of Exhibits 
Second Declaration of Andrew Macdonald , 27 January 2004. Exhibit Bra- 401 
“Genetically Engineered Cotton Suffering from Production Problems”, 
Organic Consumers Organization, 11 January 2002. Exhibit Bra- 402 
“NCC will Intensify Emphasis for Quality, Yield Answers”, Western 
Farm Press, 3 March 2001. Exhibit Bra- 403 
“Benefits - BT Cotton”, Monsanto Imagine. Exhibit Bra- 404 
“Sample Costs to Produce Cotton Transg enic Herbicide- Resistant Acala 
Variety”, San Joaquin Valley, University of California Cooperative Extension, 2003. Exhibit Bra- 405 
“Cotton Cost-Return Budget in Southwest Kansas”, Kansas State 
University Agricultural Experiment Station and Cooperative Extensive 
Service, October 2003. Exhibit Bra- 406 
Documents on Cost of Production Insurance Plan for Cotton. Exhibit Bra- 407 
Export – Import Bank of the United States, St andard Repayment Terms. Exhibit Bra- 408 
Ex-Im Bank Fee Schedule.  Exhibit Bra- 409 
Export Insurance Services. Exhibit Bra- 410 
“The Federal Scoop: US Government  Financing for Service Exports”, 
Export America, May 2003. Exhibit Bra- 411 
Cotton and Wool Situation Outlook and Outlook Yearbook, USDA, 
November 2003, Table 16. Exhibit Bra- 412 
“Agricultural Cash Rents”, USDA, NASS, July 1999. Exhibit Bra- 413 
“Agricultural Land Values and Cash Rents,” USDA, NASS, 
August 2003. Exhibit Bra- 414 
“Agricultural Land Values”, USDA, NASS, April 1999. Exhibit Bra- 415 
“What is a Farm Bill?”, Congressional Research Service, Report for 
Congress, 5 May 2001. Exhibit Bra- 416 
“Commodity Program Entitlements: Deficiency Payments”, USDA, 
May 1993. Exhibit Bra- 417 
Washington Post v. United States Department of Agriculture, 943 F. 
Supp. 31 (D.D.C. 1996). Exhibit Bra- 418 
Allocation Calculations Based on Brazil’s Methodology and US 
Summary Data. Exhibit Bra- 419 WT/DS267/R/Add.2 
Page I-471 
 
 
Agricultural Outlook Tables, November 2003, Table 17. Exhibit Bra- 420 
ERS Briefing Room: Farm Income and Costs: US Farm Sector Cash 
Receipts from Sales of Agricultural Commodities, USDA. Exhibit Bra- 421 
Fruits and Tree Nuts Yearbook, USDA, October 2003, Table A-2. Exhibit Bra- 422 
Vegetables and Melons Yearbook, USDA, July 2003, Table 3. Exhibit Bra- 423 
Allocation Calculations Based on US Methodology and US Summary 
Data. Exhibit Bra- 424 
 WT/DS267/R/Add.2 
Page I-472  
 
Questions from the Panel to the parties – 
second substantive Panel meeting  
 
I. TERMS OF REFERENCE 
 
192. Regarding the interest subsidies and storage payments listed by the United States in its 
response to the Panel's Question No. 67: 
 
(a) Please provide a copy of the regulations  under which they are currently provided and 
under which they were provided during the marketing years 1996-2002;   
 (b) Please indicate whether there are any su ch payments which are not provided to 
implement the repayment rate for upland cotto n within the marketing loan programme.  
USA 
 
Brazil’s Comment: 
 
1. The United States finally confir ms that the “other payments” ( i.e., interest and storage 
payments) are not separate subsidies but rather a component of the marketing loan programme.1  The 
US acknowledgement eliminates any question whether su ch payments are within the Panel’s terms of 
reference.2  Brazil’s request for the establishment of a panel clearly includes “subsidies and domestic 
support … relating to marketing loans … providing dir ect or indirect support to the US upland cotton 
industry”.3  Based on the US answer, Brazil amends the table at paragraph 8 of its 22 December 2003 
Answers to Question 196 to add $65 million “other  payments” to the $832.8 million for marketing 
loans, for a grand total of $887.8 million in marke ting loans for MY 2002.  Brazil also makes similar 
changes for MY 1999-2001 that combine “other paym ents” and marketing loan payments in Table 1 
of Brazil’s 9 September 2003 Further Rebuttal Submission.   
 
193. Are interest subsidies and storage payments  already included in the amounts shown in 
your submissions to date for payments under th e marketing loan programme?  Has there been 
any double-counting?  BRA  
194. Does the United States maintain its position  stated in response to the Panel's Question 
No. 67 that "it would not be appropriate for the Panel to examine payments made after the date 
of panel establishment"?  If so, please explain wh y.  Can Brazil comment on this statement?  
BRA, USA 
 
Brazil’s Comment:  
2. Brazil’s 22 December 2003 response to this questio n, particularly its reference to the request 
for the establishment of the panel and existing juri sprudence, provides a comprehensive response to 
the points raised by the United States.
4  Brazil would offer the following additional comments to the 
US Answer.   
 
3. Contrary to the suggestion at paragraphs 3-4 of the US 22 December 2003 response, Brazil’s 
11 August 2003 response to Question 19 did not change  in any way the scope of Brazil’s request for 
the establishment of a panel (“Panel Request”).  Qu estion 19 asked Brazil to clarify the measures in 
respect of which Brazil sought relief.  Brazil’s an swer referred to one set of measures relating to 
                                                      
 1 US 22 December 2003 Answer s to Questions, para. 2. 
 2 US 30 September 2003 Further Submission, paras. 6-7;  US 7 October 2003 Oral Statement, para. 2.  
 3 WT/DS267/7, p. 2 (paragraphs relating to both the 2002 FSRI and the 1996 FAIR Act).   
 4 Brazil’s 22 December 2003 Answers to Questions, paras. 3-5.  WT/DS267/R/Add.2 
Page I-473 
 
 
Brazil’s serious prejudice claims as those involvi ng domestic support and export subsidy payments 
that had been made and were required to be made by the terms of the various statutory instruments 
identified in the Panel Request from MY 1999 th rough MY 2007.  Some of these payments are 
relevant to Brazil’s present serious prejudice clai ms for the period MY 1999-2002, and some of the 
payments are relevant to Brazil’s threat of seri ous prejudice claims for the period MY 2002-2007.  
But as Brazil indicated in its 22 December 2003 An swer to Question 195, the text of the Panel 
Request (as well as Brazi l’s 11 August 2003 Answer to Question 19) in no way limits the type or 
scope of the payments made under those statutory and regulatory instruments up to 18 March 2003.   
 4. It is curious that the United States in its 22 December 2003 response takes an opposite 
position in this dispute than the one it took as the complaining party in the only other WTO serious 
prejudice dispute.5  In Indonesia – Automobiles ,,6 the measures at issue provided for past, present, and 
future subsidy payments.  Indonesia argued, similar to the US arguments here, that the effects of 
expired measures could no longer be examined fo r the purposes of current serious prejudice under 
Articles 5 and 6 of the SCM Agreement.  Rejecting such a restrictive interpretation of Articles 5 and 
6, the panel noted that:  
 
If we were to consider that past subsidies were not relevant to our serious prejudice 
analysis as they were “expired measures” while future measures could not yet have caused actual serious prejudice, it is hard to imagine any situation where a panel 
would be able to determine the existen ce of actual serious prejudice.  Thus, we 
decline to proceed on the course suggested by Indonesia.
7  
At no time did the panel find, as Indonesia argued,  that only non-expired subsidies paid under the 
measures at issue up until the date of establishment of the panel should have been considered for the 
purposes of assessing serious prejudice.  Indeed, the US position in this dispute is practically the same 
as what Indonesia argued – and the US argued against8 – in Indonesia – Automobiles .  Brazil recalls 
the consistent US positions that (a) so-called “r ecurring” subsidies for MY 1999-2001 cannot be the 
basis for any serious prejudice claims9, combined with (b) its claim that only current 2002 subsidies 
up to 18 March 2003 ( i.e., eight months of subsidies for MY 20 02) can be the basis for any serious 
prejudice claims.10  Given these two arguments, in the words of the Indonesia – Automobiles  panel, 
“it is hard to imagine any situation where a panel would be able to determine the existence of actual 
serious prejudice”.    5. As in Indonesia – Automobiles , the legal statutes and regulations set out in the Panel Request 
that mandate the payment of subsidies did not change between 18 March 2003 and 20 January 2004.  
Indeed, the 2002 FSRI Act and its implementing regul ations will remain identical (unless amended by 
the US Congress) until the end of MY 2007.  No r has the 2000 ARP changed since 18 March 2003.  
The mandated subsidies from these statutes and regul ations were flowing before 18 March 2003 and 
they will continue to flow thereafter.  This case does not present the situation where a new legal 
instrument providing subsidies is enacted after the panel request was established.  Nor is it even a 
situation as in Chile – Agricultural Products (Price Band ,
11, in which a significant amendment to the 
legal instrument covered in the panel request w as made long after the panel was established.  The 
rationale of the Appellate Body in Chile – Agricultural Products (Price Band) and of the panel in 
Indonesia – Automobiles  is to allow the Panel to conduct the required objective assessment under 
                                                      
 5 US 22 December 2003 Answers to Questions, paras. 3-5. 
 6 Panel Report, Indonesia – Automobiles , WT/DS54/R. 
 7 Panel Report, Indonesia – Automobiles , WT/DS54/R, para. 14.206. 
 8 Panel Report, Indonesia – Automobiles , WT/DS54/R, paras. 4.44-4.50.  
 9 US 30 September 2003 Further Submission, para. 94. 
 10 US 11 August 2003 An swers to Questions, para. 134; US 22  December 2003 Answers to Questions, 
paras. 3-5. 
 11 Panel Report, Chile – Agricultural Products (Price Band) , WT/DS207/R, paras. 7.3-7.8. WT/DS267/R/Add.2 
Page I-474  
 
DSU Article 11 based on all the relevant facts.  Th ese decisions are also grounded in the need for the 
“prompt settlement” of disputes under DSU Article 3.4 – and are structures to avoid the endless filing of precision-timed annual disputes and the litigation ga ming strategy envisioned by the US argument.   
 
II. ECONOMIC DATA 
 
195. Does the United States wish to revise it s response to the Panel's Question No. 67 bis, in 
particular, its statement that "the United Stat es ... does not maintain info rmation on the amount 
of expenditures made under the cited programme s to US upland cotton producers"?  Did the 
United States make enquiries of the FSA in the course of preparing its original answer? USA 
 
Brazil’s Comment:   
 
6. Brazil notes that the US answer is larg ely unresponsive to the Panel’s question.   
 
7. The Panel’s question whether the United States “maintains information” is straight-forward.  
A correct answer would have been “yes”.  The ordina ry meaning of the word “maintain” is “practice 
habitually”, “observe”, “cause to continue (a  state of affairs, a condition, an activity)”.
12  T h e  
United States consistently misled Brazil and th e Panel by stating that USDA never collected, 
organized and maintained information regarding th e amount of contract payments paid to current 
producers of upland cotton.13  There is no doubt that these statements  were false and misleading.  It is 
significant that the United States has made no attempt to refute the evidence produced by Brazil in its 
18 November 2003 Further Rebuttal Submission regard ing the FSA forms completed by practically 
every US farm receiving contract or marketing loan payments.14  Nor can the United States dispute 
that all of the information collected from the contract  and acreage forms is (and was) maintained in a 
centralized database in USDA’s Kansas City fac ility. The rapid response of USDA’s Kansas City 
office to the rice FOIA request provides compelli ng evidence of the habitual practice of the US 
government in “maintaining” both contr act and planted acreage information.15  Indeed, the strongest 
proof of the United States’ misleading conduct is th e fact that USDA produced within three weeks the 
rice data in response to a FOIA request, and that the United States effectively admitted in its 18 and 
19 December 2003 and 20 January 2004 Letters to th e Panel that it maintains this information.   
 
8. In fact, the United States continues to mislead  the Panel in its 22 December 2003 Answer to 
Question 195.  It states that “because those payments are decoupled from current production, 
expenditures under such programmes are not trac ked by whether the recipient produces upland 
cotton”.16  Neither Brazil nor the Panel ever asked the United States how the programmes are 
“tracked”.  Rather, the Panel asked whether the Un ited States “maintains information” that would 
permit the calculation of the amount of such payments .  As Brazil has demonstrated in using the rice 
FOIA request17, in discussing its proposed methodology, and in using the incomplete summary data 
provided by the United States on 18/19 December 2003, this is a simple exercise.18   
 
                                                      
 12 New Shorter Oxford Dictionary, 1993 edition, p. 1669.   
 13 US 27 August 2003 Comments on Brazil’s Rebuttal Submission and Answers to Additional 
Question, paras. 20, 21, 27;  US 11 August 2003 Answer to Question 60;  The United States made similar 
statements during the consultations held between November 2002 and January 2003.  
 14 Brazil’s 18 November 2003 Further Rebuttal Submission, Section 2.2.   
 15 Exhibit Bra-368 (Second Statement of Christopher Campbell – Environmental Working Group, 
1 December 2003). 
 16 US 22 December 2003 Answers to Questions, para. 6.   
 17 Exhibit Bra-368 (Second Statement of Christopher Campbell – Environmental Working Group, 
1 December 2003). 
 18 Brazil’s 20 January 2004 Answers to Additional Questions, paras. 43-55;  Brazil’s 28 January 
Comments and Requests Regarding US Data, Section 9. WT/DS267/R/Add.2 
Page I-475 
 
 
9. The United States also asserts that “Braz il has also not asserted that the United States 
maintains information on the receipt of decoupled  payments for upland cotton base acres by upland 
cotton producers”.19 Once again, the United States misleads and misrepresents.  What Brazil asserted 
was that the United States maintains information in  a centralized database on the amount of contract 
acreage, contract yields, and upland cotton plantings  on contract acreage that would permit the ready 
calculation of the exact amount of contract paymen ts received by current producers of upland cotton.20  
The fact that the United States claims not to have performed the simple calculation from this data does 
not mean the United States does not maintain the in formation requested by Brazil and the Panel.    
 
196. Please provide the latest data for th e 2002 marketing year on payments under the 
marketing loan, direct payments, counter-cyclical payments, user marketing certificate (step 2) 
programmes and export credit guarantee programmes.  BRA, USA 
 
Brazil’s Comment: 
10. Brazil notes the new and increased figures ( $415 million) that the US 22 December response 
presented for Step 2 payments during MY 2002.  This figure should replace Brazil’s figure presented at paragraph 8 of its 22 December 2003 Answers to Questions.
21 
 
197. Please provide actual data for 2002/2003 for US exports, US consumption and per cent 
of world consumption to replace the projected data in Exhibit US-47.  If available, please provide projected data for 2003/2004 to replace the forecast data.  USA  Brazil’s Comment: 
 
11. The US 22 December 2003 response admits at not e 24 to the table at paragraph 15 that the US 
“consumption” standard for “world market share”, within the meaning of Article 6.3(d) of the SCM 
Agreement, includes tabulating US exports and US  imports and US domestic  consumption of US 
origin upland cotton.
22  This acknowledgement that imports are also included highlights the fact that 
the United States is double counting exports as part of the world market share of the exporting country 
and part of the world market share of the importing  country.23  Since internationally-traded upland 
cotton is not similarly included twice in the tota l “world consumption,” summing up the individual 
world market shares of all countries generates a total world market share vastly exceeding 100 per 
cent – a manifestly absurd result.24  As Brazil has stated before, th e Panel should not rely on the US 
interpretation of world market share as share of world consumption – the proper interpretation of the 
term refers to the share of world exports.25 
 12. Further, Brazil notes the new information presented by the United States concerning US upland cotton exports in MY 2002 and 2003.  These figures (11.9 million bales and 13.2 million bales 
respectively) would replace Brazil’s latest information, as contained in Exhibit Bra-302 (11.3 million 
bales and 11.2 million bales respectively).  Th ese new facts support Brazil’s threat of serious 
prejudice claim under Article 6.3(d) and footnote 13  of the SCM Agreement.  For both marketing 
                                                     
 
 19 US 22 December 2003 Answer s to Questions, para. 7. 
 20 Brazil’s 18 November 2003 Further Rebuttal Submission, Section 2.2. 
 21 See Brazil’s comment on US 22 D ecember 2003 Answer to Question 192(b) above concerning the 
treatment of “other payments.”  US  22 December 2003 Answer s to Questions, para. 2.  This US statement 
eliminates any doubt that “oth er payments” are within the Panel’s terms of reference. 
 22 US 22 December 2003 Answers to Questions, para. 15 (note 24). 
 23 See Brazil’s 2 December 2003 Or al Statement, para. 66.  See also Brazil’s comment on Question 
136, below.  
24 See Brazil’s comment on Question 136, below. 
 25 See Brazil’s 7 October 2003, Oral Statement, paras. 38-41; Brazil’s 18 November 2003 Further 
Rebuttal Submission, paras. 170- 173;  Brazil’s 2 December 2003 Oral Statement, para. 66. WT/DS267/R/Add.2 
Page I-476  
 
years, the US world market share, i.e., the US share of world exports, is or will be even above its 
previous three-year average, strengthening the co nsistent trend of increasing world market shares 
since MY 1996 (as well as since MY 1986).
26 
 
198. Please comment on the respective merits of  the price-gap calculations of MY1992 
deficiency payments in US comments of 27 August, footnote 14 ($867 million), and Brazil's 
response to the Panel's Question No. 67 ($812 million).  BRA, USA  Brazil’s Comment: 
 13. As indicated in Brazil’s 22 Decembers Answ ers to Questions, Brazil agrees with the US 
methodology of calculating MY 1992 deficiency payments
27 for purposes of an AMS approach, as 
developed by the United States in its 27 Augus t 2003 Comments on Brazil’s 22 August 2003 Rebuttal 
Submission.28 
 
14. However, Brazil strongly disagrees with the US proposition that the US AMS calculation of 
deficiency payments is “conservative”.29  The US calculation is the only appropriate one under 
paragraphs 10 and 11 of A nnex 3 of the Agreement on Agriculture.  The United States suggests that it 
should have used “eligible” acreage rather than “actual” acreage for the calculation.30  However, 
paragraph 10 of Annex 3 does not refer to elig ible acreage; it refers to “the quantity of production  
eligible to receive the applied administered price”.31  Production eligible to receive the applied 
administered price under the deficiency payment programme is calculated based on the eligible, 
participating acreage and the a pplicable programme yield (not the actual yield).  Any production 
exceeding the programme yields and any production on acreage that did not participate in the 
deficiency payment programme necessarily was not  eligible production.  Thus, the fact that 
theoretically more acreage coul d have participated in the upland cotton deficiency payment 
programme ( i.e., those farms opted to not participate) cannot artificially inflate the upland cotton 
AMS figure resulting from this programme.  Thus, any production that takes place on a farm not 
participating in the deficiency payment programme is not, in fact, eligible to receive the applied 
administered price and, therefore, cannot be part  of the AMS calculation under paragraphs 10 and 11 
of Annex 3.  199. What is the composition of the A-Index?  We do note footnote 19 and, for example, 
Exhibit BRA-11, but please explain more in detail how this index is calculated. BRA  200. Concerning the chart on page 37 of Brazil's further rebuttal submission, why did Brazil use a futures price at planting time?  Is this a relevant measure for assessing acreage response?  
BRA 
 201. Is data available to show the proportion of US upland cotton production sold under futures contracts, and the prices under those cont racts, at different times during the marketing 
year?  If so, please provide summarized versions to the Panel.  How does a futures sale impact 
the producer's entitlement to marketin g loan programme payments?  BRA, USA 
                                                     
 
 26 See Brazil’s 27 October 2003 Answers to Questions, paras. 123-129.  See also Brazil’s 22 
December 2003 Answers to Questions, pa ras. 133-139, concerning Brazil’s arguments regarding a “consistent 
trend.” 
 27 Brazil emphasizes that it does not agree with to applying any price-gap calculation method for the 
calculation of marketing loan payments for AMS purposes.  See inter alia  Brazil’s 27 August 2003 Comments 
on US Rebuttal Submission, paras. 10-16. 
 28 Brazil’s 22 December 2003 An swers to Questions, para. 10. 
 29 US 22 December 2003 Answer s to Questions, para. 19. 
 30 US 22 December 2003 Answer s to Questions, para. 19. 
 31 Emphasis added. WT/DS267/R/Add.2 
Page I-477 
 
 
 
Brazil’s Comment: 
 
15. Brazil notes that the study cited by the United States32 on upland cotton farmers’ use of 
hedging instruments is relatively dated (from 1996) a nd analyzes a time period during which prices 
were high.  Therefore, it may not reflect farmer s’ use of hedging instruments during the period of 
investigation.   16. In addition, Brazil notes that the futures ma rket is not only used as a hedging instrument by 
US farmers, but also by farmers in other pa rts of the world, including Brazilian farmers
.33  It is also 
used by speculators.34  It follows that the number of open contracts does not bear any relationship to 
the amount of the US upland cotton crop hedged by  futures contracts at the New York futures 
market.35 
 
202. Concerning paragraph 7 of the US oral st atement, are the expect ed cash prices shown 
for February only?  Can the US provide the prices  for January and March of each year as well?  
USA  Brazil’s Comment: 
 
17. Brazil notes that the expected cash price is not  the relevant price for purposes of analyzing the 
effects of the marketing loan programme.  Since any marketing loan benefits are calculated as the 
difference between the loan rate and the adjusted world price, it would be necessary to look at the 
expected adjusted world pri ce to draw any conclusions.
36  This point is admitt ed by the United States 
in paragraph 75 of its 22 December 2003 Answers to  Questions:  “… because farmers will receive a 
government payment for the difference between th e loan rate and the adjusted world price”.37 
 
18. Brazil also notes that the figures presented by the United States differ to a minor degree from the ones presented by Brazil.
38  Brazil does not know the reason for these minor differences and does 
not consider them to be material.  
203. Please provide information concerning th e organization, mandate, credentials and 
standing of FAPRI.  BRA 
 204. Which support to upland cotton is not captu red in the EWG data ref erred to in Brazil's 
18 November further rebuttal submission?  BRA  
205. Does the United States accept or agree with the EWG data submitted by Brazil?  If not, 
please explain your reasons.  USA  
                                                     
 
 32 US 22 December 2003 Answer s to Questions, para. 20. 
 33 Exhibit Bra-281 (Statement of Andrew Macdonald – 7 October 2003, para. 13). 
 34 Exhibit Bra-281 (Statement of Andrew Macdonald – 7 October 2003, para. 13). 
 35 The United States appears to suggest this relati onship in paragraph 21 of its 22 December 2003 
Answers to Questions. 
 36 See Brazil’s 2 December 2003 Oral Statement, Sec tion 5.2 for furt her details on this point. 
 37 Brazil addresses this point in greater detail in its comment on Question 212 and 213 below. 
 38 Compare  US figures at paragraph 22 of the US 22 December 2003 Answers to Questions with 
Brazil’s figures as reported in Exhibit Bra-356 (January – March Quotes of the December Futures Contract, 
Expected and Actual AWP and Cash Pr ice) and at paragraph 44 of Brazil’ s 2 December 2003 Oral Statement. WT/DS267/R/Add.2 
Page I-478  
 
Brazil’s Comment: 
 
19. As a preliminary comment, the United St ates answer does not rebut evidence from EWG’s 
expert analyst that the EWG data undercounts the amount of contract payment and marketing loan 
payment subsidies.
39  While it undercounts the data, the EWG data and the estimates generated by 
Brazil’s 14/16th methodology for MY 2002 are very close.  Brazil estimates the MY 2002 direct 
payments to current cotton producers at $454.5 million40, while the EWG data shows MY 2002 direct 
payments to current cotton producers of $451.4 million.41  Similarly, Brazil’s estimates that the 
MY 2002 CCP payments to current co tton producers were $935.6 million42, while the EWG data 
shows $893 million.43  Thus, as Brazil has argued, the EWG data  could certainly be used by the Panel 
as evidence supporting  Brazil’s 14/16th methodology, as explained previously and elaborated further 
below.    20. The US 22 December 2003 response asserts, at paragraph 25, that Brazil has overestimated the support to upland cotton from contract payments .  However, the summary US data produced on 18 
and 19 December 2003 seems to show that only between 10-20 per cent of US upland cotton 
producers planted upland cotton on non-cotton base acreage.
44  The EWG data showed that, in 
MY 2002, 15 per cent of the contract payments re ceived by current producers of upland cotton were 
from other contract acreage crops.45  The United States refused to produce any information regarding 
current upland cotton production on  non-upland cotton base acreage.46  However, the EWG database – 
although understating the amounts – supports a findi ng that farms producing upland cotton received a 
significant amount of non-upland cotton contract payments.  The EWG database therefore also 
supports an adverse inference by the Panel that th e actual data withheld by the United States would 
show even higher payments to current upland co tton producers than the EWG data or the Brazilian 
estimates.  It also demonstrates that the EWG data is not a comparable substitute for the information 
requested by the Panel on 8 December 2003 and 12 January 2004.47  The EWG data contains no 
information about acreage planted and, thus, does not a llow for any farm-specific allocation.  It is also 
incomplete in terms of actual payments made.  21. The US statement in paragraph 24 of it s 22 December 2003 response focuses on the large 
number of farms not receiving di rect payments.  What the United States largely ignores is the 
predominance of very small non-co tton producing farms that receive very small upland cotton base 
payments.  In fact, according to the US summary data, the 45 per cent of farms that received upland 
cotton contract payments (but did not produce upland cotton) received only between 15 and 25 per 
cent of the upland cotton contract payments.
48  It is undisputed that the bulk of upland cotton is 
                                                      
 39 Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 29-30; Exhibit Bra-316 (Statement 
of Christopher Campbell, paras. 12-15);  Brazil’s 22 December 2003 Answer to Ques tion 204, para s. 25-26.   
 40 Brazil’s 18 November 2003 Further Rebuttal Submission, para. 8. 
 41 Exhibit Bra-317 (Environmental Working Group Database: Table of Results, Table 2). 
 42 Brazil’s 18 November 2003 Further Rebuttal Submission, para. 8. 
 43 Exhibit Bra-317 (Environmental Working Group Database: Table of Results, Table 2). 
 44 See Electronic PFC and DCP Summary Files prov ided by the United States on 18 and 
19 December 2003 respectively, data for upland cotton production on farms without upland cotton base.  Brazil 
notes that this does not mean that these farms have  no contract base acreage whatsoever.  Instead, the 
United States has withheld that data (Brazil’s 28 January 2004 Comments and Requests Regarding US Data, 
Section 2). 
 45 Exhibit Bra-317 (Environmental Working Group Database: Table of Results, Table 5 (MY 2002)).   
 46 US 18 and 19 December 2003 Letters to the Pane l and US 20 January 2004 Letter to the Panel.  See 
also Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Sections 2-3. 
 47 See Brazil’s 28 January 2004 Comments and Reques ts Regarding US Data which details the 
information that could have been adduced with the information withheld by the United States.    
48 See Electronic PFC and DCP Summary Files prov ided by the United States on 18 and 
19 December 2003 respectively.  The upland cotton co ntract acreage on farms not producing upland cotton 
represents between 15 and 25 per cent of total upland co tton contract acreage.  Brazil has used contract acreage WT/DS267/R/Add.2 
Page I-479 
 
 
produced in very large operations49, and the EWG data confirms this.50  The EWG data shows that 
5 per cent of farms receiving the highest amounts of  upland cotton payments account for 41-45 per 
cent of marketing loan payments, i.e., 41-45 per cent of production.  The top 10 per cent of farms 
account for 55-58 per cent of production, and the top 20 per cent of farms account for 70-72 per cent 
of production.51 
 
22. The United States makes the assertion in para graph 25 of its 22 December 2003 response that 
in MY 2000-2002, “only  71, 77, and 74 per cent respectively of upland cotton base acreage payments 
went to farms that planted upland cotton”.  The United States claims this EWG data shows that Brazil’s 14/16
th methodology overestimates the amount of contr act payments to upland cotton.  This is 
incorrect.  First, even the incomplete EWG data  shows a very high percentage of upland cotton 
contract payments directly connected with the cu rrent production of upland cotton.  Second, the EWG 
data cannot be used to calculate the amount of non-upland cotton base payments attributable to 
current producers of upland cotton.52  Because the EWG data cannot match contract acreage and 
planted acreage of the same farm – it is payment da ta, not acreage data.  Given the fact that 10-20 per 
cent of US upland cotton is planted on farms wi thout upland cotton base (but some other base 
acreage)53, non-upland cotton contract payments would make up for the shortfall alleged by the 
United States.54  This further highlights the need for th e withheld US data.  The United States 
obviously knows what the data shows and can e asily calculate the amount of non-cotton base 
payments allocable to upland cotton production.  The US decision not to release even “non-confidential” data that would show the amount of allocated payments is strong evidence that it knows 
that the actual data is larger than the EWG and Brazilian estimates.   
 23. Finally, the United States in paragraph 26 argues that summary data it produced on 18/19 December 2003 shows that in MY 2002, 29. 4 per cent of total cropland on farms receiving 
upland cotton contract acreage payments was plan ted to upland cotton.  This figure is highly 
misleading, because it includes all of the acreage from farms with upland cotton base acreage that do 
not plant upland cotton.  When only farms that currently produce upland cotton are included, then about 50 per cent of the cropland acreage on these farms that actually produce upland cotton was 
planted to upland cotton.  Indeed, the United Stat es acknowledges this fact in paragraph 186 of its 
22 December 2003 Answers to Questions.  
24. Further, because of the US refusal to pr ovide the information requested by the Panel on 
8 December 2003 and 12 January 2004, it is impossible to determine from the US incomplete summary data the diversity of the cropland for upl and cotton producers accounting for the majority of 
upland cotton production.  Indeed, strong evidence th at upland cotton producers concentrate in upland 
cotton production is found in the EWG data, which s hows that 85 per cent of the contract payments 
                                                                                                                                                                    
 
as a proxy for payments, which is a conservative proxy, as presumably the less productive farms ( i.e. those with 
lower yields and thus fewer payment units per payments acre and fewer payments per acre) stopped producing 
upland cotton. 
49 Brazil’s 27 October 2003 Answer to Questions, paras 7-8. 
50 Exhibit Bra-317 (Environmental Working Group Database: Table of Results, Table 3). 
 51 Exhibit Bra-317 (Environmental Working Group Database: Table of Results, Table 3). 
 52 Without the farm-specific data the United States has refused to produce, it is impossible to know for 
certain what non-upland cotton cont ract payments received by current upland cotton producers are properly 
allocated to upland cotton production.    
53 Even for those farms that mainly plant on upland cotton base, additional non-upland cotton contract 
payments would need to be allocated.  See  Electronic PFC and DCP Summary Files provided by the 
United States on 18 and 19 December 2003 respectively.  See also Brazil’s 20 January 2004 Answers to 
Additional Questions, paras. 43-55 and Brazil’s 28 January 2004 Comments and Requests Regarding US Data, 
Section 9. 
 54 See Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Section 9.  WT/DS267/R/Add.2 
Page I-480  
 
received by upland cotton producers were upland cotton payments.
55  This supports USDA’s own 
reports on cotton specialization, which indicate that the considerable bulk of cotton is produced in 
farms that specialize largely in upland cotton production.56   
 
206. Please explain how the graph in paragraph 40 of the US further rebuttal submission was 
derived.  In so doing, please clarify whether the figures are on a cents per pound basis or some 
other basis.  What averaging method was used?  Can you prepare individual charts showing average US and Brazilian cotton prices for each  of those third country markets?  USA 
 
Brazil’s Comment: 
 
25. The United States asserts in paragraph 28 of  its 22 December 2003 response that “FOB is 
greater than FAS except where the vessel is not chan ged at the port of export, in which case the values 
are equal”.  As set forth in the Second Declaration of Andrew Macdonald, “in practice there is in fact 
no difference in cost between FAS and FOB, since th e ship loads and unloads the cargo, and thus, the 
difference in selling price between cotton which is  sold FAS and cotton which is sold FOB is 
negligible”.
57  Further, Mr. Macdonald agreed with the US statement quoted above, but noted that 
“vessels are rarely ‘changed’ in the port,” and even if they were, “there would be an insignificant 
interest loss and thus, no difference between FAS and FOB values”.58  Brazil directs the Panel to 
Mr. Macdonald’s Second Declaration, in which he  provides additional details supporting his expert 
opinion.59  
 
26. Brazil notes that the United States does not a ppear to have any difficulty with comparing 
Brazilian FOB prices with US FAS prices since it mak es this comparison in the graph in paragraph 30 
of its 22 December 2003 Answers to Questions.  B ecause of the negligible difference between these 
two types of prices based on export value, Brazil agrees that there is no difficulty in comparing such 
FOB and FAS prices.  This would include the vari ous pricing comparisons between US and Brazilian 
prices set out in Brazil’s 22 December 2003 Answers to Questions 233 and 235.   27. Finally, Brazil notes the US acknowledgement  that the United Stat es used only a “simple 
average unit price” comparison between US and Brazilian prices in paragraph 30 of its 22 December 2003 response.  As Brazil has indicated, fro m a statistical point of view this is a totally 
inappropriate way to compare prices because of the enormous distortions it creates.
60  T h e  
United States should have used “weighted average” unit value pricing comparisons.    
207. Please indicate whether any of the measures challenged in this dispute obliges  cotton 
farmers to harvest their crop in order to receive the benefit of the programme (subsidy).  USA 
 
Brazil’s Comment: 
 
28. The United States confirms that the marketi ng loan programme requires farmers to harvest 
their upland cotton to receive marketing loan payments.
61  In addition, the Step 2 programme requires 
                                                      
 55 Exhibit Bra-317 (EWG Database: Table of Results, Table 5, MY 2002, top line, far right side under 
“percentage of total contract payments”, 85.07 per cent).  
 56 Brazil’s 27 October 2003 Answer to Question 125(a), paras. 7-10.   
 57 Exhibit Bra-401 (Second Declaration of Andrew Macdonald, 27 January 2004, p. 2).   
 58 Exhibit Bra-401 (Second Declaration of Andrew Macdonald, 27 January 2004, p. 2). 
 59 Exhibit Bra-401 (Second Declaration of Andrew Macdonald, 27 January 2004). 
 60 See following webpages which discuss, in a variety of contexts, the significant distortions that can 
occur with statistics by using simple aver ages as opposed to weighted averages: 
http://www.statcan.ca/english/edu/pow er/ch13/estimation/estimation.htm ;  
http://www.grantedc.com/publications/Grant%20C o%20Washington%20W&FB %20Report%202003.pdf 
 61 US 22 December 2003 Answer s to Questions, para. 31. WT/DS267/R/Add.2 
Page I-481 
 
 
the use or export of upland cotton to trigger payments.62  Brazil notes that the crop insurance 
programme requires farmers to plant  upland cotton to receive premium subsidies.  No harvest is 
required from farmers to receive indemnity paym ents, which in turn may trigger additional 
reinsurance payments to the private insuran ce companies running the crop insurance programme.63 
 
 
208. Please provide data for the marketing years 1992 and 1999-2002 of the "quantity 
of production to receive the applied administered price" ( Agreement on Agriculture , Annex 3, 
paragraph 8) for purposes of a price-gap calcul ation of support through the marketing loan 
programme. USA  
 
Brazil’s Comment: 
 
29. Brazil notes that this question direc tly implicates earlier evidence and arguments 
demonstrating that the United States has never us ed a “price-gap” methodology for calculating its 
marketing loan portion of AMS, inter alia , for upland cotton.64  Rather, the United States has always 
used and notified a budgetary methodology in accounting for marketing loan payments (marketing 
loans, loan deficiency, certificate paym ents, and interest & storage payments).65  In particular, when it 
agreed with other WTO Members on what the US “b ase level” would be for purposes of Total AMS, 
the United States chose to calculate marketing lo an payments using a budgetary approach.   
 
30. This is easily seen by first examining Exhibit Bra-19166, which is a document in which the 
United States notified “supporting material related to commitments on agricultural products contained 
in Schedule XX - United States”.  Marketing loan pa yments for upland cotton are listed on page 20 of 
the document.  The document lists the US loan de ficiency payments for upland cotton for MY 1986 as 
$126.860 million, for MY 1987 as $0.364 million, and for MY 1998 as $42.038 million.  Comparing 
these figures with the actual budgetary outlays for lo an deficiency payments in MY 1986-88, as set 
out in Exhibit Bra-4, show the same figures (rounded out).  Similar budgetary outlays are used for 
marketing loan gains and interest and storage paym ents that are also related to “marketing loan 
payments”.  In addition, Exhibit Bra-19167 contains an Annex which is the “Supporting Table for 
Cotton:  Deficiency Payment Calculation for GATT AMS.”  This table is there because the 
United States used the “price-gap” formula of  Annex 3, paragraph 10 of the Agreement on 
Agriculture to calculate the AMS for deficiency pa yments.  But no such supporting table exists for 
marketing loan payments, because a budgetary approach was used.  In short, there is no doubt that the 
United States Total AMS Commitments were based, inter alia , on the US decision to use budgetary 
outlays for calculating its marketing loan payments for upland cotton.    31. The US decision under Annex 3, paragraph 10 to use budgetary outlays instead of the price-
gap formula in calculating upland cotton AMS for mark eting loan payments is legally binding on the 
United States.  Annex 3, paragraph 5 stat es that “[t]he AMS calculated as outlined below [i.e., 
paragraphs 6-13 of Annex 3] shall constitute the base level for the implementation of the reduction 
commitments on domestic support.”  The marketing loan budgetary decision reflected in G/AG/AGST/USA was incorporated into the US schedul es and set the US “base level” of total AMS.  
The title of the G/AG/AGST/USA suggests its lega lly binding character – “Supporting Tables 
Relating to Commitments on Agricultural Products in  Part IV of the Schedules.”  These “supporting 
                                                     
 
 62 US 22 December 2003 Answer s to Questions, para. 31. 
 63 Brazil’s 24 June 2003 First Submission, paras. 80-83. 
 64 See Brazil’s 27 August 2003 Comments on US Rebuttal Submission, paras. 10-16. 
 65 See, e.g., Exhibit Bra-191 (G/AG/AGST/USA, p. 20); Exhibit Bra-47 (G/AG/N/USA/43, p. 20); 
Exhibit Bra-150 (G/AG/N/USA/10, p. 18).   
 66 G/AG/AGST/USA, p. 20. 
 67 G/AG/AGST/USA, p. 21-22. WT/DS267/R/Add.2 
Page I-482  
 
tables” were the basis upon which the “final bound co mmitment level specified in Part IV” of the US 
schedule was determined.    32. Annex 3, paragraph 5 of the Agreement on Agri culture indicates that the United States is 
bound by its initial decision to calculate AMS usi ng a budgetary approach (as permitted in Annex 3, 
paragraph 10 of the Agreement on Agriculture).  Th is conclusion follows from the text of Article 6.3 
of the Agreement on Agriculture:    
A Member shall be considered to be in compliance with its domestic support 
reduction commitments in any year in wh ich its domestic support in favour of 
agricultural producers expressed in terms of Current Total AMS does not exceed the 
corresponding annual or final bound commitment level specified in Part IV of the 
Member’s Schedule. 
33. Further, Article 3.2 provides that “[s]ubject to the provisions of Article 6, a Member shall not 
provide support in favour of domes tic producers in excess of commitment levels specified in Section I 
of Part IV of its Schedule”.  The United States’ “final bound commitment level specified in Section I 
of Part IV” of the US Schedule is currently $19.1 bi llion.  Nothing in Article 6 or any other provision 
of the Agreement on Agriculture permits a Member such as the United States to change its Annex 3, 
paragraph 10 choice of budgetary or price ga p calculations for the purposes of calculating current 
AMS.   
34. Brazil has previously detailed the reasons why permitting Members to reverse the Annex 3, 
paragraph 10 choice to calculate current AMS for a product would make the disciplines of Article 3.2 
and 6.3 of the Agreement on Agriculture inutile.
68  The United States never denied it has always 
notified marketing loan payments using a budge tary approach, and has never rebutted Brazil’s 
arguments that permitting a Member to change its el ection under Annex 3, para graph 10 to calculate 
current AMS would lead to the nullification of a Memb er’s obligations under Articles 3.2 and 6.3.  
Indeed, the US Answer to Questi on 208 provides the best example of such a nullification, when the 
United States admits that “if the applied admi nistered price for marketing years 1999-2002 were 
compared to the 1992 applied administered pri ce, the resulting negative numbers . . . show the 
decrease in the level of support from MY 1992.”69  Translated, this means that the huge increase in 
marketing loan payments to $2.5 billion in mark eting loan payments in MY 2001 would not be 
counted towards US total AMS for MY 2001.   
 35. Brazil emphasizes again that while the United St ates makes what are theoretical arguments in 
this dispute, its WTO partners properly rely on the past and most recent US notifications.
70  And these 
notifications consistently demonstrate that the United States properly treats the budgetary outlays  for 
marketing loan payments for cotton as well as other pr ogramme crops as part of its total current AMS.  
These notifications further demonstrate that US  budgeted outlays for marketing loans have 
significantly increased in MY 1999-2002 over the level of such loans in MY 1992.71    
 36. In light of the arguments and evidence set out  above, there is little need for Brazil to comment 
on the calculations provided by the US 22 December  2003 response.  Brazil notes that the US applies 
a contradictory approach to the quantity of elig ible production for MY 1992 and MY 1999-2002.  For 
example, the United States uses actu al production figures calculated from harvested acreage for MY 
1999-2002, while it calculates eligible production for MY 1992 as planted eligible acreage multiplied 
                                                     
 
 68 Brazil’s 27 August 2003 Comments on US 22 August 2003 Rebuttal Submission, paras. 10-16.   
 69 US 22 December 2003 Answer to  Question 208, para. 37.   
 70 See, e.g., Exhibit Bra-191 (G/AG/AGST/USA, p. 20); Exhibit Bra-47 (G/AG/N/USA/43, p. 20); 
Exhibit Bra-150 (G/AG/N/USA/10, p. 18).   
 71 Brazil’s 9 September 2003 Further Submission, Table 1.   WT/DS267/R/Add.2 
Page I-483 
 
 
by the yield on harvested  acreage.72  This grossly overstates the eligible production.  In fact, the US 
“eligible production” figures even overstate actual  production in MY 1992 by 432,333 bales.73  The 
actual eligible production for MY 1992 was 6.485 billion pounds74, not the 7.748 billion calculated by 
the United States.75  When compared to the actual production eligible for marketing loans in MY 
1999-2002, the Panel can see that significantly greater US upland cotton production was provided marketing loan benefits in each of tho se later years compared to MY 1992.   
 209. It is understood that the data in the graph in paragraph 5 of the US oral statement are 
as at harvest time, while the data in the graph in  paragraph 39 of Brazil's oral statement are as 
at planting time. Please explain why the trend of US acreage increase/decrease differs between 
these two graphs. BRA, USA  
 
Brazil’s Comment: 
 
37. Brazil reemphasizes its position that only pl anted acres constitute a reliable measure for 
planting decisions in a single country, such as the United States.
76  This is highlighted by the fact that 
changes in planted and harvested acreage for the United States during MY 1996-2003 do not move in 
parallel.  Contrary to the US assertion that the “movements in acreage figures are fairly similar ”77, in 
fact, the US planted and harvested acreage changes are in entirely opposite directions in 3 out of 
8 marketing years78, vary by great magnitudes in a further 3 out of 8 marketing years79, and are “fairly 
similar” only in 2 out of 8 marketing years.80  This overall picture can hardly be called “fairly similar” 
movements.  Brazil refers the Panel to its 22 December 2003 Answer to Question 21081, 
demonstrating that in fact US planted acreage and a proxy for worldwide planted acreage move in 
quite opposite directions, demonstrating that US pr oducers of upland cotton do not take their planting 
decisions based on the same market-based price factors as other producers worldwide.82 
 
210. Are worldwide planted acreage figures available?  BRA, USA 
 
Brazil’s Comment: 
 
38. Brazil agrees that no data on harvested acres is available on a worldwide basis.  However, 
Brazil strongly disagrees that the only possible co mparison between US and worldwide upland cotton 
acreage needs to be done on the basis of harvested acreage.83  As discussed before, the only valid 
measure of farmers planting decisions is planted acres, as harvested acres figures are distorted by 
variations over time in the abandonment rate.84  Therefore, it is critical to use planted acreage for the 
                                                      
 72 US 22 December 2003 Answer to Question 208, paras 33-35.   
 73 Compare  US figure at paragraph 33 of its 22 Decem ber 2003 Answers to Questions (16,142,333 
bales) with the actual production in MY 1992 of 15,710,000 bales, as reported in Exhibit Bra-4 (“Fact Sheet: 
Upland Cotton”, USDA, January 2003, p. 4). 
 74 11,164,726 planted eligible acres times 0.837 (share of planted acres that was harvested (Exhibit Bra-
4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4 (Abandonment Rate))) times 694 pounds per 
harvested acre (Exhibit Bra-4 (“F act Sheet: Upland Cotton,” USDA, January 2003, p. 4 (Yield))). 
 75 US 22 December 2003 Answer s to Questions, para. 33. 
 76 Brazil’s 27 October 2003 Answers to Questions, paras. 27-28;  Brazil’s 18 November 2003 Further 
Rebuttal Submission, para. 87;  Brazil’s 22 December 2003  Answers to Questions, paras. 30-32. 
 77 US 22 December 2003 Answer s to Questions, para. 39. 
 78 MY 1997, 1999, 2000. 
 79 MY 1996, 1998, 2001. 
 80 MY 2002, 2003. 
 81 Brazil’s 22 December 2003 Answers to Questions, para. 31-36. 
 82 Brazil’s 18 November 2003 Further Rebuttal Submission, Section 3.4 (containing further references). 
 83 US 22 December 2003 Answer s to Questions, para. 40. 
 84 Brazil’s 27 October 2003 Answers to Questions, paras. 27-28;  Brazil’s 18 November 2003 Further 
Rebuttal Submission, para. 87;  Brazil’s 22 December 2003  Answers to Questions, paras. 30-32. WT/DS267/R/Add.2 
Page I-484  
 
United States in any analysis of congruence in pl anting decisions between the United States and the 
rest of the world.  However, harvested acres may serve as a proxy for planted acreage on a worldwide basis.
85  On this basis, no congruence exists betw een the planting decisions of US upland cotton 
farmers and upland cotton farmers worldwide.86  But, even if one were to look at harvested acres for 
both US and worldwide planting decisions, there is no congruence in the movements.87 
 
211. Brazil presents a graph in paragraph 59 of its further rebuttal submission indicating the 
increasing cumulative loss incurred by cotton pr oducers.  Please comment on the argument that 
US cotton producers could not continue operati ng without subsidies.  In particular: 
 
(a) to what extent does the use of 1997 surv ey technological coefficients with annually 
updated values affect the results?  
 Brazil’s Comment: 
 39. Brazil reads the Panel’s question as requesting the United States to provide an estimate of 
how much the updated 2003 USDA ARMS 1997 survey  overstates the $872 per acre deficit between 
total costs and market revenue for the period MY  1997-2002.  The United States’ 22 December 2003 
response declines to provide any dollar per acre estim ate.  Indeed, the US response appears to raise 
more questions than it provides answers.   
40. The United States has claimed that the 2003 USDA cost data used by Brazil in calculating the 
$872 per acre deficit
88 cannot be relied on by the Panel.89  Because this is a fact asserted by the 
United States, it has the burden of establishing it.90  The Panel should expect the United States, which 
employees the USDA personnel who created the 2003 cotton update of the 1997 ARMS study, to 
have provided statements or other evidence from thes e cost experts explaining why the 2003 update is 
unreliable and cannot be used by the Panel.  No su ch statements were provided.  Brazil has examined 
the websites of USDA and the US National Cotton Council carefully and cannot find any warnings 
that the 2003 upland cotton costs and revenue are unreliable.  Indeed, the current NCC website 
provides a direct link to the ERS-USDA costs an d returns website for each major US region.91  
Presumably, the NCC intended its Members to rely on such data or they would not have included the 
link.  Further, the United States neglected to in form the Panel that the 2003 upland cotton cost and 
revenue data has benefited from a “new costs of  production estimation methodology” implementing 
the American Agricultural Economics Association (AAEA) Recommendations.92  It is reasonable for 
the Panel to find that the 2003 cotton updates to the 1997 ARMS study using this new AAEA-recommended methodology results in a more accurate  estimate of cotton costs and revenues – not a 
less accurate estimate.     
 
41. What the United States attempts to prove  in its 22 December 2003 An swer to Question 211(a) 
is that the use of biotechnology cotton (“BT cotton” ) has lowered costs, and that somehow these lower 
costs were not reflected in the annual updated USDA co sts and returns surveys.  It is noteworthy that 
the United States now admits that the USDA personnel updating the 1997 ARMS study properly 
                                                     
 
 85 Brazil’s 22 December 2003 An swers to Questions, para. 32. 
 86 Brazil’s 22 December 2003 An swers to Questions, para. 33. 
 87 Brazil’s 22 December 2003 An swers to Questions, para. 34. 
 88 Brazil’s 18 November 2003 Further Rebuttal Submission, Section 3.1. 
 89 See e.g. US 22 December 2003 Answers to Questions, para. 43. 
 90 See e.g. Appellate Body Report, Japan – Apples , WT/DS245/AB/R, para. 157  (“It is important to 
distinguish, on the one hand, the principle that the complainant must establish a prima facie case of 
inconsistency with a provision of a covered agreement from, on the other hand, the principle that the party that 
asserts a fact is responsible for providing proof thereof.”). 
 91 htt://risk.cotton.org/CotBudgets/cotbudget.htm, visited 20 January 2004. 
 92 See www.ers.usda.gov/briefing/FarmIncome/Glossary/compare.htm  visited 28 January 2004.  A link 
to this ERS page is provided on the NCC Webpage.   WT/DS267/R/Add.2 
Page I-485 
 
 
updated the cost of production data to show increased upland cotton seed costs.93  But, without citing 
any proof, the United States asserts that these same personnel that properly updated the cotton cost 
data (to reflect increased (BT-cotton and overall) seed costs) improperly failed to “capture the cost 
savings from technological changes that alter the mix of production activities and inputs.”94   
 
42. The credibility of this assertion is difficult to accept given the fact that the US government 
during the period of investigation touted  the productivity benefits of using, inter alia , BT-cotton.95  
Indeed, an Economic Research Service-USDA Report updated through 27 October 1999 analyzed 
ARMS data concerning the use of BT cotton.96  The ERS report identified increased yields and lower 
use (and hence costs) of pesticides as indicated below:  
 
Comparison of mean yields shows that in most cases (4 of 7 region/year cases for which data were sufficient) adopters of Bt  cotton appear to obtain statistically 
significant higher yields than nonadopters.  Although less prevalent, similar results (2 of 5 cases) were observed for Bt corn. For the case of herbicide-tolerant crops, the 
results are mixed: only for a few regions and in some years are yields higher for 
adopters. Most of the time (4 of 5 for corn, 9 of 13 for soybeans, 3 of 5 for cotton), differences in yields are statistically insignificant.  
Comparison of mean pesticide acre-treatmen ts for 1997 shows that in most cases (2 
of 3) the adoption of Bt cotton reduces treatments of insecticides normally used on the pests targeted by Bt.  In 1 of 3 cases, total treatments for all other cotton pests are 
higher for adopters than nonadopters. Insecticide treatments for Bt-targeted pests on 
corn are significantly lower for Bt users than for nonusers. Adoption of herbicide-
tolerant varieties accompanied statisti cally significant reductions in herbicide 
treatments in 4 of 8 cases across all crops, mostly for soybeans.  
It is difficult to imagine how USDA ERS personnel wo rking with ARMS survey data could arrive at 
the conclusions of (a) higher yields for BT cotton and (b) lower use of pesticides and chemicals in 
1999 as detailed above, but the USDA personnel upda ting the cotton cost data in 1999-2002 could 
not.  This evidence suggests that because information on the cost savings for using BT cotton were 
widely available for farmers and the ERS, then th ey would also be known to those updating the cotton 
cost survey.  Thus, the Panel can conclude that  the published USDA cost survey properly identified 
both cost increases and cost savings.  
 
43. Finally, to attempt to answer the Panel’s question concerning the graph at paragraph 59 of 
Brazil’s 18 November 2003 Further Rebuttal Submissi on, Brazil analyzed the extent to which any 
alleged overstating of costs could impact on the hug e $872 per acre cost-revenue gap.  The answer, as 
outlined below, is very little.   
 
44. To conduct this analysis, Brazil first assume d, contrary to the evidence outlined above, that 
the USDA employees updating the cost savings data
97 “got it wrong”.  Brazil then determined that the 
largest published estimate of the possible cost  savings for using BT-cotton was $20 per acre.98  The 
                                                      
 93 US 22 December 2003 Answer to  Question 211(a), para. 45.   
 94 US 22 December 2003 Answer to Question 211(a), para. 45. 
 95 See http://www.ers.usda.gov/publications/tb1906/tb1906b.pdf  visited 28 January 2004; US 
22 December 2003 Answers to Qu estions, para. 44 (note 44). 
 96 http://www.pestlaw.com/x/guide/1999/USDA-19990625A.html visited 28 January 2004. 
 97 Brazil’s 27 October 2003 Answers to Questions, p. 56 (setting out USDA data).  
 98 Exhibit Bra-404 (Monsanto Imagine, “Benefits – BT Cotton” downloaded from 
www.monsanto.co/monsanto/layout/our_pledge/bnefits/bt_cotton.asp  visited 28 January 2004).  The document 
concludes that the average US cotton farmer using BT –cotton has “average net incomes . . . increased by $50 
per hectare in the United States” The Monsanto assertio n of $50 per hectare translates into $20.2 per acre 
because one hectare constitutes 2.47 acres.   WT/DS267/R/Add.2 
Page I-486  
 
next step was to determine that between 1997-20 02 an average of 58 per cent of cotton acreage was 
planted to BT-cotton between MY 1998-2002.  This is reflected in the graph below:
99   
 
 
 
45. With 58 per cent of US acreage between 1998-2 002 was planted to BT-cotton, this meant that 
the average per acre national cotton cost savings was $12 between 1997-2002 (0. 58 x $20).  But recall 
that the United States answer clai ms that the USDA 1998-2002 cost da ta reflects the cost increases for 
BT-cotton seed, but not the cost savings from use of  fewer chemicals.  Therefore, to reflect the net 
cost savings, Brazil further deducted the differe nce in between increased cotton-seed in 1997 and 
between 1998-2002 ($12.8 per acre).100  Thus, in the best-case US scenario, the total amount of 
average cost savings allegedly not reflected in published USDA data was $24.8 per acre.  
 
46. Brazil recalls that the total six-year deficit  between total costs and total revenue from USDA’s 
2003 revenue and costs estimates ( i.e., the updated 1997 ARMS Study) is $872 per acre.101  Brazil 
then assumed (1) the accuracy of the $12 per acre net cost reduction from using BT-cotton, (2) that 
the $12 per acre net cost savings existed for th e entire 1998-2002 period, and (3) that USDA cost 
experts updating the 1997 ARMS Study in 1998-2002 were not aware of such cost reductions or 
improperly failed to include them in the latest USDA update of cotton revenue and costs, then the 
1997-2002 deficit between USDA’s tota l reported costs and total mark et revenue would still be $748 
per acre.102   
 47. In sum, while Brazil believes that at least  some of the assumptions listed above are highly 
questionable, the “best case” that the United States  could have put forwar d (but did not) shows 
continued huge long-term deficits of $748 per acre be tween US producers’ total costs and their market 
revenue.  In short, the United States has not met its burden of proving that its own USDA data was 
hopelessly flawed.  Brazil and the Panel can prope rly rely on the 2003 cotton cost and revenue data 
showing either $872 or $748 average per acre defici ts between costs and ma rket revenue during MY 
1997-2002.  Both figures reflect huge gaps between mark et revenue and total costs of production.  As 
Brazil has argued, this evidence strongly supports the significant impact of the US subsidies on US 
production, exports and on world prices.   
                                                     
 
 99 http://www.whybiotech.com/index.asp?id = visited 28 January 2004. 
 100 This was done by subtracting the amount of increased seed costs in Exhibit Bra-323 (Costs and 
Returns of US Upland Cotton Farmers, MY 1997-2002) from MY 1997 – this was  0 in 1998, $1 in 1999, $13 in 2000, $20 in 2001, and $30 in 2002.   
 
101 Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 59-62. 
 102 This figure has been calculated by applying the $12 per acre time five years (which is conservative, 
because in earlier years less Bt-cotton was planted) a nd also deducting the yearly  increases in seed costs 
(compared to the 1997 basis), since the $12 represented a net cost saving, i.e., net of cost increases to due higher 
seed costs.   WT/DS267/R/Add.2 
Page I-487 
 
 
 
(ii) Comment on US Argument concerning Canada Dairy    
 
48. Finally, Brazil notes the US attempt to di stinguish the Appellate Body’s decision in Canada – 
Dairy in paragraph 42 of the US 22 December 2003 Answer to Question 211.  In assessing the 
credibility of these new US arguments, it is instructiv e to review what the United States argued before 
the Appellate Body in Canada – Dairy.  First, on the issue of whether average cost of production data 
should be used, the United States made the following arguments in Canada – Dairy :   
 
[T]he Panel correctly recognized that an individual producer cost of production 
benchmark was unworkable.  The Panel noted that governments rarely have the sort 
of detailed, producer-specific information th at such a test would require.  Indeed, as 
discussed below, Canada itself was unable to supply the necessary data regarding 
individual producer participation in the CEM market to support its claim that no payments were being made.  …  In sum, the Panel’s reliance on the CDC’s average 
total cost of production data as a ‘sufficien t, albeit conservative, approximation of the 
average total cost of production of the Canadi an dairy industry’ is consistent with the 
Appellate Body’s instruction to sue an aver age total cost of production benchmark in 
this case. 
49. The Panel will recall that the United States in this dispute has argued that using an average 
total cost of production was not appropriate.
103  Yet, as in Canada – Dairy , the issue in this dispute is 
not whether there are certain  producers that may sell cotton (or milk) below their total cost of 
production.  Of course, there will be some efficien t producers who will be able to do so, even with 
few or no subsidies.  Rather, the issue generally in both cases is whether, on average , the producers’ 
total costs of production are above the prices received by  the producers in the relevant markets.  Thus, 
as in Canada – Dairy, the average total cost of production ge nerated by USDA and used by Brazil is 
more than a “useful approximation”.  
 50. The United States’ arguments in this dispute that fixed costs should not be considered by the 
Panel mirrored arguments made by Canada in Canada – Dairy .  Consider the following arguments 
made by the United States (which we re accepted by the Appellate Body) in Canada – Dairy and 
which are practically identical to argumen ts made by Brazil in this dispute: 
 
With respect to imputed costs, the Pane l correctly recognized that these are “real 
costs” that a producer must recoup in order to stay in business over time.  In economic terms, these costs represent opportuni ty costs or the costs associated with 
opportunities that are foregone by not putting the producers’ resources to their best 
use. The producers’ resources include fam ily labour, its managerial services, and its 
capital.  There is a cost associated with us ing all of these resources.  For example, if a 
farmer foregoes the opportunity to earn cash wages off the farm in order to contribute his labour to the farm’s production, the valu e of his labour is properly counted as an 
economic cost to the farm even though the farmer does not pay cash wages to himself.  Likewise, it makes no sense to suggest, as Canada does, that the farm which 
hires labour and management services is incurring a cost, while the farm that uses 
family labour and management is making a profit.
104  
Likewise, the Panel correctly concluded that there was no basis to exclude the 
marketing, transportation, and administra tive costs included in the CDC cost of 
production data. …  [T]he panel properly concluded that these are also ‘real costs’ 
                                                      
 103 US 18 November 2003 Further Rebuttal Submission, Section IV.F.3(1) – (4).  
 104 Appellee Submission of the United States, Canada – Dairy (21.5)(II),  para. 40  ( see 
http://www.ustr.gov/enforcement/briefs.shtml).  WT/DS267/R/Add.2 
Page I-488  
 
that producers must recoup if they are to remain in business over time. …  The costs 
incurred by the farmer that must be recouped to avoid going out of business do not stop at the ‘farm gate’.
105 
Brazil agrees with the United States that all of the costs identified above (which the Appellate Body 
accepted in its decision) are “real costs” that a pr oducer must recoup “in order to stay in business over 
time”.  This is precisely Brazil’s point in this case.  
 51. The United States argues that Canada – Dairy is inapposite because “the issue for which 
Brazil seeks to use total costs is not whether a subsidy exists but to evaluate the effect of the subsidy, 
an altogether different analysis”.
106  First, this is incorrect as a factua l matter.  One use of the total cost 
of production data by Brazil has been as circum stantial evidence to demonstrate that contract 
payments are support to upland cotton and that such  payments provide a benefit to US upland cotton 
producers.107  This is directly analogous to the issue of wh ether the subsidy existed in Article 9.1(c) of 
the Agreement on Agriculture in Canada – Dairy.   
 
52. Second, the evidence of the total cost of production was used in both cases to demonstrate 
that both dairy and cotton producers were selling thei r products into a market well below their total 
costs of production.  In Canada – Dairy , Canadian producers were selling C-milk into the export 
market well below their total cost of production.  In cotton, the US producers were selling into all 
identifiable markets at well below their total costs of production.108  And in both cases, the subsidies 
provided by the Canadian and US governments permitted these producers to continue to produce 
without regard for the gap between market revenue and total costs of production.  In sum, without 
both the Canada – Dairy panel and this Panel examining total costs of production, it would be 
difficult to determine whether all the alleged subsidi es existed, and second, to determine the role that 
subsidies played in maintaining production.    (a) to what extent do producers base planting  decisions on their ability to cover operating 
costs but not whole farm costs? USA   
 Brazil’s Comment: 
 
53. Brazil generally agrees that covering operati ng costs are important to producers who are 
making planting decisions “in the short term – that is, the market price for one year”.
109  And it is true 
that during a one-year “short term” period, a producer may be able to afford to receive revenue that 
only meets its operating costs and at least some of the fixed costs.110  But the US 22 December 2003 
Answer to Question 211(b) appears to suggest111 that even over a long-term period of time – between 
5-10 years – producers can continue to plant upland cotton oblivious to whether they meet their total 
costs of production.  This is, of course, econom ic nonsense for agriculture or any other economic 
sector.   
                                                      
 105 Appellee Submission of the United States, Canada – Dairy (21.5)(II),  para. 42 ( see 
http://www.ustr.gov/enforcement/briefs.shtml) .   
 106 US 22 December 2003 Answer to  Question 211, para. 42.   
 107 Brazil’s 22 August 2003 Rebuttal Submission, paras. 30-41; Brazil’s 18 November 2003 Further 
Rebuttal Submission, paras.  59-72;  Brazil’s 2 December 2003 Or al Statement, paras. 25-33.   
 108 Compare the prices set out in Brazil’s 22 December 2003  Answers to Questions 233 and 235, and in 
Exhibits Bra-383 – Bra-388, with US total cost of production data in Exhibit Bra-323 (Costs and Returns of US 
upland cotton Farmers MY 1997-2002).    
109 US 9 October 2003 Closing Statement, para. 12 (The full context of the quote is as  follows:  “Total 
costs are relevant over the long-term, but Brazil uses this  (inaccurate) number to comp are to revenue in the short 
term – that is, the market price for one year.”).    
110 See Exhibit Bra-283 (Statement of Christopher Ward – 7 October 2003, paras. 7-10).   
 111 See in particular the graph at paragraph 47 of the US 22 December 2003 Answer to 
Question 211(b).   WT/DS267/R/Add.2 
Page I-489 
 
 
 54. Basic economics holds that no business can continue to operate unless its total costs of 
production are met over the long term.  The United States recognizes this when it states, in its 
18 November 2003 Further Rebuttal Submission, that “in the long run, producers will have to cover 
these asset and overhead (i.e., economic) costs”.
112  USDA’s ERS suggests that the long term is a 
period between 5-10 years113, and Christopher Ward testified th at the normal recovery period for 
cotton equipment investments is 5-7 years.114  In light of this evidence, Brazil focused on total costs 
for a six-year period of time between MY 1997-2002 in analyzing the long-term cost/revenue gap.115  
By contrast, the US graph at paragraph 47 of its 22 December 2003 Answer to Question 211(b) 
improperly focuses on only operating costs.  Neither the US graph nor the US response provides any 
hint as to how US cotton producers could survive fo r six years without market revenue covering their 
fixed costs, i.e., covering lease or mortgage payments, payi ng labor, recovering equipment costs, and 
paying taxes and insurance.116  In fact, the land-specific costs must be paid every year simply to be 
able to continue farming on leased land or to avoid foreclosure in the case of owner-operators.117   
 
55. The US arguments that economists are only concerned with examining operating costs, and 
not total costs, are simply not correct.  For ex ample, the University of California Cooperative 
Extension economists conduct a large number of st udies regarding costs of production for different 
types of, inter alia , upland cotton farms in California.  Ever y one of these studies, which are relied on 
throughout the agricultural industry in California a nd other states, contains a detailed examination of 
all types of costs.118  Other economic studies of the cost of pr oduction similarly provide for total costs, 
including the land charge and rents.119 
 56. Additional evidence that total costs are relevant to planting decisions even  in the short term of 
one year is found in several documents on an intended but not introduced “Cost of Production 
Insurance Plan for Cotton”.  The entire intent of this project to develop new a insurance programme 
was to provide comprehensive insurance covering total costs – not just operating costs.
120  If upland 
cotton producers were solely concerned with cove ring only their operating costs each year, then the 
project would not also have sought to provide co tton producers with protection from increased fixed 
                                                      
 112 US 18 November 2003 Further Rebuttal Submission, para. 122.   
 113 Exhibit US-84 (Production Costs Critical To Farm ing Decisions, William D. McBride, ERS, p. 40 
(quoted in US 18 November 2003 Further Rebuttal Submission, para. 118).    
114 Exhibit Bra-283 (Statement of Christopher Ward – 7 October 2003, para. 10).   
 115 This was not, therefore, a “ran domly selected period,” as the United States alleges in paragraph 41 
of its 22 December 2003 Answer to Question 211(a).   
 116 See Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 64-69 (setting forth 
composition of fixed costs.  This evidence has never been rebutted by the United States).    
117 See Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 64-69 (setting forth 
composition of fixed costs.  This evidence has never been rebutted by the United States).   
 118 Exhibit Bra-405 (Sample Cost to Produce Cotton – Transgenic Herbicide-Resistant Alacla Variety, 
San Joaquin Valley, University of California Cooperative Extension, 2003).  A large number of cost of 
production studies by the University of California Coope rative Extension for cotton, as well as for many other 
crops, can be found at www. ucanr.org/CES.CEA.shtml.   
 119 Exhibit Bra-406 (Cotton Cost-Return Budget in Southwest Kansas, Kansas State University 
Agricultural Experiment Station and Cooperative Extensive Service, October 2003).   
 120 Exhibit Bra-407 (Documents on Cost of Production Insurance Plan for Cotton)(“Review of the 
FCIC Cost of Production Insurance Plan for Cotton,” Sparks Companies, Inc., 15 September 2003, p. 11, 12 and 
16. (COP insurance policy is based on the farmer’s total cost .”)); “Underwriting Review of FCIC Cost of 
Production Insurance Plan for Cotton,” Jeffrey T. LaFrance, Ph.D, 13 September 2003, p. 5 (“… the basis for the guarantee is not a farmer-chosen per centage of expected or predicted revenu e; rather it is a percentage of an 
estimate of the total cost of production .); “Review of Poposed ‘Cost of Pr oduction Insurance Plan for Cotton,’ 
Jerry R. Skees, Dr. Barry J. Barnett, Dr. J. Roy Black, and James Long, 15 September 2003, p.32 (“Purchasers will be required to provide estimate s of variable expenses per acre, fixed expenses per acre, and land expenses 
per acre  in addition to the acreage and historical yield information required for existing cotton insurance 
products.”) emphasis added WT/DS267/R/Add.2 
Page I-490  
 
costs such as leasing land, employing workers, and annual financing costs for replacement equipment.  Yet, the “Cost of Production Insurance Plan for Cotton” programme focused on annual protection that 
would include all types of costs, because that is  what the sponsors perceived farmers needed.    
 57. Finally, the Panel should recognize that the mo st efficient low-cost US  producers will be able 
to withstand lower market prices without the need for significant subsidies for a year or two.  But 
higher-cost producers will not.  The ERS study on  production costs cited by the United States 
highlighted the ability of higher-cost producers to survive in the shorter term only through 
government payments:    
Low-cost producers are generally better able to survive periods of low prices and 
thrive when prices improve, while high-cost  producers are often the first to exit 
farming when prices are low.
121  
**  **  **  ** 
 
Also, this cost-price squeeze has put an  emphasis on enhancing revenues through a 
variety of sources, such as government programmes, and on controlling or cutting 
costs. Government programme support has likely helped many producers remain in business and may explain why structural ad justments in these industries have been 
gradual.
122  
Many US upland cotton producers are “high- cost” producers, accordin g to USDA’s latest 
comprehensive cost of production survey.123  Brazil notes that Professor Sumner found that roughly 
70 per cent of US planted acreage would continue to  be planted to upland cotton even without the US 
subsidies.124  This finding that 30 per cent of the US cotton acreage would not remain planted to 
cotton is consistent with the conc lusion that it is the category of high-cost cotton producers that would 
not be able to survive without US s ubsidies – even in the short term.   
 
212. Brazil states in paragraph 37 of its oral statement that studies of Westcott and Price 
found that the effect of the programme on cotton is  to add an additional 1 to 1.5 million acres 
during marketing years 1999-2001 and to suppress US prices by 5 cents per pound. Does the US 
reject these findings? Why or why not? USA    
Brazil’s Comment:  
58. At the outset, Brazil notes that USDA econo mists Westcott and Price are among the most 
experienced and well-respected USDA analysts, w ho both have long records of publication of US 
government reports and other research studies.  They  have an in-depth knowledge of the marketing 
loan programme.  Further, they received comments and suggestions for their study from leading US 
agricultural economists such as Professor Bruce Gardner.
125  Westcott and Price’s study was their best 
estimate of the effects of the marketing loan progra mme.  It bears repeating that they developed their 
study independently of this dispute in 2000.    
                                                     
 
 121 Exhibit US-84 (Production Costs Critical To Farmi ng Decisions, William D. McBride, ERS, p. 40).  
This study includes a graph regarding wheat farmers on page 41 which illustrates that low-cost producers can 
survive much lower prices while high er-cost wheat farmers require much higher prices even to meet their 
operating costs.  The same dynamic exists for US cotton farmers.    
 122 Exhibit US-84 (Production Costs Critical To Farmi ng Decisions, William D. McBride, ERS, p. 41).   
 123 Exhibit Bra-16 (“Characteristics and Production Co sts of US Cotton Farms”, USDA, October 2001). 
 124 Brazil’s 9 September 2003 Further Submission, Annex I, Table 5a.   
 125 Exhibit Bra-222 (“Analysis of the US Commodity Loan Program with Marketing Loan Provisions,” 
USDA, AER 801, cover page). WT/DS267/R/Add.2 
Page I-491 
 
 
59. The Westcott/Price study is an approved USDA paper published by USDA’s Economic 
Research Service.126  It is only during this dispute that the United States’ government began to 
characterize this study as an “interesting ‘academic’ exercise”127, whereas, outside this dispute, its 
results represent USDA’s official view on the effects of the marketing loan programme.   
 
60. Brazil recalls that the US Payment Lim itations Commission, chaired by USDA’s Chief 
Economist, requested Westcott and Price to update  their study and analyze the effects of the 
marketing loan programme in MY 2001.128  This official US Commission never criticized the 
approach chosen by Westcott and Price; rather, the Payment Limitations Commission relied on it.  It is not clear to Brazil why the United States considers this study to be appropriate for analyzing effects 
of current agricultural policies and for consideri ng policy reform proposals such as more effective 
payment limitations in a domestic political contex t, but, when US upland cotton subsidy programmes 
undergo multilateral scrutiny in a WTO context, the Unite d States considers the very same study to be 
fatally flawed and unreliable.   
61. Indeed, the United States goes so far as to ch aracterize the Westcott/Price study as irrelevant 
for the analysis of this Panel.
129  The United States claims that using baseline projections for the 
period MY 1999-2001 will not suffice for the Panel’ s analysis, as the Panel needs to assess “actual 
conditions”.130  Brazil notes that the 2000 USDA baseline act ually projected much higher prices than 
occurred during the period MY 1999-2001, thus the 5-cent per pound price suppression found by 
Westcott and Price understate the effects of “actual conditions”.131  This is confirmed by the fact that, 
when Westcott and Price used actual data to up date their study for the Payment Limitations 
Commission, their results showed much stronge r effects of the marketing loan programme.132  Brazil 
notes that Professor Sumner has analyzed the effect s of the marketing loan programme using actual 
MY 1999-2001 data.133  Not surprisingly, the overall results of both Westcott/Price studies are in line 
with Professor Sumner’s results.134 
 
62. The United States also rejects the Westcott/Pri ce study because its lagged price analysis based 
on the 2000 USDA baseline allegedly would not re flect farmers’ actual price expectations.135  Brazil 
and Professor Sumner have addressed the issues of th e inappropriateness of using futures prices in 
complex modeling systems before.136  The undisputed evidence is that – as the United States itself 
admits137 – futures market prices cannot be used for such modeling systems.138   
 
63. Brazil also notes that Westcott and Price in their updated MY 2001 analysis used actual MY 
2001 prices as farmers’ price expectations.  This cr edits farmers with accurate information about 
                                                      
 126 Exhibit Bra-222 (“Analysis of the US Comm odity Loan Programme with Marketing Loan 
Provisions”, USDA, AER 801).  
127 US 22 December 2003 Answer s to Questions, para. 48. 
 128 Brazil’s 7 October 2003 Oral Statement, paras. 31-34. 
 129 US 22 December 2003 Answer s to Questions, para. 48. 
 130 US 22 December 2003 Answer s to Questions, para. 49.  Brazil notes that the United States 
understands “actual conditions” to refer to actual price e xpectations held by US upland cotton producers.  These 
are, however, as Brazil and the United St ates agree, “fundamentally unobservable”. 
 131 Brazil also notes that the 2000 USDA ba seline contained actual data for MY 1998, i.e., the 
Westcott/Price study used USDA’s FAPSIM model for retrospective analysis. 
 132 See Brazil’s 7 October 2003 Oral Statement, paras. 31-34. 
 133 See Annex I of Brazil’s 9 September 2003 Further Submission, para. 4, Table I.5e (regarding the 
data used, baseline and resulting effect s of the marketing loan programme). 
 134 See inter alia Brazil’s 7 October 2003 Oral Statement, paras. 9, 34. 
 135 US 22 December 2003 Answers to Questions, paras. 50-51. 
 136 See Brazil’s 20 January 2004 Comments on US Model Critique, para. 56 (for further references). 
 137 US7 October 2003 Oral Statement, para. 34. 
 138 Brazil offers additional rebuttal arguments in its  comment on the US 22 D ecember 2003 Answer to 
Question 213, below. WT/DS267/R/Add.2 
Page I-492  
 
upcoming prices and represents a third approach to modeling price expectations  – the others being of 
course lagged prices and futures market prices.    64. In the context of its critique of the Westcott/Price study, the United States repeats its contention that futures market prices are the appropriate indicator for upland cotton farmers’ price 
expectations, and that the effect of the marke ting loan programme can be judged by looking at 
farmers’ expectations about the US seasonal aver age cash price in the upcoming marketing year.
139  
This approach is simply factually wrong.  There is no question that marketing loan payments are 
based off  the adjusted world price – not a cash price.  Both Brazil and Professor Sumner explained 
this fact in detail on 2 and 3 December 2003.140  Indeed, the United States acknowledges this fact 
elsewhere in its 22 December 2003 Answers to Questions.141  Thus, the effects of the marketing loan 
programme would depend on upland co tton farmers’ expectations about the adjusted world price.  All 
of the repeated US arguments that there are no e ffects of the marketing loan programme for upland 
cotton in MY 1999-2001 because the expected US cash price was above the loan rate are simply 
meaningless.142   
 
65. The US argument that the marketing loan pr ogramme has no effects if the expected US cash 
price is above the loan rate is, however, also wrong on its merits.  (The same  would be true had the 
United States relied on the correct price – the adjust ed world price.)  Brazil demonstrated that the 
spread between the January to March quotes of the D ecember futures contract and the adjusted world 
price is (i) 18.5 cents143 (if measured against the average AWP for the following marketing year) or 
(ii) 12.22 cents144 (if measured against the December AWPs).145  Subtracting this spread from the 
average of the January to March quotes of the D ecember futures contract provides the expected 
adjusted world price (i) for the upcoming marketi ng year and (ii) for the upcoming December.  As 
Professor Sumner has explained, it is also not at all clear which futures pr ices to use for any such 
calculations.146  Taking the quotes of just one month for a single futures contract, as the United States 
does, is an overly simplistic approach.147  But whether one assumes that farmers look at the average 
AWP for the upcoming marking year or at some particular AWP for a specific month such as 
                                                      
 139 US 22 December 2003 Answ ers to Questions, para. 51.  See also US 18 November 2003 Further 
Rebuttal Submission, Section IV.G (for earlier US arguments using this fatally flawed approach). 
 140 See Brazil’s 2 December 2003 Oral Statement, Sec tion 5.2 and Exhibits Bra-370 – Bra-371.  See 
also Brazil’s 22 December 2003 Answer s to Questions, para. 155;  Braz il’s 20 January 2004 Answers to 
Additional Questions, para. 21. 
 141 US 22 December 2003 Answers to Questions, para. 75.  Also Exhibit US-126 calculates the 
marketing loan benefit correctly as the difference between the loan rate and th e adjusted world price, rather than 
– as implied by the United States in its other arguments –  as the difference between the loan rate and the cash 
price.  
142 US 22 December 2003 Answers to Questions, pa ra. 51.  Brazil is puzzled to learn that the 
United States continues to ignore these basic facts about the operation of the marketing loan program for upland 
cotton and continues to rely on this seriously flawed ar gument.  Brazil recalls again that the United States is 
fully aware of its error, as demonstrated by its statements in paragraph 75 of its 22 December 2003 Answers to 
Questions and by Exhibit US-126, both of which rely on the adjusted world price as the basis for calculating 
marketing loan benefits.  
143 Exhibit Bra-356 (January – March Quotes of th e December Futures Contract, Expected and Actual 
AWP and Cash Price). 
 144 Exhibit Bra-370 (The Differen ce Between the Adjusted World Price and the December Futures 
Contract), presented by Profe ssor Sumner on 3 December 2003. 
 145 Concerning the problems inherent in the choice of the exact spread, see Exhibit Bra-345 (Response 
to Further US Criticism of the Annex I Model of th e Effect of US Cotton Subsidies – Daniel Sumner, 
2 December 2003, para. 13). 
 146 Bra-345 (Response to Further US Criticism of the Annex I Model of the Effect of US Cotton 
Subsidies – Daniel Sumner, 2 December 2003, paras. 11-12). 
 147 Bra-345 (Response to Further US Criticism of the Annex I Model of the Effect of US Cotton 
Subsidies – Daniel Sumner, 2 December 2003, para. 12). WT/DS267/R/Add.2 
Page I-493 
 
 
December, the fact is that the expected world pri ce has always been well below the loan rate during 
MY 1999-2002.148   
 66. Moreover, even if the expected  adjusted world price would not have been below the loan rate, 
that does not mean that there are no effects fro m the marketing loan programme.  As Professor 
Sumner explained on 3 December 2003, this is becau se farmers have a probability distribution for the 
expected adjusted world price.  Th at means they will expect with a cer tain likelihood that the adjusted 
world price will be below (or above) the mean of the expectation.
149  It follows that even if farmers 
expect the mean of the probability distribution for the AWP to be above the loan rate, they will 
nevertheless expect some marketing loan payments to be made.150 
 
67. In sum, Brazil emphasizes that the Westco tt/Price studies are important evidence of the 
effects of the upland cotton marketing loan programme that corroborate the effects found by Professor Sumner and the effects that are implied by all th e non-econometric evidence for the effects of the US 
upland cotton subsidies presented by Brazil. 
 
68. Finally, Brazil notes a new US argument that undercuts the US arguments regarding the peace 
clause.  The United States argues fo r the first time in its 22 Decemb er 2003 Answers to Questions that 
the marketing loan programme does not guarantee  US upland cotton producers 52 cents per pound in 
income.
151  Rather, there is additional revenue genera ted by the marketing loan programme that 
increases the effective support level – so- called “marketing loan facilitated revenue”.152  This revenue 
results from several sources.  First, US farmers receive a domestic farm price when selling their crop.  
This price is consistently above the adjusted worl d price, off which the mark eting loan payments are 
based.153  It follows that US farmers receive additional revenue, as the US farm price plus the 
difference between the loan rate (52 cents) and the adjusted world price (below the US farm price) 
will exceed 52 cents.154  Second, by cleverly marketing their upland cotton crop, US farmers can 
maximize this additional marketing loan facilitate d revenue, which Westcott and Price assumed to be 
14 cents .155   
 69. In Exhibit US-126, the United States provides monthly data on the amount of additional marketing loan facilitated revenue.  This actual data demonstrates considerable additional positive 
revenue “facilitated” by the marketing loan progra mme.  Thus, using an adjusted world price as the 
loan repayment rate for upland cotton (as opposed to  a local posted county price used for other crops 
                                                     
 
 148 See Brazil’s 2 December 2003 Oral Statement, pa ras. 43-47, and Professor Sumner’s oral 
explanation on 3 December 2003. 
 149 See Exhibit Bra-371 (Simple Example of the Calcul ation of Expected Marketing Loan Benefit). 
 150 Professor Sumner’s oral explanations on 3 December 2003; Brazil’s 2 December 2003 Oral 
Statement, para. 48;  Brazil’s 22 Decembe r 2003 Answers to Questions, para. 155. 
 151 In passing, Brazil notes that the use of 14 cents as marketing loan facilitated revenue was taken from 
the assumptions in USDA’s own FAPS IM policy simulation model (Exhibit Bra-222 (“Analysis of the US 
Commodity Loan Program with Marketing Loan Provisions,”  USDA, AER 801, p. 11)).  In addition, Westcott 
and Price demonstrate that the additional marketing loan facilitated revenue for MY 1999 is 12.7 cents – very 
close to the authors’ assumption (Exhibit Bra-222 (“An alysis of the US Commodity Loan Programme with 
Marketing Loan Provisions,” USDA, AER 801, p. 8)).  Finally, Exhibit US-126 does not contradict the 
appropriateness of using 14 cents, as Exhibit US-126 does not provide the entire marketing loan facilitated 
revenue received by farmers  ( see Brazil’s arguments in the main body of its comment). 
 152 US 22 December 2003 Answers to Qu estions, paras. 50-52.  Brazil not es that this additional revenue 
in rare circumstances can also turn out to be negative.  
153 See Brazil’s 27 October 2003 Answers to Questions, chart at paragraph 172 and Exhibit Bra-311 
(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 1996 to the present). 
 154 US 22 December 2003 Answers to Qu estions, paras. 50-52.  Brazil not es that this additional revenue 
may also turn out to be negative, as shown by Exhibit US-126. 
 155 US 22 December 2003 Answers to Questions, para. 52.   WT/DS267/R/Add.2 
Page I-494  
 
except rice) increases the revenue guarantee beyond the official loan rate, as shown by the data in 
Exhibit US-126.  This data, however, understates th e real effect for two basic reasons.  First, it 
calculates the additional revenue based on an average national cash price that may be quite different 
from the price an actual upland cotton farmer receives for its crop.  Second, and more importantly, it 
omits the second source of “marketing loan facilitate d revenue” – the timing decisions of farmers in 
marketing their crop and taking out marketing loan benefits. 
 70. The existence of additional marketing loan programme facilitates reve nue further highlights 
the importance of the upland cotton marketing lo an programme in assisting upland cotton producers 
to close the gap between costs and market returns.  It also invalidates further the US argument during 
the peace clause phase of this dispute that a rate of  support should be used for purposes of the “peace 
clause” analysis, as the rate of support is the only measure that the United States controls.
156  T h e  
United States now admits that it does not control the ra te of support either, as the rate of support may 
be above (or even below) 52 cen ts, depending on market conditions157, and farmers’ timing decisions 
for the marketing of their crop.  Nor does the Un ited States control the flow of marketing loan 
payments, as there is no mechanism in the upla nd cotton marketing loan programme to stem or 
control the flow of upland cotton marketing loan paym ents.  This is precisely one of the reasons that 
Brazil has challenged this mandatory programme as causing a threat of serious prejudice.   
 
213. What differences, if any, can be observed  in the results of econometric models in the 
literature which use lagged prices and those which use futures prices to analyse the effect of 
prices on planting decisions?  BRA, USA 
 
Brazil’s Comment: 
71. The United States focuses its response entirely on Professor Sumner’s model.  In fact, it does 
not provide an answer to the question posed by the Panel.  Brazil recalls that this question asks for 
differences in results that can be observed from models in the literature  that use lagged prices and 
futures prices.  In its 22 December 2003 response to this question, Brazil detailed that there are no 
comparable models that use futures prices, but th at all models discussed in the context of this 
proceeding – as well as all other large-scale multi-co mmodity models – use some variant of lagged 
prices.158   
 72. At the outset, Brazil notes that the United States has presented no econometric model  in this 
dispute.  The United States has not taken advant age of the economic and econometric expertise of 
USDA’s Economic Research Service to  substantiate econometrically its  argument that $12.9 billion in 
upland cotton subsidies have had no effect on produ ction and exports of US upland cotton and have 
had no effects on US or world prices.    73. Instead, the United States has criticized various aspects of Professor Sumner’s model.
159  In 
particular, it has focused its critique on Professor Sumner’s approach to modeling farmers’ price 
expectations.  However, Professor Sumner and Brazil have effectively rebutted all of these 
criticisms.160   
 
                                                      
 156 See inter alia US 11 July 2003 First Submission, para. 94;  US 22 July 2003 Oral Statement, 
paras. 12-13. 
 157 These market conditions are in pa rticular reflected in the spread between the adjusted world price 
and the cash price received by  US upland cotton producers. 
 158 Brazil’s 22 December 2003 Answers to Questions, paras. 37-42. 
 159 US 7 October 2003 Oral Statement, paras. 26-50;  US 22 December 2003 Comments on Brazil’s 
Econometric Model. 
 160 See Exhibit Bra-345 (Response to Further US Criticis m of the Annex I Model of the Effects of US 
Cotton Subsidies – Professor Daniel Sumner, 2 December 2003, paras. 6- 14, with further references).  WT/DS267/R/Add.2 
Page I-495 
 
 
74. The United States cites Andrew Macdonald in su pport of its propositions that futures prices 
are the better price indicators.161  However, once again, the United States takes a quote out of context.  
What Mr. Macdonald actually said in the cited para graph is that New York futures prices are an 
indicator of the direction in which prices will move in the future, i.e., price trends, not an indicator of 
actual price in the future.162 
 
75. The United States further cites a US governme nt study that allegedly demonstrates that a 
certain percentage of US upland cotton produ cers rely on the New Yo rk futures market to price  their 
crop for actual sales.163  While Brazil cautions against the use of the specific results of the study (as it 
is somewhat dated)164, Brazil agrees that at least some farmers price their crop with reference to the 
New York futures price.  However, what this study does not demonstrate is that US upland cotton 
producers rely on the futures market in making their planting decisions many months before 
marketing.  76. The basic question that arises from the US critic ism is the following:  is Professor Sumner’s 
approach to model farmers’ price expectations biased towards generating stronger effects?  The 
United States correctly notes that “[t]he lagged pr ices used by Brazil and [P rofessor Sumner] can[,] at 
best, be an approximation of farmers’ price expectations”.
165  This is an obvious fact; the actual price 
expectations of thousands of farm ers are “fundamentally unobservable”.166   
 77. There are three basic approaches to modeling fa rmers’ price expectations:  (1) using lagged 
prices, (2) using futures market prices if availabl e, and (3) using rational expectations in various 
forms, including crediting farmers with complete information ( i.e., using the actual price as the 
expected price
167).   
 78. It is not clear that any of these approaches lead to a priori  biased results.  However, it is 
standard practice among economists to use lagged prices in a large-scale, multi-commodity 
econometric policy simulation framework.  FAPRI,  USDA and the US Congressional Budget Office 
(“CBO”) use lagged prices in their models.  Indeed the United States admits that using futures prices 
for these models is not feasible and has never been done.
168  Had Brazil attempted to use this 
unconventional and untested approach for its model,  the United States could have raised legitimate 
concerns as to the reliability of the model resu lts.  Any such results would have been purely 
speculative.169 
 79. Indeed, Brazil would have had to develop equations to predict futures prices for those 
commodities for which a functioning futures market exists.  It also would have had to use an 
altogether different modeling approach for price exp ectations for crops for which there is no futures 
market.  Again, this would have been purely speculative.
170 
 
                                                      
 161 US 22 December 2003 Answer s to Questions, para. 57 
 162 Exhibit Bra-281 (Statement by Andrew Macdonald – 7 October 2003, para. 13, even clearer 
paras. 17, 28, 31).  
163 US 22 December 2003 Answer s to Questions, para. 58. 
 164 See Brazil’s comment on Question 201, above. 
 165 US 22 December 2003 Answer s to Questions, para. 56, see also para. 64. 
 166 Brazil’s 9 September 2003 Further Submission, Annex I, para. 18. 
 167 Westcott/Price have chosen this approach for the update of their study for purposes of the Payment 
Limitations Commission. 
 168 US 7 October 2003 Oral Statement, para. 34.  
 169 Exhibit Bra-345 (Response to Further US Criticis m of the Annex I Model of the Effect of US 
Cotton Subsidies – Daniel Sumner, 2 December 2003, paras. 9-14). 
 170 Exhibit Bra-345 (Response to Further US Criticis m of the Annex I Model of the Effect of US 
Cotton Subsidies – Daniel Sumner, 2 December 2003, paras. 9-14). WT/DS267/R/Add.2 
Page I-496  
 
80. The approach favoured by the Unite d States is not itself free of problems.
171  So far, futures 
market prices have only been used in statistical est imation using aggregate time-series data and not in 
econometric policy simulations.172  Using it for modeling purposes raises further questions about the 
choice of futures contracts, the time period ove r which quotations are used, and calculations of 
appropriate spreads, among others.173 
 
81. In sum, there are good reasons that FAPRI,  USDA and the CBO use lagged prices in their 
policy simulation models.  The Panel will recall that the FAPRI model (using lagged prices) was 
influential in the policy-making process leading to the 2002 FSRI Act, and that FAPRI, USDA and CBO models (all of which are based on lagged prices ) are used regularly in US policy evaluation and 
formulation.  Professor Sumner’s approach u ses a simple and commonly used proxy for the 
fundamentally unobservable price expectations of farmers.
174  Brazil is puzzled that the United States 
now views the very approach that every credible econometric policy simulation model takes as a significant error once this approach is used by Brazil in this dispute.    
82. The United States further argues that in year s with strong exogenous  shocks lagged price 
models are poor proxies for price expectations.
175  The United States criticizes Professor Sumner’s 
MY 2002 results as grossly overstated.176  Brazil notes that it is has never relied on Professor 
Sumner’s results of individual years.  Instead, Br azil has used averages of the effects of the US 
programmes in MY 1999-2002 and MY  2003-2007.  Using these averages mitigates any problems 
that may have existed from the use of lagged prices in any individual year. 
 
83. Finally, Brazil notes that the United States relies on elasticities supplied by Professor Sumner 
in Annex I to calculate acreage responses fro m the expected lower cash prices in MY 2002.177  
However, these US calculations the United States are meaningless for several reasons.  First, the 
futures prices used by the United States are pr oblematic.  Using only a single month’s quotes for a 
single contract does not appropriately model the complexities of farmers’ planting and marketing 
timings.178  Second, it is unclear from the US response wh ether the United States used an appropriate 
spread for the calculation of price expectations held by farmers.179  Third, it is therefore unclear 
whether the United States has calculated the appr opriate change in price expectations between 
MY 2001 and 2002.  Finally, even assuming that all of these problems did not exist, the results calculated by the United States using Professor Sumn er’s elasticities fail to provide meaningful 
results.  These elasticities were applied in Prof essor Sumner’s model to obtain direct effects, i.e., 
effects before any feedback from the FAPRI US crops model and the CARD international cotton 
model.
180  Thus, the results are nowhere near the results  that one would have obtained using Professor 
Sumner’s full Annex I model.  For all these reasons , Brazil strongly disagrees with the conclusion that 
the marketing loan programme did not have any eff ect in MY 2002.  Brazil also recalls its arguments 
                                                      
 171 Exhibit Bra-345 (Response to Further US Criticis m of the Annex I Model of the Effect of US 
Cotton Subsidies – Daniel Sumner, 2 December 2003, paras. 9-14). 
 172 Exhibit Bra-345 (Response to Further US Criticis m of the Annex I Model of the Effect of US 
Cotton Subsidies – Daniel Sumn er, 2 December 2003, para. 9). 
 173 Exhibit Bra-345 (Response to Further US Criticis m of the Annex I Model of the Effect of US 
Cotton Subsidies – Daniel Sumner, 2 December 2003, paras. 11-13). 
 174Exhibit Bra-345 (Response to Further US Criticism of  the Annex I Model of the Effect of US Cotton 
Subsidies – Daniel Sumner, 2 December 2003, para. 14).  
 175 US 22 December 2003 Answer s to Questions, para. 61. 
 176 US 22 December 2003 Answer s to Questions, para. 63.  
 177 US 22 December 2003 Answer s to Questions, para. 63. 
 178 Exhibit Bra-345 (Response to Further US Criticis m of the Annex I Model of the Effect of US 
Cotton Subsidies – Daniel Sumner , 2 December 2003, para. 12).  
 179 Brazil’s 2 December 2003 Oral Statement, para. 44;  Exhibit Bra-345 (Response to Further US 
Criticism of the Annex I Model of the Effect of US Co tton Subsidies – Daniel Sumner, 2 December 2003, para. 
13). 
 180 See Brazil’s 20 January 2004 Comments on US Model Critique, paras. 64, 70. WT/DS267/R/Add.2 
Page I-497 
 
 
and evidence regarding the serious flaws in the US application of its futures price methodology using 
expected cash prices rather than expected adjusted world prices.181 
 
III. DOMESTIC SUPPORT 
 
214. Please provide a copy of regulations regar ding the marketing loan programme and loan 
deficiency payments published at 58 Federal Register 15755, dated 24 March 1993.  What does this regulation indicate about the target price?  USA  215. Please expand or comment on the statemen t at paragraph 91 of the US further rebuttal 
submission that the counter-cyclical target pric e ceases to be paid when the farm price rises 
above 65.73 cents per pound.  In this scenario , should the Panel disregard Direct Payments?  
BRA, USA  216. How many times have upland cotton pro ducers been able to update their base acres 
since 1984?  How do upland cotton producers come to  note the possibility of future updating?  
Please provide examples of relevant material.  BRA, USA  Brazil’s Comment: 
 
84. In addition to its own answer
182, Brazil offers two comments to the US response to this 
question.  First, the United States makes a f actual mistake in describing the calculation of base 
acreage under the deficiency payment programme.183  While the United States’ description of the 
calculation of deficiency payment crop base as the rolling five-year average minus the high and low 
year would be correct for other deficiency pa yment crops, upland cotton (and rice) had a special 
provision.184  7 CFR 1413.7(c) mandates the calculation of upland cotton base as “the average of the 
acreages planted and considered planted to such cr op for harvest on the farm in each of the 3 crop 
years preceding such crop year.185  For farms participating in the programme, all current base acreage 
was “considered planted”.186  Therefore, for the base to cha nge, farmers had to opt out of the 
programme.187 
 85. Second, Brazil does not consider credible or relevant a statement by the United States that 
“[g]iven the current US fiscal situation,”188 any further base update four years from now seems 
“unlikely”.  The Panel must determine whether th e 2002 FSRI Act update of the direct and counter-
cyclical payment base is a violation of paragrap hs 6(a) and (b) of Annex 2 of the Agreement on 
Agriculture.    
217. What is the reason for reducing payments under the PFC and direct payments 
programmes for planting and harvesting fruit, vege tables and wild rice on certain base acreage?  
Please comment on the statements by the Eu ropean Communities that "the reduction in 
payment for fruit and vegetables, if the EC underst ands correctly, is in fact designed to avoid 
unfair competition within the subsidising Member." (EC oral statement at first session, first substantive meeting, paragraph 29) and "To find otherwise would not permit a WTO Member 
wishing to introduce decoupled payments to take  account of important elements of internal 
competition (…)" (EC response to Panel third party Question No. 5).  USA 
                                                     
 
 181 See Brazil’s comment on Question 212, above. 
 182 Brazil’s 22 December 2003 Answers to Questions, paras. 47-50. 
 183 US 22 December 2003 Answers to Questions, paras. 67-68. 
 184 Exhibit Bra-26 (7 CFR 1413, Deficiency Payment Program, 1993 edition). 
 185 Exhibit Bra-26 (7 CFR 1413.7(c)). 
 186 Exhibit Bra-26 (7 CFR 1413.3, “Considered planted acreage”). 
 187 Brazil’s 22 December 2003 An swers to Questions, para. 47. 
 188 US 22 December 2003 Answer s to Questions, para. 70. WT/DS267/R/Add.2 
Page I-498  
 
 
Brazil’s Comment: 
 
86. The United States does not answer the Panel’s first question as to “what is the reason” that 
PFC and direct payments are reduced for planting and harvesting fruits, vegetables, and wild rice.  No 
reason is provided in the US 22 December 2003 response.   
 87. Nor does the United States take advantage of the Panel’s second question to comment on the 
statement made by the European Communities that “the reduction in payment for fruit and vegetables, 
is in fact designed to avoid unfair competition within the subsidizing Member”.
189  No US comment is 
provided.  The EC argument involves considerable speculation about the “design” of the US 
measures.  With the United States deciding not to prov ide any such reasons, the Panel is left without a 
factual basis to know whether the US reduction of payment based on growing fruits and vegetables is 
intended to “minimize any distorti on which may be caused by any decoupled payments in markets 
which were historically undistorted by subsidies”.190   
 
88. The EC argument appears to attempt to impo se a “trade distortion” test to the criteria of 
Annex 2, paragraph 6.  However, Brazil notes that  the EC argued that a decoupled domestic support 
measure need not be tested with regard to the “fundamental  requirement” in Anne x 2, paragraph 1 to 
determine whether it has “trade distorting effects”.191  Nor do any of the specific criteria in 
paragraph 6(b) of Annex 2 refer to “trade distorting effects”.192  Annex 2, paragraph 5 requires the 
specific criteria of Annex 2, paragraph 6 to be met for a direct payment measure to be included within 
the green box.     89. But even if Annex 2, paragraph 6(b) include d a “trade distorting effects” test, the EC is 
simply wrong that the elimination or reduction of PFC and direct payments when fruits and vegetables 
and wild rice are grown does not “distort” trade.  The EC argument ignores the distortion in trade in 
the products on which payments are focused, i.e., upland cotton and the other programme crops rather 
than fruits, vegetables, and wild rice.  Limiting or prohibiting payments for types of products 
representing 60 per cent of the value of production in a region such as California, Florida, or Arizona 
has the effect of maintaining production in the 40 per cent of the value of crops for which programme 
payments are received.
193  This “distorts” the trade in the ag ricultural crops receiving the payment by 
maintaining or increasing their production.   The practical effect of the PFC and direct payment 
restriction is that the resources are targeted to wards certain “types” of crops only.  Negotiators 
intended that measures that were so linked to curre nt production were not properly part of the green 
box.    
90. In light of this evidence, the EC’s argument  boils down to asserting that trade distortions for 
products that traditionally have been subsidized  should be permitted in order to prevent trade 
distortion in markets for non-subsidized products.  Thus, the EC’s argument is not one that would 
avoid distortions; it is one of maintaining existing distortions, contrary to the object and purpose of 
the Agreement on Agriculture.
194   
 
                                                      
 189 EC 23 July 2003 Oral  Statement, para. 29. 
 190 EC 11 August 2003 Answer to Third Party Question 11, para. 30. 
 191 EC 11 August 2003 Answer to Third Party Questions 6 and 9, paras. 17, 23-25. 
 192 Indeed, the United States has acknow ledged that such effects can be presumed if the specific criteria 
in paragraph 6 of Annex 2 are not complied with.  See US 11 August Answer to Question 31, para. 65 (“if a new 
measure does not conform to the basic and applicable policy-specific criteria in Annex 2, it will not have the 
benefit of the presumption that it meets the fundamental requirement of the first sentence.”).  
193 Exhibit Bra-105 (“Statement of Professor Daniel Sumner at the First Meeting,” para. 24); Oral 
Statement of Brazil, paras. 65-66. 
 194 See Brazil’s 22 August 2003 Rebuttal Submission, paras. 8-9, note 15.   WT/DS267/R/Add.2 
Page I-499 
 
 
91. The only thing the US 22 December 2003 response does is to repeat earlier faulty arguments 
attempting to defend the fruits, vegeta bles, and wild rice payment limitation.195  The US response is 
useful because it finally clarifies that the US argu ment boils down to the assertion that if a direct 
payment measure does not require  production, then it cannot violate Annex 2, paragraph 6.  The US 
22 December 2003 response states, at paragraph 73, th at “paragraph 6 [no subsection listed] prohibits 
basing payments on production requirements … ”.196  It further states that the reduced PFC and direct 
payments “are not ‘related to, or based on, the type or volume of production’ since the recipient need 
not produce anything at all ”.197  But there has never been an  issue whether PFC and direct payments 
require production.  All this means is that they comply with Annex 2, paragraph 6(e), in that “no 
production shall be required in order to receive such payments”.  But what about Annex 2, 
paragraph 6(b), which must be in terpreted to have a separate mean ing apart from paragraph 6(e)?   
 92. Paragraph 6(b) focuses on the amount
 of payments related to the type  of production.  In other 
words, if a farmer decides to produce something (re cognizing that he or she need not under Annex 2, 
paragraph 6(e)), does the direct payment provision condition the amount  of payment on the type  of 
production undertaken?  The answer with respect  to the 1996 FAIR and the 2002 FSRI Act for PFC 
and direct payments is a clear “yes”.  The amount of the PFC or direct payments falls when prohibited crops are grown – and increases when the prohibited crops cease to be grown.  These legal provisions 
send a fairly compelling message to the farmer – channel your current production into certain crops to 
continue receiving the full amount of direct paym ents today.  This re-couples payments to current 
production.   
 
93. The United States claims, at paragraph 73 of its 22 December 2003 response, that all a 
producer need do to receive the full payment is to “ merely  refrain from producing fruit, vegetables, or 
wild rice”.
198  This is an interesting dismissal given that the practical effect of this provision is to 
direct production away from crops that represent up to 60 per cent of the value of available options for 
cotton farmers in states such as Florida, California, and Arizona.   
 94. Moreover, the logic of the US argument le ads to an evisceration of any disciplines in 
Annex 2, paragraph 6, and is therefore contrary to the object and purpose of that provision.  Consider 
the following hypothetical:  a m easure provides for a direct payment that was reduced by 75 per cent 
if a farmer produced any of 99 per cent of the available crop options; as a practical matter, farmers 
could only plant one or two crops  (or no crops) and still receive the full payment.  Under the US 
argument, because the farmer had no obligation to  grow any crops, it could “merely refrain” from 
producing 99 per cent of available crops.  Like the fruits, vegetables and wild rice exception, this 
argument would emasculate the green box re quirement of Annex 2, paragraph 6(b). 
 218. Please comment on the testimony of USDA Chief Economist Keith Collins cited in paragraph 36 of Brazil's oral statement regar ding the trade-distorting and production-
distorting nature of the marketing loan payments.  USA    Brazil’s Comment: 
 95. The United States states in its response to th is question “that marketing loan payments are 
potentially  production- and trade-distorting”.
199  Yet, Keith Collins’ statement did not say 
“potentially” production- and trade-distorting.  Dr. Collins stated that market ing loan payments “are  
                                                      
 195 US 22 December 2003 Answer s to Questions, para. 73. 
 196 US 22 December 2003 Answer s to Questions, para. 73. 
 197 US 22 December 2003 Answer s to Questions, para. 73. 
 198 Emphasis added. 
 199 US 22 December 2003, An swers to Questions, para. 74 (emphasis added). WT/DS267/R/Add.2 
Page I-500  
 
unambiguously trade-distorting and production-distorting”.
200  This is quite a different statement than 
the one the United States appears to “agree” to .  Coming from the Chief Economist of the USDA, 
who is one of the most-widely respected agricultu ral economists, it is positive evidence that marketing 
loan payments are not only “potentially” production-  and trade-distorting, but that these payments 
have, in fact, “unambiguously” distorted US production and exports of upland cotton.  But 
Dr. Collin’s statement also confirms what other evidence in the record already demonstrates:  the 
effect of the marketing loan programme is to su stain economically unviable US production of upland 
cotton, that in turn increases US exports and suppresses world prices.201 
 96. In a further response to this question, th e United States itself provides the reason why its 
arguments about the expected cash price as a meaningf ul measure of the effects of the marketing loan 
programme are seriously flawed.  The United States confirms that marketing loan benefits are not 
paid off the cash price (so that any expectations  about future cash prices would matter), but that 
“farmers will receive a government payment fo r the difference between the loan rate and the adjusted 
world price ”.
202  Thus, what potentially matters in eval uating the effects of the marketing loan 
programme is the expected adjusted world price, and not the expected cash price.203  Looking at the 
expected adjusted world price, it is below the loan rate in all marketing years during the period of 
investigation and, therefore, the marketing loan pr ogramme is expected to have a significant effect on 
US farmers’ upland cotton planting decisions.204  This fact confirms all the other evidence presented 
by Brazil to demonstrate the trade- and production-distorting effects of the marketing loan programme.
205 
 
IV. EXPORT CREDIT GUARANTEES 
 
219. Under the Agreement on Agriculture  the general position is that the use of export 
subsidies, both those listed in Article 9.1 as well as those within the scope of Article 1(e) which 
are not so listed, may only be used within the limits of the product specific reduction 
commitments specified in Part IV of Members' Schedules.  One might therefore have expected 
that Article 3.3 of the Agreement on Agriculture  would have prohibited the use of both listed and 
non-listed export subsidies in excess of reduction  commitment levels in the case of scheduled 
products and, in the case of non-scheduled prod ucts, would have simply prohibited the use of 
any export subsidy.  Instead, the Article 3.3 pr ohibition is limited in both cases to export 
subsidies listed in Article  9.1. What significance,  if any, does this contextual aspect have for 
how Article 10.2 might be interpreted having regard, inter alia , to:  
 (a) the fact that export performance-related tax incentives, which like subsidized export 
credit facilities were considered  as a possibl e candidate for listing as an Article 9.1 
export subsidy in the pre-December 1991 Dra ft Final Act negotiations, have been held 
                                                     
 
 200 Brazil’s 2 December 2003 Oral Statement, para. 36 and Exhibit Bra-211 (“The Current State of the 
Farm Economy and the Economic Impact of Federal Policy,” Hearings before the Committee on Agriculture, US House of Representatives, p. 43)(emphasis added). 
 
201 Brazil’s 9 September 2003 Further Submission, Section 3.3.4.7.1;  Brazil 7 October 2003 Oral 
Statement, paras. 31-33;  Brazil’s 18 November 2003 Further Rebuttal Submission, Sections 3.1, 3.2, 3.4 and 3.7.1;  Brazil’s 2 December 2003 Oral Statement,  Section 5.2. 
 
202 US 22 December 2003 Answers to Qu estions, para. 75 (emphasis added). 
 203 Brazil’s 2 December 2003 Oral Statement, Secti on 5.2.  Brazil notes that the United States, in 
Exhibit US-126, appears to acknowledge this fact, as it ca lculates the marketing loan benefit as the difference 
between the loan rate and the adjusted world price, rather than the cash price, as the United States implies in its 
other arguments. 
 204 Brazil’s 2 December 2003 Oral Statement, Section 5.2, in particular paras. 44-50 (including Exhibits 
Bra-356-359) and Professor Sumner’s oral explanations on 3 December 200 3 (including Exhibit Bra-370-371). 
 205 Brazil’s 9 September 2003 Further Submission, Section 3.3.4.7.1;  Brazil 7 October 2003 Oral 
Statement, paras. 31-33;  Brazil’s 18 November 2003 Further Rebuttal Submission, Sections 3.1, 3.2, 3.4 and 
3.7.1;  Brazil’s 2 December 2003 Oral Statement,  Section 5.2. WT/DS267/R/Add.2 
Page I-501 
 
 
(for example, in United States – Tax Treatment for Foreign Sales Corporations , 
WT/DS108) to be subject to the anti-circumvention provisions of  Article 10.1;  and  
 (b) the treatment of international food aid and non-commercial transactions under 
Article 10?  USA  
 
Brazil’s Comment: 
 
97. Brazil agrees with the United States that Ar ticle 8 of the Agreement on Agriculture assumes 
the role the Panel suggests one might have expected Article 3.3 to play.
206  Article 8 prohibits the use 
of both those export subsidies listed in Article 9.1 and those not listed in Article 9.1 other than in 
conformity with the Agreement on Agriculture and the commitments specified by a Member in its 
Schedule.  98. However, Brazil does not consider that th is fact provides illuminating context for the 
interpretation of Article 10, including Articles 10.1 and 10.2.  The question is whether Article 10.2 of 
the Agreement on Agriculture exempts or carves-out  export credits from the disciplines included in 
Article 10.1.  The Appellate Body has concluded that  to exempt or carve-out particular categories of 
measures from general obligations such as the ex port subsidy obligations in the Agreement on 
Agriculture, the exemption or carve-out must be explicit in the text of an agreement.
207  Article 10.2 
includes no such explicit exemption or carve-out.208  The negotiators knew how to make such an 
exemption or carve-out explicit, as evidenced by,  for example, Article 13 of the Agreement on 
Agriculture, footnote 15 to Article 6.1(a) of the SCM Agreement, and the second paragraph of 
item (k) of the Illustrative List of Export Subsidies.209  The United States has not rebutted these 
arguments.  
99. Instead, the United States appeals to what  it considers to be “similarity” between the 
treatment of export credit instruments and inte rnational food aid in Articles 10.2 and 10.4.
210  These 
two provisions are fundamentally different, however .  Article 10.2 announces Members’ intent to 
work toward negotiations on specific disciplines for export credits, and calls on Members to adhere to 
those disciplines once they are adopted.  As Br azil noted in its 22 December 2003 Answers to 
Questions, the nature of the disciplines negotiated a nd the way in which they are transposed into the 
WTO will dictate the effect they will have on cl aims against export credits under Article 10.1.211  At 
least for the time being, however, Article 10.2 does not meet the standard for carve-outs or exemptions set by the Appellate Body in EC – Sardines and EC – Hormones , and export credits are 
subject to the disciplines of Article 10.1.
212 
 
100. Article 10.4 similarly does not meet the sta ndard for exemptions or carve-outs set by the 
Appellate Body in EC – Sardines and EC – Hormones .  However, it does provide specific disciplines 
for international food aid through reference to FAO and Food Aid Convention provisions.  In Brazil’s 
                                                      
 206 See US 22 December 2003 Answers to Questions, para. 79. 
 207 Appellate Body Report, EC – Sardines , WT/DS231/AB/R, para. 201-208; Appellate Body Report, 
EC – Hormones , WT/DS26/AB/R, para. 128. 
 208 See Brazil’s 22 July 2003 Oral Statement, paras. 100-115;  Brazil’s 22 August 2003 Rebuttal 
Submission, paras. 99-100; Brazil’s 27 August 2003 Comments on US Rebuttal Submission, paras. 33-52;  
Brazil’s 18 November 2003 Further Rebuttal Submissi on, paras. 219-220; Brazil’ s 2 December 2003 Oral 
Statement, paras. 73-76; Brazil’s 22 Decembe r 2003 Answers to Questions, paras. 51-57. 
 209 See, e.g,. Brazil’s 2 December 2003 Oral Statement, para. 75. 
 210 US 22 December 2003 Answers to Questions, paras. 80-82. 
 211 Brazil’s 22 December 2003 Answers to Questions, paras. 51-57. 
 212 See Brazil’s 22 July 2003 Oral Statement, paras. 100-115;  Brazil’s 22 August 2003 Rebuttal 
Submission, paras. 99-100; Brazil’s 27 August 2003 Comments on US Rebuttal Submission, paras. 33-52;  
Brazil’s 18 November 2003 Further Rebuttal Submissi on, paras. 219-220; Brazil’ s 2 December 2003 Oral 
Statement, paras. 73-76; Brazil’s 22 Decembe r 2003 Answers to Questions, paras. 51-57. WT/DS267/R/Add.2 
Page I-502  
 
view, Article 10.4 could be considered an example of the situation envisioned in paragraph 56 of 
Brazil’s 22 December 2003 Answers to Questions.213  Article 10.4 sets out a benchmark against 
which to determine whether particular internati onal food aid measures cons titute “export subsidies”, 
within the meaning of Article 10.1.  Thus far, the Appellate Body’s decisions (in US – FSC214 and 
Canada – Dairy215) have directed panels to contextual guidance included in the SCM Agreement for 
this determination.  In a case against internationa l food aid measures, however, a panel could look to 
the alternative benchmarks set out in Article 10. 4 as context for its determination whether those 
measures constitute “export subsidies” for the purposes of  Article 10.1.  (A panel could also look to a 
Member’s notifications to the Committee on Agricu lture.  The United States, for example, notifies 
international food aid – or some portion of the international food aid provided by it – as export 
subsidies to be counted towards its reduction commitments.216) 
 
220. What will be the relevance of Articles 9 and 10.1 of the Agreement of Agriculture  to 
export credit guarantees when discipl ines are internationally agreed?  BRA 
 221. In respect of the table in paragraph 161 of the US August 22 rebuttal submission 
(concerning the cohort specific treatment of ex port credit guarantees), the Panel notes the 
subsequent US agreement (footnotes 82 and 96 in  US further submission of 30 September 2003; 
footnote 160 in US 18 November further rebutta l submission) to Brazil's assertion (footnote 67 
in Brazil's 27 August 2003 comments on US rebutta l submission) that the total figure net of re-
estimates should be $230,127,023 instead of the figure which originally appeared ($381,345,059).  
(a) Please submit a corrected table reflecting a ll of the necessary information to produce 
this result, to the extent this is possible for the reasons indicated in footnote 96 in US 
further submission of 30 September 2003.  
 Brazil’s Comment: 
 
101. The data provided by the United States in the chart accompanying its response demonstrates 
that using the net present value methodology im posed by the US Federal Credit Reform Act 
(“FCRA”), premiums for the CCC guarantee progra mmes over the period 1992-2002 were inadequate 
to cover the operating costs and losses of the programmes, in the amount of $230 million.
217  For a 
complete assessment under item (j), administrati ve expenses in the amount of approximately 
$39 million should be added.218 
 102. Brazil addresses further the US chart in its comments on other US answers, below. 
 
(b) Please clarify whether and how the Panel should treat the figures in Exhibit BRA-182 
for the net lifetime re-estimates for each respective cohort.   
 
                                                      
 213 Brazil’s 22 December 2003 An swers to Questions, para. 56. 
 214 Appellate Body Report, US – FSC , WT/DS108/AB/R, para. 136-140. 
 215 Appellate Body Report, Canada – Dairy , WT/DS103/AB/R and WT/DS1 13/AB/R, paras. 87-90. 
 216 See, e.g.,  Exhibit Bra-99 (G/AG/N/USA/39, p. 2). 
 217 US 22 December 2003 An swers to Questions, char t included in response  to Question 221(a).  
 218 Exhibit Bra-133 (Guaranteed Loan Subsidy and Administrative Expenses of US Export Credit 
Guarantee Programmes GSM 102, GSM 103 and SCGP). WT/DS267/R/Add.2 
Page I-503 
 
 
Brazil’s Comment: 
103. The United States’ response is inaccurate.  In st ating that “all of the first five cohorts (1992-
1996), including 1994, are profitable”,219 the United States oddly neglects to account for the most 
recent reestimate data, which it has included in its own chart, provided with its response to question 
221(a).  That chart shows massive upward reestimat es in 2003 for the 1992, 1993, 1994, 1996, 1997 
and 2001 cohorts.  Accounting for those reestimates,  the 1994 cohort, which the United States asserts 
is nearly closed220, does not show profitability.  Nor do the 1997, 1998, 2000, 2001 or 2002 cohorts. 
 104. The United States is implying that over time, c ohorts will turn out to be positive.  The data 
does not support this implication.  Upward reest imates continue, even on “older” cohorts, and net 
results do not suggest profitability with anywhere n ear the uniformity suggested by the United States. 
 
105. Finally, Brazil emphasizes that showing gains or losses for particular cohorts  is not relevant 
for the purposes of item (j), which calls for the assessment of a “ programme ” across its entire 
portfolio.
221   
 (c) The Panel notes that the CCC 2002 financial statement in Exhibit BRA-158 refers to 
annual "administrative" expenses of $4 million, and that the US has also referred to this 
figure in its submissions (e.g. US first written submission, paragraph 175).  Please confirm whether the figures in the table in paragraph 161 of the US August 22 rebuttal submission (or a corrected version thereof) includes "administrative expenses", of approximately $4 million per year over the period 1992-2002, and explain why (or why 
not) this affects the substantive result.  
 Brazil’s Comment: 
 
106. Brazil agrees that for a co mplete assessment under item (j),  administrative expenses in the 
amount of approximately $39 million
222 should be added to the $230 million of losses recorded in the 
chart accompanying the US response to question 221(a),  or to $211 million of losses recorded in the 
Brazilian chart included as Exhibit Bra-193.  
(d) Please identify what is considered an "a dministrative expense" for this purpose.   
 
(e) The Panel notes the US statement in par agraph 160 of its answers to Panel questions 
following the first meeting that all cohorts are still open although the 1994 and 1995 cohorts will close this year.  Is this still an a ccurate statement?  If not, please indicate 
whether any cohorts have since "closed" for the period 1992-2002.   
 
Brazil’s Comment:  
107. The United States’ response is inaccurate.  Us ing the most recent data available, provided by 
the United States with its response to question 221( a), the subsidy figure net of reestimates for the 
1994 cohort will in fact be positive, indicating losses.  Based on this same data , the same thing can be 
said for other “older” cohorts, such as 1997 and 1998.  Moreover, the United States’ data 
demonstrates that 2002 and 2003 reestimates for “old er” cohorts 1992, 1993, 1994, 1996 and 1997 are 
all upward , indicating adjustments for even great er losses than previously anticipated. 
                                                      
 
 219 US 22 December 2003 Answer s to Questions, para. 86. 
 220 US 22 December 2003 Answer s to Questions, para. 93. 
 221 See Brazil’s 2 December 2003 Oral Statement, pa ra. 81; Brazil’s 18 November 2003 Further 
Rebuttal Submission, para. 248; Brazil’s 27 August 2003 Comments on US Rebuttal Submission, para. 61. 
 222 Exhibit Bra-133 (Guaranteed Loan Subsidy and Administrative Expenses of US Export Credit 
Guarantee Programmes GSM 102, GSM 103 and SCGP). WT/DS267/R/Add.2 
Page I-504  
 
108. Brazil emphasizes, however, that show ing gains or losses for particular cohorts  is not relevant 
for the purposes of item (j), which calls for the assessment of a “ programme ” across its entire 
portfolio.  
(f) The Panel notes the current "high" figures for 1997 and 1998 indicated in the original 
US chart.  Pending their confirmation a nd/or updating by the US, why does the US 
assert that a cohort will necessarily reach a "profitable" result (for example, the 1994 
cohort, which has almost closed still indi cates an outstanding amount)?  Do "re-
estimates" reflect also expectations about a cohort's future performance?  
 
Brazil’s Comment:  
109. Once again, the United States’ response is inaccu rate.  The United States asserts that data for 
the 1994 cohort indicate profitability.
223  Using the most recent data av ailable, however, provided by 
the United States with its 22 December 2003 respon se to question 221(a), the subsidy figure net of 
reestimates for the 1994 cohort will in fact be pos itive, indicating losses.  Based on this same data, the 
same thing can be said for other “older” cohorts, such as 1997 and 1998.  Moreover, the United States’ data demonstrates that 2002 and 2003 reestimates for “older” cohorts 1992, 1993, 
1994, 1996, 1997 are all upward , indicating adjustments for even greater losses than previously 
anticipated.  
110. The United States shows no evidence  to support its assertion that Pakistani and Ecuadorean 
defaults account for an im portant part of the poor performance of the 1997 cohort.
224  Nor does it offer 
any evidence to show that those defaults were resched uled, or that they are performing.  Additionally, 
the United States’ assertion that it expects the 1998 c ohort to show profitability is not supported by 
the data included with its response to question 221(a).225  As recently as 2002, upward reestimates 
were made to the 1998 cohort, indicating that there is no discernible trend of profitability. 
 111. In any event, Brazil notes that show ing gains or losses for a particular cohort  is not relevant 
for the purposes of item (j), which calls for the assessment of a “ programme ” across its entire 
portfolio.
226 
 (g) Why should the Panel "eliminate" the 2001 and 2002 cohorts from its examination, as 
suggested in paragraph 198 of the US further rebuttal submission?  
 Brazil’s Comment: 
 112. The United States confuses two issues in paragraphs 96-97 of its response.
227  First, it notes 
that reestimates need to be applied to the subsidy est imate included in the prior, actual year column of 
the US budget, since the original subsidy estimat e included in the budget year column of the US 
budget includes subsidy figures for some guarantees that are budgeted but not in fact granted.  In other words, fewer guarantees are granted than were b udgeted to be granted.  Brazil recognized this in 
Exhibit Bra-193, as does the United States in the ch art included with the US response to question 
221(a).  Nonetheless, both Brazil and the United States reach the same conclusion – over the 10-year 
period, operating costs and losses outpace premiums collected for the CCC programmes (even before 
administrative expenses are included in the calcula tion).  The United States tracks losses of $230 
                                                     
 
 223 US 22 December 2003 Answer s to Questions, para. 93. 
 224 US 22 December 2003 Answer s to Questions, para. 94. 
 225 US 22 December 2003 Answer s to Questions, para. 94. 
 226 See Brazil’s 2 December 2003 Oral Statement, pa ra. 81; Brazil’s 18 November 2003 Further 
Rebuttal Submission, para. 248; Brazil’s 27 August 2003 Comments on US Rebuttal Submission, para. 61. 
 227 US 22 December 2003 Answers to Questions, paras. 96-97. WT/DS267/R/Add.2 
Page I-505 
 
 
million in the chart accompanying its response to Question 221(a), and Brazil tracks losses of $211 
million in Exhibit Bra-193.  113. The second point the United States makes is th at the data it has presented in its response to 
question 221(a) includes no “operating e xperience” with the 2001 and 2002 cohorts.
228  This is wholly 
inaccurate.  Estimates of costs and losses are based, first and foremost, on historical experience with 
borrowers.229  Moreover, the chart included in the US response to question 221(a) shows that 
reestimates – which are in part made to reflect ope rating results – have already been made for both the 
2001 and 2002 cohorts.  
114. Finally, the United States’ assertion that there is a “trend of negative reestimates”
230 is not 
borne out by the data provided by the United States itself, in its response to question 221(a).  In 2002, 
upward reestimates were made for the 1992, 199 3, 1994, 1995, 1996, 1997 and 1999 cohorts.  
Similarly, in 2003, upward reestimates were made for the 1992, 1993, 1994, 1996, 1997, 2001 and 
2002 cohorts.  It is not at all “reasonable to expect  that in the fullness of time the data will … reflect 
further negative reestimates for cohorts 2001 and 2002”,231 as the United States asserts, for the simple 
reason that recent data provided by the United States shows significant upward reestimates across all 
cohorts , including “older” cohorts that are presumably closer to closing.   
 115. For all of these reasons, the US sugg estion that the 2001 and 2002 cohorts should be 
disregarded by the Panel in its item (j) analysis should be rejected. 
 
(h) Why should the Panel "eliminate", in addition, the 2000 cohort, as also suggested in 
paragraph 198 of the US further rebuttal submission for which information is 
presumably more "complete"?   
 
Brazil’s Comment:  
116. The United States notes that the original subs idy estimate for the 2000 cohort was reduced to 
reflect the fact that fewer guarantees were  granted than were budgeted to be granted.
232  This is wholly 
irrelevant, and does not even remotely imply profitability  for those guarantees that were actually 
issued in fiscal year 2000.  As the data provide d by the United States in its response to question 
221(a) demonstrates, there is still a large positive subsidy estimate, indicating losses, for the 2000 
cohort.    117. Moreover, the data provided by the United St ates in its response to question 221(a) shows 
that, as cohorts age, downward reestimates can not be assumed.  In 2002, upward reestimates were 
made for the 1992, 1993, 1994, 1995, 1996, 1997 a nd 1999 cohorts.  Similarly, in 2003, upward 
reestimates were made for the 1992, 1993, 1994, 1996, 1997, 2001 and 2002 cohorts.  Brazil also 
notes that cohorts that are “older” than the 2000 cohort – such as the 1994, 1997 and 1998 cohorts, continue to show positive s ubsidy estimates, or losses. 
 
                                                     
 
 228 US 22 December 2003 Answers to Questions, paras. 96, 99. 
 229 See e.g. Brazil’s 22 August Rebuttal Submission, para. 113 (including notes 234-235), Exhibit Bra-
118 (Federal Accounting Standards Advisory Board, S TATEMENT OF FEDERAL FINANCIAL ACCOUNTING 
STANDARDS NO. 19, Technical Amendments to Accounting Standards for Direct Loans and Loan Guarantees in 
Statement of Federal Financial Accounting Standards No. 2  (March 2001), p. 16 (para. 36) (“Actual historical 
experience of the performance of a risk category is a primary factor  upon which an estimation of default cost is 
based.”)).  
230 US 22 December 2003 Answer s to Questions, para. 98. 
 231 US 22 December 2003 Answer s to Questions, para. 98. 
 232 US 22 December 2003 Answer s to Questions, para. 101. WT/DS267/R/Add.2 
Page I-506  
 
118. For these reasons, the US suggestion that th e 2000 cohort should be disregarded by the Panel 
in its item (j) analysis should be rejected.  
(i) Under the US approach, at what point in time could a Panel ever make an assessment of 
the programme, if it had to wait for each cohort to be completed before it could be 
"properly" assessed?  Why is it inapprop riate for the Panel to include these "most 
recent years" in its evaluation, as the US suggests in paragraph 199 of its 18 November 
further rebuttal submission?  USA  
 Brazil’s Comment: 
 
119. Brazil notes that the United States has not  answered the Panel’s question.  In the 
United States’ view, it is only appropriate to make  an assessment of a programme under item (j) using 
a net present value accounting methodology once all cohorts  in a period are closed.  The United States 
specifically argues as follows: 
 
Not until the cohort is closed can one make an assessment as to whether or not that 
particular cohort represents a cost to the Federal Government.
233 
120. According to the United States, no cohort in the period 1992-2002 has yet closed.  Therefore, 
in the United States’ view, were the Panel to undertake a 10-year assessment of the CCC programmes 
under item (j) using a net present value accounting me thodology, it could only do so for the period 
1982-1991.  Of course, since net present valu e accounting for the CCC programmes only began in 
1992, following passage of the FCRA in 1990, su bsidy estimate and reestimate figures would be 
unavailable for this period.  121. In insisting that it is necessary to wait until c ohorts are closed to be used for the purposes of 
item (j), the United States is effectively saying th at net present value accounting is not an appropriate 
way to assess a programme under item (j).  As the Unite d States is well aware, the whole point of net 
present value accounting, endorsed by the US Congress and the President of the United States in the 
FCRA, is to assess the costs of contingent liabilities, like guarantees, when they are issued, rather than 
when they are paid (on a default of the underlyi ng loan).  Brazil notes that there are important 
retrospective elements to the net present va lue accounting methodology imposed by the FCRA – 
initial estimates of costs and losses are based, firs t and foremost, on historical experience with 
borrowers
234, and reestimates are calculated annually to adjust initial estimates as dictated by actual 
results.  In any 10-year period, of course, the mo st recent years will have been subject to fewer 
reestimates than the earlier years.  This is not, as the United States suggests, a flaw  in the 
methodology.  It is  the methodology.  The methodology records what the US Congress, the 
US President and US government accountants agr ee is a more actuarially appropriate means of 
assessing the costs and losses of c ontingent liabilities like guarantees.235 
 122. The United States’ rejection of net present value accounting as an accurate way to make an 
assessment under item (j) is particularly odd give n the United States’ conclusion that it would be 
                                                     
 
 233 See e.g. US 11 August 2003 Answers to Questions, para. 159. 
 234 See e.g. Brazil’s 22 August 2003 Rebuttal Submission, para. 113 (including notes 234-235), Exhibit 
Bra-118 (Federal Accounting Standards Advisory Board, S TATEMENT OF FEDERAL FINANCIAL ACCOUNTING 
STANDARDS NO. 19, Technical Amendments to Accounting Standards for Direct Loans and Loan Guarantees in 
Statement of Federal Financial Accounting Standards No. 2  (March 2001), p. 16 (para. 36) (“Actual historical 
experience of the performance of a risk category is a primary factor  upon which an estimation of default cost is 
based.”)). 
 235 Brazil’s 22 July 2003 Oral Statement, para. 128. WT/DS267/R/Add.2 
Page I-507 
 
 
inappropriate “to subject the [CCC programmes] to the analytical yoke of the unique circumstances of the Polish and Iraqi defaults over 10 years ago . . ”.
236   
 123. The United States had previously made th is assertion, albeit only with respect to Iraq.
237  The 
United States has offered no support whatsoever for this assertion238, which is inaccurate in at least 
two respects.  As Brazil has noted, these defaults were not  “over 10 years ago”.  The US General 
Accounting Office reports that the losses in Iraq occurred over the period 1990-1997.239  Nor are these 
defaults “unique,” as the United States argues.  As discussed below in Brazil’s comments on the US 
response to question 225, the evidence regarding write-offs  by the CCC (not even mentioning defaults 
that are not  written off) demonstrates that the Iraqi and Polish defaults are not at all “unique”. 
 
124. Setting factual inaccuracies aside, if the Unite d States wants to put post-1991 defaults on pre-
1992 guarantees behind it, it should embrace , rather than reject , the net present value accounting 
methodology adopted in the FCRA.  Using net present value accounting and the FCRA formula to make an assessment of the CCC programmes under item  (j), the United States is not held accountable 
(in these proceedings, at least) for post-1991 defau lts on pre-1992 cohorts.  Post-1991 activity on pre-
1992 CCC guarantees is treated separately
240, and is not in any way included in the data provided by 
the United States in its response to question 221(a), or  by Brazil in Exhibit Bra-193.  Even without the 
effect of the Iraqi and Polish defaults, both th e United States and Brazil conclude that the CCC 
programmes have lost money over the period 19 92-2002 (the United States puts those losses at over 
$230 million; Brazil at $211 million).  (For a complete assessment under item (j), administrative 
expenses in the amount of approxima tely $39 million should be added.241) 
 125. Rejecting the use of net present value a ccounting to assess the CCC programmes under item 
(j) does not keep the United States from cherry picki ng the results of the FCRA formula to make its 
case.  According to the United States, using data for some cohorts that have not yet closed is 
acceptable, but using data for other cohorts that have  not yet closed is not acceptable.  Several points 
are clear regarding the United States’ approach.    126. First, it is factually inaccurate for the United States to assert, in paragraph 103 of its response, 
that “trends” suggest that annual downward reestimat es on older cohorts will continue and will grow.  
The chart included with the US response to question 221(a) indicates upward reestimates in 2002 for 
every cohort  during the period 1992-1999.  Similarly, that same chart shows upward  reestimates in 
2003 for the 1992, 1993, 1994, 1996, 1997 and 2001 c ohorts.  Moreover, that same chart shows 
“trends” of positive net subsidy estimates after adjus ting for cumulative reestimates, even for cohorts 
that the United States considers are close to closing – 1994, 1997 and 1998.  In other words, these 
aging cohorts are losing money .  Thus, it is not at all factually accurate to conclude that reestimates 
are generally downward as a cohort ages and approaches closure, or that as a cohort approaches 
closure, the data suggests that it will have made money.  
                                                     
 
 236 US 22 December 2003 Answer s to Questions, para. 102. 
 237 US 22 August 2003 Rebuttal Submission, para. 172. 
 238 As the party asserting this fact, the United States bears the burden of proving it.  See e.g. Appellate 
Body Report, Japan – Apples , WT/DS245/AB/R, para. 157  (“It is important to distinguish, on the one hand, the 
principle that the complainant must establish a prima facie case of inconsistency with a provision of a covered 
agreement from, on the other hand, the pr inciple that the party that asserts a fact is responsible for providing 
proof thereof.”). 
 239 Brazil’s 27 August 2003 Comments, para. 65 (and document cited at note 81). 
 240 See e.g. Exhibit Bra-116 (Office of Management and Budget, Circular No. A-11, Section 185, p. 
185-4); Notes to Financial Statements contained in Exhibit US-129 (US Department of Agriculture, Office of 
Inspector General, Financial and IT Operations, Au dit Report, Commodity Credit Corporation’s Financial 
Statements for Fiscal Years 2003 and 2002, Audit Report N° 06401-16-FM (November 2003) p. 15). 
 241 Exhibit Bra-133 (Guaranteed Loan Subsidy and Administrative Expenses of US Export Credit 
Guarantee Programmes GSM 102, GSM 103 and SCGP). WT/DS267/R/Add.2 
Page I-508  
 
127. Second, even if one accepts the US argumen t that the 2001 and 2002 cohorts should be left 
out of the calculation because there are not yet any “ operating results” for those years (a point that is 
itself factually inaccurate, as addressed by Brazil above)
242, this does not explain the United States’ 
decision to eliminate the 2000 cohort – for whic h it acknowledges there are “operating results” – 
when it concludes that “cohorts 1992-1999, taken as a whole, currently reflect a net negative 
reestimate (i.e., profitable performance)”.243  When the 2000 cohort is included, the data provided by 
the United States in the chart accompanying its respon se to question 221(a) show losses.  This is a 
gross example of the cherry-picking exercise in wh ich the United States would have the Panel engage 
to gerrymander a result in the United States’ favour.  Consistent with the Panel’s duty to make an 
objective assessment of the facts, it should not accept this approach. 
 
128. Third, the US approach does not tell the Panel anything about how the CCC programmes  fare 
when assessed under item (j).  Item (j) calls fo r an assessment of the entire portfolios of the 
programmes themselves.244  In contrast, the US approach only offers some indication of how 
particular, carefully-selected cohorts  are performing (and as discussed in the previous two paragraphs, 
the results do not even reflect profitability for tho se cohorts).  The data provided by the United States 
itself demonstrates that using the net present valu e methodology imposed by the FCRA, premiums for 
the CCC guarantee programmes  over the period 1992-2002 were in adequate to cover the operating 
costs and losses of the progra mmes, in the amount of $230 million.245  For a complete assessment 
under item (j), administrative expenses in the amount of approximately $39 million should be 
added.246 
 
129. If the Panel does not consider that net presen t value accounting is an appropriate way of 
assessing the CCC programmes under item (j), Brazil h as also demonstrated that the long-term 
operating costs and losses of the programmes outpace premiums collected, using a cash-basis 
accounting  methodology.  The chart included at paragr aph 165 of Brazil’s 11 August 2003 Answers, 
reproduced below, tracks this result: 
                                                      
 242 US 22 December 2003 Answer s to Questions, para. 99. 
 243 US 22 December 2003 Answer s to Questions, para. 103. 
 244 See Brazil’s 2 December 2003 Oral Statement, para . 81; Brazil’s 18 November 2003 Further 
Rebuttal Submission, para. 248; Brazil’s 27 August 2003 Comments on US Rebuttal Submission, para. 61. 
 245 US 22 December 2003 An swers to Questions, char t included in response  to Question 221(a).  See 
also Exhibit Bra-193.  
 246 Exhibit Bra-133 (Guaranteed Loan Subsidy and Administrative Expenses of US Export Credit 
Guarantee Programmes GSM 102, GSM 103 and SCGP). WT/DS267/R/Add.2 
Page I-509 
 
 
 
Fiscal 
year Premiums collected (88.40) + 
Recovered principal and interest 
(88.40) + Interest revenue (88.25) Admin. expenses (00.09) + Default 
claims (00.01) + Interest expense 
(00.02) 
1993 $27,608,000 + $12,793,000 + 
$15,672,000247 = $56,073,000 $3.320,000248 + $570,000,000249+ 
$0250 = $573,320,000 
1994 $20,893,000 + $458,954,000 + $0251 = 
$479,847,000 $3,381,000252 + $422,363,000253 + 
$0254 = $425,744,000 
1995 $18,000,000 + $62,000,000 + $0255 = 
$80,000,000 $3,000,000 + $551,000,000 + 
$10,000,000256 = $564,000,000 
1996 $20,000,000 + $68,000,000 + 
$26,000,000257 = $114,000,000 $3,000,000258 + $202,000,000259 + 
$61,000,000260 = $266,000,000 
1997 $14,000,000 + $104,000,000 + 
$26,000,000261 = $144,000,000 $4,000,000262 + $11,000,000263 + 
$62,000,000264 = $77,000,000 
1998 $17,000,000 + $81,000,000 + 
$54,000,000265 = $152,000,000 $4,000,000266 + $72,000,000267 + 
$62,000,000268 = $138,000,000 
1999 $14,000,000 + $58,000,000 + $0269 = 
$72,000,000 $4,000,000270 + $244,000,000 + 
$62,000,000271 = $310,000,000 
2000 $16,000,000 + $100,000,000 + 
$99,000,000272 = $215,000,000 $4,000,000273 + $208,000,000274 + 
$62,000,000275 = $274,000,000 
2001 $18,000,000 + $149,000,000 + 
$125,000,000276 = $292,000,000 $4,000,000277 + $52,000,000278 + 
$104,000,000279 = $160,000,000 
                                                      
 247 Exhibit Bra-126 (US budget for FY 1995, p. 156). 
 248 Exhibit Bra-126 (US budget for FY 1995, p. 156). 
 249 Exhibit Bra-126 (US budget for FY 1995, p. 156). 
 250 No budget line, Exhibit Bra-126 (US budget for FY 1995, p. 156). 
 251 Exhibit Bra-95 (US budget for FY 1996, p. 162). 
 252 Exhibit Bra-95 (US budget for FY 1996, p. 161). 
 253 Exhibit Bra-95 (US budget for FY 1996, p. 162). 
 254 Exhibit Bra-95 (US budget for FY 1996, p. 162). 
 255 Exhibit Bra-94 (US budget for FY 1997, p. 176). 
 256 Exhibit Bra-94 (US budget for FY 1997, p. 175). 
 257 Exhibit Bra-93 (US budget for FY 1998, p. 175). 
 258 Exhibit Bra-93 (US budget for FY 1998, p. 174). 
 259 Exhibit Bra-93 (US budget for FY 1998, p. 175). 
 260 Exhibit Bra-93 (US budget for FY 1998, p. 175). 
 261 Exhibit Bra-92 (US budget for FY 1999, p. 106). 
 262 Exhibit Bra-92 (US budget for FY 1999, p. 105). 
 263 Exhibit Bra-92 (US budget for FY 1999, p. 106). 
 264 Exhibit Bra-92 (US budget for FY 1999, p. 106). 
 265 Exhibit Bra-91 (US budget for FY 2000, p. 112). 
 266 Exhibit Bra-91 (US budget for FY 2000, p. 111). 
 267 Exhibit Bra-91 (US budget for FY 2000, p. 112). 
 268 Exhibit Bra-91 (US budget for FY 2000, p. 112). 
 269 Exhibit Bra-90 (US budget for FY 2001, p. 112). 
 270 Exhibit Bra-90 (US budget for FY 2001, p. 110). 
 271 Exhibit Bra-90 (US budget for FY 2001, p. 111). 
 272 Exhibit Bra-89 (US budget for FY 2002, p. 118). 
 273 Exhibit Bra-89 (US budget for FY 2002, p. 116). 
 274 Exhibit Bra-89 (US budget for FY 2002, p. 117). 
 275 Exhibit Bra-89 (US budget for FY 2002, p. 117). 
 276 Exhibit Bra-88 (US budget for FY 2003, p. 120). WT/DS267/R/Add.2 
Page I-510  
 
2002 $21,000,000 + $155,000,000 + 
$61,000,000
280 = $237,000,000 $4,000,000281 + $40,000,000282 + 
$93,000,000283 = $137,000,000 
Total $1,841,920,000 $2,925,064,000 
Long-term Net Cost $1,083,144,000
 
130. In Exhibit US-128, the United States has also provided data to be used for an assessment of 
the CCC programmes under item (j) us ing cash-basis accounting.  As discussed further in Brazil’s 
comment to the US response to question 222, the data  offered by the United States in Exhibit US-128 
leads to the same conclusion, when adjusted to account properly for the impact of rescheduling on 
defaults.284 
 131. Finally, an even more fundamental appr oach demonstrates the incredibility of the 
United States’ assertion that “trends” suggest that the CCC programmes are making and will continue 
to make profits.  Congressional testimony by USDA officials and reports by the US General 
Accounting Office demonstrate that 1990-1997 de faults on Iraqi and Polish CCC guarantees 
amounted to approximately $4 billion.
285  The US General Accounting O ffice also noted in 1995 that 
defaults on Russian and Former Soviet Union GSM 102 guarantees similarly reached $2 billion by the end of 1993, and that despite repeated rescheduli ng agreements, those debts were not being repaid.
286  
These defaults were not, therefore, all “over 10 years ago”, as the United States suggests at 
paragraph 102 of its 22 December 2003 response.  Nor are they “unique”, as the United States also 
suggests at paragraph 102.  In addition to this $6  billion in defaults, the United States’ response to 
question 225 cites to further “writte n-off” or “forgiven” defaults of $20 million.  This does not, of 
course, account for other defaults that have  not yet been written-off or forgiven.   
 
132. Even if premiums collected  over the entire lifetime of the CCC guarantee programmes are 
considered, these defaults, in the amount of over $6 billion, would mean net losses in the amount of 
                                                                                                                                                                     
 277 Exhibit Bra-88 (US budget for FY 2003, p. 118). 
 278 Exhibit Bra-88 (US budget for FY 2003, p. 119). 
 279 Exhibit Bra-88 (US budget for FY 2003, p. 120). 
 280 Exhibit Bra-127 (US budget for FY 2004, p. 109). 
 281 Exhibit Bra-127 (US budget for FY 2004, p. 107). 
 282 Exhibit Bra-127 (US budget for FY 2004, p. 108). 
 283 Exhibit Bra-127 (US budget for FY 2004, p. 108). 
 284 At paragraph 103 of its 22 December 2003 respon se, the United States refers to “the uniform 
performance of reschedulings”.  The United States has offered no  proof that its reschedulings are performing.  
Yet as the party asserting this fact, the Unite d States bears the burden of proving it.  See, e.g., Appellate Body 
Report, Japan – Apples , para. 157  (“It is important to distinguish, on the one hand, the principle that the 
complainant must establish a prima facie case of inconsistency with a provision of a covered agreement from, 
on the other hand, the principle that th e party that asserts a fact is responsible for providing proof thereof.”).  In 
fact, according to the US General Accounting Office, resc heduling of GSM defaults has not historically been 
“performing,” and has rath er been in arrears.  See Brazil’s 22 August 2003 Comments, para. 99 (and note 94). 
 285 See Brazil’s 11 August 2003 Answers to Questions, para. 167 (second bullet point), citing  Exhibit 
Bra-87 (“Testimony of August Schumacher Jr., Unde r Secretary, Farm and Foreign Agricultural Service, 
USDA, before the Subcommittee on General Farm Comm odities, Hearing on the Asian Financial Crisis, 
4 February 1998,” p. 10-11) and Exhibit Bra-157 (US General Accounting Office, R EPORT TO THE CHAIRMAN , 
TASK FORCE ON URGENT FISCAL ISSUES , COMMITTEE ON THE BUDGET , HOUSE OF REPRESENTATIVES , 
International Trade:  Iraq’s Participation in US Agricultural Export Programs , GAO/NSIAD-91-76 
(November 1990), p. 27 (Table IV.2)).  See also  Brazil’s 18 November 2003 Further Submission, para. 251.  
 286 See Brazil’s 22 August 2003 Rebuttal Submission, para. 109 (note 226), citing Exhibit Bra-181 (US 
General Accounting Office, Report to the Ranking Mino rity 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 1995), p. 50-52 and Table 2.6).  See also  Brazil’s 18 November 2003 
Further Submission, para. 251. WT/DS267/R/Add.2 
Page I-511 
 
 
over $5.5 billion .287  Brazil emphasizes that this is just ta king account of the defaults about which 
Brazil is aware.  Brazil also notes that while the United States emphasizes the role of rescheduling in the recovery of defaults (which Brazil disputes in its comments on the US answer to question 222 below), the more than $6 billion in defaults discussed here have not been rescheduled , or at least 
where they have been (in the case of Russian a nd Former Soviet Union), they are in arrears.
288  This 
demonstrates that long-term operating un-recovere d and non-recoverable cost s and losses for the CCC 
programmes have outpaced premiums collected by a considerable amount.   133. Item (j) does not require the Panel to adopt or to reject any particular methodology to assess 
the CCC guarantee programmes.
289  Nor do the facts  require the Panel to endorse any one 
methodology to determine that the CCC guarant ee programmes constitute  export subsidies under 
item (j).  Brazil has demonstrated that under any methodology, properly applied, premiums for the 
CCC guarantee programmes over the period 1992-2002 were  inadequate to cover the operating costs 
and losses of the programmes.  222. For GSM 102, 103 and SCGP, please provi de year-by-year amounts from 1992 to 2003 
with respect to: (i) cumulative outstanding guar antees; (ii) claims paid; (iii) recoveries made; 
(iv) revenue from premiums; (v) other current revenue, including interest earned; (vi) interest charges paid; and (vii) administrative costs of  running the programmes.  Please indicate any 
allocation methodologies used to calculate administrative costs.  USA  
Brazil’s Comment:  
134. Exhibit US-128, provided by the United States in response to this question, allegedly demonstrates that using a cash basis accounti ng methodology, the CCC export credit guarantee 
programmes generate money.  In fact, the United States claims that revenue collected outpaces total 
expenses for the three programmes by $666 million.  Brazil has offered a similar chart at paragraph 
165 of its 11 August 2003 Answers.  Brazil’s ch art demonstrates that th e CCC programmes lost 
$1.048 billion over the period of FY 1993-2002.  The total difference between the US result and Brazil’s result is $1.75 billion.    135. This figure closely corresponds to the tota l “Claims Rescheduled” figure reported by the 
United States in Exhibit US-128.
290  Indeed, the difference betw een the chart provided by the 
United States in Exhibit US-128 and Brazil’s ch art in paragraph 165 of its 11 August 2003 Answers 
lies in the treatment of rescheduled debt.291  The United States treats defaulted guarantees that have 
                                                      
 287 Brazil has calculated that the highest amount of premiums that could have been generated would 
amount to approximately $450 million.  See Brazil’s 11 August 2003 Answers to Questions, para. 167 (second 
bullet point).  Data included in Exhibit US-128 suggests that Brazil is over-estimating the amounts of premia 
collected.  
288 The US General Accounting Office noted that defaults on Russian and Former Soviet Union 
guarantees reached $2 billion by the end of 1993, and that despite repeated rescheduling agreements, those debts 
were not being repaid.  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 1995), p. 
50-52 and Table 2.6).  Brazil raised this point in its 22 August 2003 Rebuttal Submission (at para. 109, note 
226) and its 18 November 2003 Further Submission (para. 251).  It remains unrebutted by the United States. 
 289 See Brazil’s 22 December 2003 Answers to Questions, paras. 68-75. 
 290 The fact that both figures do not match exactly is explained by the fact that the United States 
analyses data covering FY 1992-2003 on a cohort-specifi c basis, while the data available to Brazil covers FY 
1993-2002 and represents actual performance of  the CCC programs during a given fiscal year. 
 291 If the Panel were to compare all other totals, it would readily see that the totals correspond, taking 
into account that the US data covers FY 1992-2003 and is on the basis of cohorts, while Brazil’s data covers 
only FY 1993-2002 and represents the actual performance of the programs in a fiscal year.  Brazil does not have WT/DS267/R/Add.2 
Page I-512  
 
been rescheduled as 100 per cent recovered on the day the terms of the rescheduling are agreed.
292  
Brazil, on the other hand, has treated rescheduled cl aims as receivables, until they have been actually 
recovered.293  Only once CCC actually collects incremental amounts on a rescheduled claim is the 
corresponding incremental amount of the default c onsidered “recovered” and no longer a loss to 
CCC.294  Under Brazil’s approach, whatever portion of r escheduled claims is collected in a particular 
year is treated as a recovery, whereas under the United States’ approach, the entirety  of the 
rescheduled claims is treated as a recovery at the moment the terms of the rescheduling are agreed.  
 136. Brazil’s approach is the more actuarially appr opriate of the two, and is consistent with the 
cash-basis accounting preferred by the United States in this dispute.  Under cash-basis accounting, 
when financial commitments are rescheduled, they would normally be re-amortized on a new, longer 
payment schedule that reduces the amount of each periodic payment due from the borrower.  Rescheduling does not mean that a creditor collects  on an outstanding claim – it just means that the 
creditor hopes  to do so in the future by reducing th e amount the borrower has to pay each month.
295  
CCC, in fact, acknowledges that all it possesses followi ng a rescheduling is a receivable, and that not 
all receivables are collectable.296  (And in fact, CCC rescheduling has historically been in arrears.297)  
The US approach, therefore, overstates the effect  rescheduled guarantees have on claims paid, by 
automatically treating rescheduled guarantees, in ev ery instance, as actual recoveries of claims paid, 
at the moment the terms of the rescheduling are agreed.  (Indeed, the CCC’s Financial Statement for 
FY 2002 and 2003 confirm that rescheduling of e xport credit guarantee receivables covered both 
principle and interest, thereby confirming that not  all of the rescheduled debt performs and that 
additional interest charges were also rescheduled.)298 
 
                                                                                                                                                                     
access to FY 2003 data, as the actual fi gures for that year will only be publis hed in connection with the FY 2005 
budget.   
 292 See Exhibit US-128.  The United States defines “Claims Outstanding” (G) as “Claim Payments” (D) 
minus “Claims Recovered” (E) minus “Claims Rescheduled” (F).  It follows that a rescheduled claim no longer 
constitutes an outstanding claim at the moment the terms of the rescheduling are agreed.  Instead, for accounting purposes, the rescheduling is simply treated as 100 percent recovered.   
 
293 This is the reason that Brazil treats recovered prin ciple as a revenue inflow  for accounting purposes.  
The principle recovered is netted against the claims paid by CCC ( see Brazil’s 11 August  2003 Answers to 
Questions, para. 163).   
 294 Contrary to this approach, the United States nets defaults paid against the sum of recovered and 
rescheduled defaults ( see Exhibit US-128).  However, it only  hopes  to eventually recover rescheduled debt; the 
rescheduling alone does not mean it will do so. 
 295 See Exhibit Bra-115 (US General Accounting Office (“GAO”), Report to the Chairman, 
Subcommittee on Criminal Justice, US House of Representatives Committee on  the Judiciary, “Loan 
Guarantees:  Export Credit Guarantee Programs’ Long-Run Costs Are High,” GAO/NSIAD-91-180, 
19 April 1991, p. 3 (Table 1, Note a) (“GAO/NSIAD-91-180”) (accounts receivable for the GSM programmes 
“[i]ncludes delinquent payments and rescheduled debt not yet due .”) (emphasis added).  
 296 Brazil’s 27 August 2003 Comments on US Rebuttal Submission, para. 64. 
 297 Brazil’s 22 August 2003 Comments, para. 99.  See also Exhibit Bra-181 (US General Accounting 
Office, Report to the Ranking Minority Member, Committ ee on Agriculture, Nutrition, and Forestry, US Senate, 
Former Soviet Union:  Creditworthiness of Successor States and US Export Credit Guarantees , GAO/GGD-95-
60 (February 1995), p. 50-52 and Table 2.6 (noting that in 1995 defaults on Russian and Former Soviet Union 
guarantees reached $2 billion by the end of 1993, and that despite repeated rescheduling agreements, those debts 
were not being repaid.); Exhibit Bra-152 (GAO, Statement of Allan I. Mendelowitz, Director, Trade, Energy 
and Finance Issues, National Security and International Affairs Division, before the Task Force on Urgent Fiscal Issues of the Committee on Budget of the US House of Representatives, Status Report on GAO’s Reviews of the 
Targeted Export Assistance Programme, the Export E nhancement Programme, and the GSM-102/103 Export 
Credit Guarantee Programmes , GAO/T-NSIAD-90-53, 28 June 1990, p. 14 (noting that historically, the 
majority of GSM support that is  rescheduled is “in arrears.”).  
 
298 Exhibit US-129 (CCC Financial Statements for FY 2002 and 2003 – Audit Report, USDA, Office of 
the Inspector General, Report No. 06401-16-FM, November 2003, Note 5, p. 22). WT/DS267/R/Add.2 
Page I-513 
 
 
137. Brazil maintains its position that it is not a ppropriate to treat as “recovered” those losses 
(resulting from defaults) that were actually incurre d by the CCC export credit guarantee programmes 
and that are rescheduled, until such a point in time when the money actually has been recovered.   
Therefore, Brazil maintains that its cash-basis formul a is the appropriate one.  It follows that the CCC 
export credit guarantee programmes su ffered losses of $1.1 billion between fiscal years 1993-2002, 
resulting in a finding that the CCC programmes operate  at premium rates inadequate to cover the 
long-term operating costs and losses of the programmes, within the meaning of item (j).   
223. Are the premium rates applicable to GSM 102, 103 and SCGP subject to regular review 
as to their adequacy in enabling the opera ting costs and losses associated with these 
programmes?  If so, what criteria or benchmarks  are taken into consideration for this purpose? 
Secondly, how do the premium ra tes applied compare with the implicit cost of forfaiting 
transactions and with premiums fo r export credit insurance?  USA 
 Brazil’s Comment: 
 
138. Although the United States asserts that premium rates for the GSM-102, GSM-103 and SCGP programmes are “reviewed annually”
299, it offers no evidence to support this assertion.300  As Brazil 
has already noted, both USDA’s Inspector General and the US General Accounting Office have noted 
the CCC’s failure to change its premium rates or to reflect credit risk in those rates – and its inability 
to do so given the one-per cent fee cap included in US law – as evidence of a failure to cover costs 
and losses.301 
 139. The CCC guarantee programmes are unique financing instruments that are not available on the market.
302  Brazil has demonstrated that forfaits and CCC export credit guarantees are not similar 
financial instruments, and therefore that the te rms for forfaits cannot serve as benchmarks against 
which to determine whether CCC export credit guarantees confer “benefits”.303  The United States has 
offered no  evidence that the two instruments “compete as a method for trade financing over 
comparable tenors in similar markets ….”304  Further, the regulations for the CCC programmes belie 
the United States’ assertion that “an importer does not necessarily realize any benefit from a CCC export credit guarantee”.
305  The regulations state that the programmes operate in cases where banks 
“would be unwilling to provide financing without CCC’s guarantee”.306  To summarize the differences 
between the two instruments, the essential function of a CCC guarantee is to make possible an export 
sale that would otherwise be impossible.  A forfait, by contrast, does not make an impossible sale possible, but instead merely allows an exporter to collect its receivable without waiting for that 
receivable to come due.
307  This opportunity, offered by the forfait, only arises if the CCC guarantee 
has made the sale happen in the first place. 
 
                                                      
 299 US 22 December 2003 Answer s to Questions, para. 107. 
 300 As the party asserting this fact, the Unite d States bears the burden of proving it.  See Appellate Body 
Report, Japan – Apples , para. 157  (“It is important to distinguish, on the one hand, the principle that the 
complainant must establish a prima facie case of inconsistency with a provision of a covered agreement from, 
on the other hand, the principle that the party that asserts a fact is responsible for providing proof thereof.”).  
301 Brazil’s 22 December 2003 Answers to Questions, paras. 63-64. 
 302 See Exhibit Bra-190 (Affidavit of Marcelo Franco, Seguradora Bras ileira de Crédito à Exportação). 
 303 Brazil’s 22 August 2003 Rebuttal Submission, paras. 103-105;  Brazil’s 27 August 2003 Comments 
on US Rebuttal Submission, paras. 68-70;  Brazil’s 7 October 2003 Oral Statement, para. 72;  Brazil’s 
18 November 2003 Further Rebuttal Submission, paras. 233-241;  Brazil’ s 2 December 2003 Oral Statement, 
para. 79; Brazil’s 22 December 2003 Answers to Questions, paras. 65-66. 
 304 US 22 December 2003 Answer s to Questions, para. 109. 
 305 US 22 December 2003 Answer s to Questions, para. 109. 
 306 Exhibit Bra-38 (7 CFR 1493.10(a)(2) (GSM 102 and GSM 103 regulations)).  See also  Exhibit Bra-
38 ((7 CFR 1493.400(a)(2) (SCGP regulations)). 
 307 See, e.g., Brazil’s 18 November 2003 Further Rebuttal Submission, para. 237. WT/DS267/R/Add.2 
Page I-514  
 
140. Even if the two instruments were similar, the United States has not met its burden to establish 
(under either Article 10.3 of the Agreement of Agri culture, or as the party asserting the fact) that CCC 
guarantees are provided on terms no better than those offered for forfaiting instruments on the market.  
Although the United States curiously repeats its argu ment that it “does not have access to specific 
implicit rates available in the marketplace”
308, Brazil presented evidence regarding forfaiting fees five 
months ago, with its 27 August 20 03 submission.  That evidence demonstrates that forfaiting fees are 
well above fees for CCC export credit guarantees.309  It also demonstrates that unlike CCC guarantee 
fees, which vary on the basis of only one factor – the length of the underlying credit – forfaiting fees 
additionally vary according to the risks involved in the transaction310, as one would expect of any 
market-based financial instrument.  
141. Similarly, export credit insurance and CCC e xport credit guarantees are not similar financial 
instruments, and therefore the terms for export cr edit insurance cannot serve as benchmarks against 
which to determine whether CCC export credit guara ntees confer “benefits”.  The United States has 
acknowledged the differences between CCC guarantees and export credit insurance.
311  One critical 
difference, noted by the WTO Secretariat in the WTO document quoted by the United States in 
paragraph 108 of its 22 December 2003 response, is that premia for insurance vary according to the 
credit rating or risk status of both the importer and the importing country.312  In contrast, neither 
importer risk nor country risk have any impact on the premiums payable for GSM 102, GSM 103 or 
SCGP guarantees.313  Moreover, Brazil notes that while export credit insurance is indeed available for 
agricultural commodities, export cr edit insurance for agricultural co mmodities is limited to 360 days, 
or the expected/useful life of the commodity in question.314  In contrast, CCC guarantees are available 
for terms of up to 10 years.315  
 142. Even if the two instruments were similar, the United States has not met its burden to establish 
(under either Article 10.3 of the Agreement of Agri culture, or as the party asserting the fact) that CCC 
guarantees are provided on terms no better than thos e offered for export credit insurance obtained on 
the market.  The United States argues that “[p]ri vate commercial quotes for export credit insurance 
are simply not available to the United States”.
316  Brazil attaches two premium fee schedules:  first, a 
fee schedule published by Export Insurance Services, Inc., a private broker for export credit insurance 
for small businesses offered by the US Export-Import Bank (“Ex-Im Bank”) (Exhibit Bra-410); and second, a fee schedule published by Ex-Im Bank itself for export credit insura nce for small businesses 
(Exhibit Bra-409). 
 
143. The Panel will note that the rates in Ex-Im  Bank’s own fee schedule, which do not even 
include administrative fees that would be adde d by a private broker such as Export Insurance 
Services, exceed those offered for CCC guarantees by considerable margins.
317  When administrative 
                                                      
 308 US 22 December 2003 Answer s to Questions, para. 109. 
 309 Brazil’s 27 August 2003 Comments on US Rebuttal Submission, paras. 76-77 and Exhibit Bra-199 
(Trade and Forfaiting Review, Volume 6, Issue 9 July/August 2003).  
310 Brazil’s 27 August 2003 Comments on US Rebuttal Submission, paras. 75-76. 
 311 US 11 August 2003 Answers to Questions, para. 179.  The United States has correctly observed that 
“[i]f the commercial market does not offer a particular borrower the exact terms  offered by a government, then 
the government is providing a benefit to the recipient . . .”  Panel Report, Canada – Aircraft II , WT/DS222/R, 
Annex C-2 (para. 7) (emphasis added). 
 312 G/AG/NG/S/13, para. 9. 
 313 See US 11 August 2003 Answers to Questions, para. 184; Brazil’s 11 August 2003 Answers to 
Questions, paras. 192, 195.  
314 Exhibit Bra-408 (Export-Import Bank, Standard Repayment Terms), p. 3 (Chart II, no. 2), 4 (second 
bullet point).  Brazil made a similar point with respect to forfaits.  See Brazil’s 27 August 2003 Comments, 
para. 78.  
315 Brazil’s 24 June 2003 First Submission, para. 101. 
 316 US 22 December 2003 Answer s to Questions, para. 109. 
 317 Compare  Ex-Im Bank schedule in Exhibit Bra-409 with CCC fee schedule in Exhibit Bra-155. WT/DS267/R/Add.2 
Page I-515 
 
 
fees levied by a market-based institution are acc ounted for, the differences become even more 
pronounced.318 
 144. This comparison likely understates the extent  to which CCC rates are below-market, for two 
reasons.  First, government support from Ex-Im Bank does not constitute a market benchmark for the 
purposes of Article 1.1(b) of the SCM Agreement.
319  Nonetheless, this comparison demonstrates that 
the CCC guarantee programmes do not even meet non-market benchmarks.320  Second, the 
comparison involves export credit insurance for smal l businesses.  As noted by the US International 
Trade Administration’s Foreign Commercial Service,  export credit insurance for small businesses is 
offered at reduced premium rates.321 
 
145. Finally, because the provisions address some what different disciplines and could require 
different means of implementation, Brazil reiterates its earlier request that the Panel find that the CCC 
programmes constitute export subsidies by virtue of both Articles 1 and 3.1(a) of the SCM Agreement 
and item (j).322 
 
224. Please indicate how the CCC's cost of borrowing was treated in the 2002 financial 
statement of the CCC, in Exhibit BRA 158.  USA  Brazil’s Comment: 
 146. Brazil notes that it has accounted for CCC’s interest expense and revenue figures (lines 00.02 
and 88.25 of the US budget) in its cash-basis accounting methodology.
323 
 
225. Please indicate whether there was any instan ce where the CCC "wrote off" debt and, if 
so,  please indicate the accounting regulation or  principle used.  If a "written off" debt is 
subsequently recovered, do the CCC's accounts ref lect both the interest cost and interest 
received in relation to the debt during the time it was "written off"?  USA  Brazil’s Comment: 
 
147. As noted in Brazil’s comment on the US res ponse to question 221(i), if the Panel uses a net 
present value accounting methodology to assess  the CCC programmes under item (j), the 
United States would not be held accountable (in th ese proceedings, at least) for write-offs on pre-1992 
cohorts.  Activity on CCC guarantees issued before 1992 is not in any way included in the net present 
                                                     
 
 318 Compare  Export Insurance Services, Inc. fee schedule in Exhibit Bra-410 (p. 6-7) with CCC fee 
schedule in Exhibit Bra-155.  
319 See Appellate Body Report, United States – Countervailing Duties on EC Products , 
WT/DS212/AB/R, para. 124 (Appellate  Body questions whether a “fair market price” is reached when a 
government “shapes” the market, stating that “[t]he Panel’ s absolute rule of ‘no benefit’ may be defensible in 
the context of transactions between tw o private parties taking place in reas onably competitive markets; however, 
it overlooks the ability of governments to obtain certain results from markets by shaping the circumstances and 
conditions in which markets operate.”).  See also  Arbitrator’s Decision, Brazil Aircraft , WT/DS46/RW, 
para. 6.95 (One reason the Panel offered for rejecting a proposed benchmark was that the benchmark was “the 
direct result of a government  guarantee,” rather than an indication of  the “commercial or market rate of 
interest.”).  See also id ., paras. 6.90-6.92, 6.104. 
 320 The Panel will recall that Brazil made a simila r comparison between Ex-Im Bank export guarantee 
fees and CCC export guarantee fees , and reached the same result.  See Brazil’s 22 August 2003 Comments, 
para. 110. 
 321 Exhibit Bra-411 ( The Federal Scoop:  US Government Financing for Service Exports , EXPORT 
AMERICA  (May 2000), p. 33). 
 322 Brazil’s 18 November 2003 Further Rebuttal Submission, para. 228. 
 323 See Brazil’s 11 August 2003 Answers to Questions, para. 165.  See also  Brazil’s comments on 
Question 221(i), above. WT/DS267/R/Add.2 
Page I-516  
 
value data provided by the United States in its r esponse to question 221(a), or by Brazil in Exhibit 
Bra-193.
324  Even without the effect of the write-o ffs detailed in paragraph 114 of the US 
22 December 2003 response – all of which relate to pre-1992 cohorts – both the United States and 
Brazil conclude that the CCC programmes have lo st money over the peri od 1992-2002 (the United 
States puts those losses at over $230 million; Brazil at $211 million).325  (For a complete assessment 
under item (j), administrative expenses in the amount of approximately $39 million should be 
added.326) 
 148. Under a cash-basis accounting methodolog y of assessing the CCC programmes under item (j), 
the United States should be held accountable for write-offs and “debt forgiveness” (as defined in 
paragraph 113 of the US response) that occurred during the period 1992-2002, even if it relates to 
guarantees that were issued before 1992.  Alth ough this is not clear from the US 22 December 2003 
response, to the extent that the write-offs cat alogued in paragraph 114 of the US 22 December 2003 
response are related to defaults  that occurred in the period 1992-2002, Brazil presumes that the 
defaults themselves would be included in the line ite m (00.01) for default claims, which are tracked in 
the chart included at paragraph 165 of Brazil’s 11 August 2003 Answers to Qu estions, and reproduced 
in Brazil’s comments on the US  response to question 221(i), supra .  Applying a cash-basis accounting 
methodology, Brazil demonstrated that long-te rm operating costs and losses outpace premiums 
collected over the period 1992-2002 for the CCC programmes, by $1.083 billion.  
226. If a debt was "written off" more than te n years ago, does it still create a cost to the 
programme?  If so, how is this reflected in th e 2002 financial statement of the CCC, in Exhibit 
BRA 158 (or any other material)? USA   Brazil’s Comment: 
 149. As discussed in Brazil’s comment on the US r esponse to question 225, if the Panel uses a net 
present value accounting methodology to assess th e CCC programmes under item (j), the United 
States would not be held accountable (in these proceedi ngs, at least) for write-offs that occurred more 
than 10 years ago.  The reason is that those write-o ffs would relate to guarantees issued prior to 1992.  
Activity on CCC guarantees issued before 1992 is not in any way included in the net present value 
data provided by the United States in its response to question 221(a), or by Brazil in Exhibit Bra-
193.
327   
 150. Under a cash-basis accounting methodolog y of assessing the CCC programmes under item (j), 
the United States would not be held accountable fo r write-offs and “debt fo rgiveness” that occurred 
more than 10 years ago (at least in this proceedi ng), assuming that the period of review is 1993-2002.  
This is because the underlying defaults would also ha ve occurred more than 10 years ago, even before 
the write-offs or forgiveness.  151. However, Brazil would like to correct the United States’ mischaracterization of Brazil’s 
position about the 10-year period of review for an ass essment under item (j).  Brazil does not agree, as 
the United States asserts, that an examination beyond 10 years is “inappropriate”.
328  Rather, Brazil 
                                                      
 324 As Brazil notes in its comment on Question 221(g) , however, estimates of costs and losses made in 
the context of the FCRA formula are based, first and foremost, on historical experience with borrowers.  Thus, 
prior defaults would tend to lead to positive subsidy estimates on new guarantees. 
 325 See US 22 December 2003 Answers to Questions, response to Question 221(a); Brazil’s Exhibit 
Bra-193.  
 326 Exhibit Bra-133 (Guaranteed Loan Subsidy and Administrative Expenses of US Export Credit 
Guarantee Programmes GSM 102, GSM 103 and SCGP). 
 327 As Brazil notes in its comment on the US respons e to Question 221(g), however, estimates of costs 
and losses made in the context of the FCRA formula are based, first and foremost, on historical experience with 
borrowers.  Thus, prior defaults would tend to lead to positive subsidy estimates on new guarantees. 
 328 US 22 December 2003 Answer s to Questions, para. 102. WT/DS267/R/Add.2 
Page I-517 
 
 
considers that a 10-year period is adequate  in this case to get a picture of the performance of the CCC 
programmes’ portfolio.  If the Panel wishes to look beyond that 10-year period, Brazil does not believe that doing so would be “inappropriate”.  Brazil has noted that should the Panel wish to 
corroborate evidence showing that over the peri od 1992-2002, the long-term operating costs and 
losses for the CCC programmes outpace premiums collected, it could look to CCC’s 2003 financial 
statements, which state that uncollectible am ounts on pre-1992 CCC guarantees outpace premiums 
collected during the period 1981-1991 by nearly $2 billion.
329   
 
227. The United States has indicated that Braz il continues to "mischar acterize" the amount 
of $411 million in the 2002 financial statement of the CCC, in Exhibit BRA 158, pp. 18 & 19.  
Can the United States please indicate how it believes this amount – referred to on p. 19 of the 
Exhibit as "Credit Guarantee Liability-End of Fiscal Year" - should be properly characterized?  How, if at all, does it represent CCC operating costs or losses? USA 
 Brazil’s Comment: 
 
152. In paragraphs 117-118 of its 22 December 2003 response, the United States again rejects use of the FCRA formula as an appropriate methodolog y to make an assessment of the CCC programmes 
under item (j), since it is based on “estimates”.  As not ed above, the United States’ view is that it is 
only appropriate to use a net present value accounting methodology once all cohorts in a period are 
closed.
330  In paragraphs 117 and 121 of  its 22 December 2003 response, the United States argues that 
the “credit guarantee liability” figure included in th e CCC financial statements, which is calculated 
using a net present value accounting methodology, does not reflect “losses”, within the meaning of 
item (j), but instead only estimated losses.    153. This does not stop the United States from app ealing to the FCRA formula when it believes it 
suits its purposes to do so.  In paragraph 119, the United States c ites with approval the $22 million 
credit guarantee liability figure used in CCC’s 2003 financial statements as evidence of “good 
performance” by the CCC guarantee programmes.  Braz il notes, however, that at page 4 of the notes 
to its 2003 financial statements, CCC defines the term “credit guarantee liability” as “the estimated 
net cash outflows (loss) of the gu arantees on a net present value basis”.
331  Thus, the $22 million 
figure still represents a “loss”, as does the $230 million cumulative figure listed in the chart included with the US response to question 221(a).  For a complete assessment under item (j), administrative 
expenses in the amount of approxima tely $39 million should be added.
332 
 154. Finally, Brazil directs the Panel’s attention to the massive increase from 2002 to 2003 in the 
losses CCC considers it will incur at the time all post- 1991 guarantee cohorts are closed.  At page 15 
of the notes to its 2003 financial statements, CCC es timates that when all post-1991 cohorts close, it 
                                                     
 
 329 Notes to Financial Statements contained in Exhibit US-129 (US Department of Agriculture, Office 
of Inspector General, Financial and IT Operations, Audit Report, Commodity Credit Corporation’s Financial 
Statements for Fiscal Years 2003 and 2002, Audit Report N° 06401-16-FM (November 2003) p. 15).  Brazil notes that unlike the CCC 2002 financial statements included in Exhibit Bra-158, the CCC 2003 financial 
statements included in Exhibit US-129 are not publicly available on the USDA website.  See 
http://www.usda.gov/oi g/rptsauditsccc.htm.  
 
330 See e.g. US 11 August 2003 Answers to Questions, para. 159 (“Not until the cohort is closed can 
one make an assessment as to whether or not that pa rticular cohort represents a cost to the Federal 
Government.”). 
 331 Notes to Financial Statements contained in Exhibit US-129 (US Department of Agriculture, Office 
of Inspector General, Financial and IT Operations, Audit Report, Commodity Credit Corporation’s Financial Statements for Fiscal Years 2003 and 2002, Audit Report N° 06401-16-FM (November 2003) p. 4). 
 
332 Exhibit Bra-133 (Guaranteed Loan Subsidy and Administrative Expenses of US Export Credit 
Guarantee Programmes GSM 102, GSM 103 and SCGP). WT/DS267/R/Add.2 
Page I-518  
 
will have lost $1.16 billion (as opposed to th e $770 million it reported in  its 2002 financial 
statements).
333  
 
228. What accounting principles should the Pane l use in assessing the long-term operating 
costs and losses of these three programmes?  For example, if internal US Government 
regulations require costs to be treated differently to generally accepted accounting principles, is 
it incumbent on the Panel to conduct its analysis in accordance with that treatment?  BRA, USA 
 V. SERIOUS PREJUDICE  
 
229. What is the meaning of the words "may arise in any case where one or several of the 
following apply" (emphasis added) in Article 6.3 of the SCM Agreement ?  Please comment on 
the possibility that these words indicate that on e of the Article 6 subparagraphs may not be 
sufficient to establish serious prejudice and that serious prejudice should be considered an additional or overriding criterion to the fa ctors specified in the subparagraphs.  BRA 
 
230. Please comment on Brazil's views on Article 6.3 of the SCM Agreement as stated in 
paragraphs 92-94 of its further submission. USA   231. Do you believe that the now-expired Article 6.1 and/or Annex IV of the SCM Agreement 
are relevant context for the Panel's interpretation of Article 6.3?  USA 
 
Brazil’s Comment: 
 
155. For the reasons Brazil has previously artic ulated, Brazil disagrees that Article 6.1 and 
Annex IV of the SCM Agreement are relevant contex t for interpreting the present text of Part III of 
the SCM Agreement.
334   
 156. The US 22 December 2003 response to Questi on 243 confirms the fundamental role that 
Annex IV plays in its analysis of actionable s ubsidies in Part III of the SCM Agreement.  The 
United States treats Annex IV as if the title of th e Annex were “Calculation of the Total Ad Valorem 
Subsidization for Subsidies Subject to Part III of th e Agreement”.  But all participants know and agree 
that Annex IV is dead.  If it were not, then Braz il’s submissions would certainly have been far more 
concise, as the total ad valorem subsidization for the US subsidies is 95 per cent over the four-year 
period of investigation.   157. The US reference in paragraph 131 of its 22 December 2003 Answer to Question 231 to the 
Appellate Body report in US – CVD’s on EC Products is inapposite.  That case involved 
countervailing duty measures, not actionable subsi dy measures and claims under Part III of the SCM 
Agreement.  The Appellate Body’s c itation to Annex IV was in the context of citing to a long list of 
SCM provisions that refer to the “recipient” of a “benefit” in the SCM Agreement.  The Appellate 
Body did not, as the United States seeks to do in this case, use Article IV as the sole legal basis for the 
wholesale inclusion of countervailing duty methodologies into Part III of the SCM Agreement.   
 
158. In paragraph 132 of its 22 December 2003 An swer, the United States continues to make the 
assumption that contract payments are “not tied to  the production of upland cotton”.  As a factual 
                                                     
 
 333 Notes to Financial Statements contained in Exhibit US-129 (US Department of Agriculture, Office 
of Inspector General, Financial and IT Operations, Audit Report, Commodity Credit Corporation’s Financial 
Statements for Fiscal Years 2003 and 2002, Audit Report N° 06401-16-FM (November 2003) p. 15).  The 
United States reports that premiums of $246 milli on were collected on CCC guarantees over the period 1992-
2003.  See Exhibit US-128. 
 334 Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 96-107;  Brazil’s 2 December 2003 
Oral Statement, paras. 4-6.  WT/DS267/R/Add.2 
Page I-519 
 
 
matter, Brazil has demonstrated that contract payments are tied to the production of upland cotton.335  
The evidence of much higher upland cotton per-acre payments, among many other facts, demonstrates 
that the de jure “flexibility” is, in practice, not ex ercised by upland  cotton producers336, and that the 
bulk of the upland cotton contract payments are paid to current upland cotton producers.337   
 
159. More importantly, while the United States rep eats its calls for Brazil to implement various 
allocation methodologies in paragraph 132 of its 22 December 2003 Answers to Questions, it refuses 
to provide the information that would allow Brazil or the Panel to even perform a calculation using 
the flawed US methodology based on Annex IV.  And the United States is just plain wrong to suggest 
in paragraph 132 of its 22 Decem ber 2003 response that Brazil has “refus[ed] to countenance any 
allocation of the decoupled payments it has cha llenged … ”.  Brazil’s 20 January 2004 Answer to 
Question 258 explained in greater detail in Br azil’s methodology for allocating the payments.338  
Brazil even demonstrated that applying the US allocation methodology with the flawed and incomplete US 18/19 December 2003 data resulted in  levels of support to upland cotton that were 
consistent with Brazil’s 14/16
th Methodology.339   
 
232. How, if at all, should the Panel take in to account the effects of other factors in its 
analysis of the effects of US subsidies under Arti cle 6.3? If the Panel should compare the effects 
of other factors to establish the relative signific ance of one compared to others, how would this 
be done? What would be relevant “factors” for this purpose? BRA 
 
233. In Brazil's view, what is or are the "same market(s)" for the purposes of Article 6.3(c)? 
Does Brazil's view of "world market" imply that regardless of which domestic (or other) "market" is examined, price suppr ession will be identifiable? BRA 
 234. Does "significant" price suppression und er Article 6.3(c) necessarily amount to 
"serious" prejudice within the meaning of Article 5(c)?  Could the level of "significance" of any 
price suppression under Article 6.3(c) determine whether any prejudice under Article 5(c) rises 
to the level of "serious prejudice"? USA, BRA  
                                                     
 
 335 See Brazil’s 22 August 2003 Rebuttal Submission, S ection 2.2 and references included therein.  See 
also Brazil’s 18 November 2003 Further Rebuttal Submission, Section 3.7.5. 
 336 See Brazil’s 22 August 2003 Rebuttal Submission, S ection 2.2 and references included therein.  See 
also Brazil’s 18 November 2003 Further Rebuttal Submission, Section 3.7.5. 
 337 Brazil’s 18 November 2003 Further Rebuttal Submission, Section 2.1; Brazil’s 28 January 2004 
Comments and Request Regarding US Data, Section 9.  See also Brazil’s comment on Question 205, above. 
 338 Brazil’s 20 January 2004 Answers to Additional Questions, paras. 43-55. 
 339 Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Section 10. WT/DS267/R/Add.2 
Page I-520  
 
Brazil’s Comment: 
 
160. The US 22 December 2003 response again ignores the determination of the panel in 
Indonesia – Automobiles , which found that the term “significant” in Article 6.3(c) required 
examination of a link between the size of the margins of undercutting and whether those margins 
could “meaningfully affect supp liers of the imported product”.
340  Under this “meaningfully affect” 
standard, the focus, at least fo r the purposes of Article 6.3(c)341, is on producers of the non-subsidized 
like product.  Have their revenue, investments, or crop choices been “meaningfully affected” by the level of price suppression experienced?  These are the types of questions that provide guidance as to 
whether a particular level of price suppression is significant or not.  The notion of “meaningfully 
affect” and “serious prejudice” are, in essence, equivalent for the purpose of Article 6.3(c). 
 161. The US 22 December 2003 response to Question 234, at paragraph 136, states that “[t]he use of the term ‘significant’ however, would seem to be intended to prevent insignificant price effects 
from rising to the level of serious prejudice.”  But this statement presumes some sort of an objective 
standard exists by which to judge what are “insi gnificant price effects”.  The United States provides 
no suggestions how this Panel or fu ture panels are to make such an abstract determination.  The 
United States’ position implies th at the “Panel will know them when they see them”.  But the 
Article 6.3(c) test, at least, requires the Panel to  make an assessment of the relationship between the 
price effects and serious prejudice.  And this link is to be judged by whether the price effects are “significant”.   
 
162. The Panel should firmly reject the two-step pr ocess suggested by the US interpretation.  The 
first step would require a finding, using some unkno wn, non-textual standard, of whether a particular 
price level of suppression is “significant”.  Evid ence that Brazilian producers would have lost 
$71.5 million during MY 1999-2002 from only one cent per pound of price suppression
342 would be 
totally irrelevant for the first step.343  Only if a panel makes this “significant” finding, divorced from 
any impact on producers, would it move to the second step, i.e., whether that level of now-significant 
price effects caused serious prejudice.  But such  an interpretation, like many proposed by the 
United States in this dispute, would leave Members w ho lost millions of dollars due to the effects of 
subsidies without a remedy.  There is no textual basis for such a result, which would be contrary to the 
object and purpose of the SCM Agreement.  In sum, the Panel should adopt the Indonesia – 
Automobiles standard of judging significance in light of whether the particular level of price 
suppression “meaningfully affects” non-subs idized suppliers of the like product.344   
 
                                                      
 340 “Although the term “significant” is not defined, the inclusion of this qualifier in Article 6.3(c) 
presumably was intended to ensure that margins of undercutting so small that they could not meaningfully affect 
suppliers of the imported product whose price was being undercut are not considered to give rise to serious 
prejudice…” (emphasis added).  Panel Report, Indonesia – Automobiles , WT/DS54/R, para. 14.254. 
 341 Brazil notes that Articles 6.3( a), (b) and (d) do not contain similar qualitative or quantitative 
qualifiers.   
 342 Brazil’s 9 September 2003 Further Submission, para. 258 (citing a $143 million loss from a 2 cents 
per pound level of price suppression).   
 343 A good example of evidence that would be irrelevant under the first part of the US test is found in 
the testimony of Christopher Ward.  He indicated that a 10 percent increase in prices  for Mato Grosso producers 
in MY 2000 and MY 2001 would have permitted them to cover their variable costs for MY 2001 and come 
close to covering variable costs in MY 2000.  Howeve r, because of the losses th ey suffered without such 
revenue increases, many Mato Grosso producers reduced production or were forced out of cotton production.  
Mato Grosso production fell by 34 per cent between MY 2000 -2001.  Exhibit Bra-283 (Statement of 
Christopher Ward – 7 October 2003, paras. 8-10 and accompanying graph). 
 344 The US example of a per-unit payment of 0.0001 cents per pound in paragraph 136 is irrelevant, 
because under its hypothetical, this particular level of price suppression could neve r “meaningfully affect” any 
suppliers of the like product. WT/DS267/R/Add.2 
Page I-521 
 
 
163. 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”.345  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. Under th ese circumstances, any m easurable and identifiable 
effect on the world price from the subsidies provided by a singl e Member is important.  In this case, 
the Panel is faced with particularly compelling facts – during MY 1999-2002 (and even during MY 
1997-1998) the record shows that the absolute nume rical 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.346 
 164. Finally, the United States argues in paragraph 136 that the effect of Brazil’s interpretation is 
that any production subsid y would run afoul of Part III of the SC M Agreement, thus turning it into a 
prohibited subsidies provision.  There is no basis fo r this argument.  First, it is difficult to see how 
extremely low levels of production subsidies (0.0001 cents per pound price effects in the US example) 
could “materially affect” any competing producers of the non-subsidized Member.  Only production 
subsidies that generate price suppression significant enough to “materially affect” competitors would 
be subject to the disciplines of Part III.  This is  far from an insignificant th reshold, and gives meaning 
to the word “significant”.   
165. Second, this US argument is similar to othe r arguments it has made to the effect that any 
limitations on the amount of subsidies would change “actionable” subsidies to “prohibited” 
subsidies.
347  The United States loses sight of the basic f act that an actionable subsidy that creates 
adverse effects is a violation of WTO rules.  No Member has the right to provide unlimited production 
subsidies if they cause serious prejudice.  Members deciding to impose discretionary or mandatory 
limits on the amount of production subsidies may si gnificantly diminish the possibility that such 
subsidies create significant price suppression or an ongoing threat of serious prejudice.  But it is wrong for the United States to argue that because th e only practical way to impose limitations on 
production subsidies may be some sort of a cap on su ch subsidies necessarily an actionable subsidy is 
turned into a “prohibited subsidy”.
348   
 235. Please comment on paragraphs 8, 9 and 10  of the US 2 December oral statement, in 
particular, why the average Brazilian price is show n as lower than the average US price.  BRA 
 236. The Panel notes Exhibit US-47 (and the chart in paragraph 13 of the US 2 December oral statement).  Please provide a conceptually analogous chart to Exhibit US-63 with respect to 
data relating to the US interpretati on of "world market share".  USA 
 Brazil’s Comment: 
 
166. Brazil considers it telling that the United States does not provide the percentage figures 
underlying the chart at paragraph 138 of its 22 December 2003 response.  This is because the 
percentage figures reveal that the US methodology suffers from a fatal flaw.  The sum of the US 
world market share, as defined by the United States
349, and the “rest of the world” market share, as 
                                                      
 345 Brazil’s 9 September 2003 Further Submission, Table 22; Brazil’s 7 October Oral Statement, 
paras. 30-34.  
346 See Brazil’s 9 September 2003 Further Submission, paras. 148-161, 190, 200-232, 254, 379-384 and 
Table 23. 
 347 US 2 December 2003 Oral Statement, paras 83-84.   
 348 US 2 December 2003 Oral Statement, paras 83-84.   
 349 “(Domestic Mill Use + Exports)” / Total World Consumption; see US 22 December 2003 Answers 
to Questions, para. 137. WT/DS267/R/Add.2 
Page I-522  
 
defined by the United States
350, far exceeds 100 per cent.  To clarify this point, Brazil presents the 
following table, based on the data provided by the United States in Exhibit US-47 and in response to 
question 197.351 
 
 US Domestic 
Consumption US 
Exports World 
Consump-
tion Non-US352 
Domestic 
Consumption Non-US 
Exports US 
Share
353 Non-
US 
Share Total 
Share 
 million bales per cent 
1995 10.647 7.675 86.040 75.393 19.900 21.29 110.75 132.05 
1996 11.126 6.865 88.031 76.905 20.100 20.44 110.19 130.63 
1997 11.349 7.500 87.138 75.789 19.300 21.63 109.12 130.76 
1998 10.401 4.298 84.640 74.239 19.400 17.37 110.63 128.00 
1999 10.194 6.750 90.957 80.763 20.600 18.63 111.44 130.07 
2000 8.862 6.740 92.172 83.310 19.800 16.93 111.87 128.79 
2001 7.696 11.000 94.381 86.685 18.100 19.81 111.02 130.83 
2002 7.270 11.900 97.930 90.660 18.700 19.58 111.67 131.25 
2003 6.200 13.200 97.690 91.490 19.100 19.86 113.20 133.06 
 
167. Indeed, as the Panel can readily see, the “rest of the world” “world market share”, as defined 
by the United States, exceeds 100 per cent – a result that defies any logic.  
168. For the ease of the Panel’s reference, Br azil presents an excerpt from its own figures 
originally presented in Exhibit Bra-302,354 showing that, under Brazil’s and USDA’s definition of the 
“world market share,” the total world market share equals 100 per cent. 
 
                                                      
 350 “(Non-US Domestic Mill Use ( i.e. consumption) + Non-US Exports) / Total World Consumption. 
 351 US 22 December 2003 Answ ers to Question, para. 15 and Exhib it US-120.  Since the United States 
did not provide any data on “Non-US Exports,” Brazil has used USDA published figures on “Foreign Cotton 
Exports” from USDA’s Cotton and Wool Yearbook (Exhibit Bra-412 (Cotton and Wool Situation and Outlook 
Yearbook, USDA, November 2003, Table 16).   
352 “World Consumption minus US Domestic Consumption.” 
 353 The 2003 figure differs a little from what would seem to be the 2003 figure in the US table at 
paragraph 138 of the US 22 December 2003 Answers to Questions.  It appear s that the reason is the 
United States use of its non-updated figures from Exhibit US-47, rather than the updated MY 2002 and 2003 
figures from its 22 December 2003 response to Question 197, para. 15. 
 354 See also Brazil’s 27 October 2003 Answers to Questions, paras. 123-129. WT/DS267/R/Add.2 
Page I-523 
 
 
 US upland cotton 
exports Non-US upland 
cotton exports World upland 
cotton exports US 
Share Non-
US 
Share Total 
Share 
 million bales per cent 
1995 7.375 19.394 26.769 27.55 72.45 100.00 
1996 6.399 19.384 25.783 24.82 75.18 100.00 
1997 7.060 18.534 25.594 27.58 72.42 100.00 1998 4.056 18.559 22.615 17.94 82.06 100.00 1999 6.303 19.805 26.108 24.14 75.86 100.00 2000 6.303 19.170 25.473 24.74 75.26 100.00 
2001 10.603 17.072 27.675 38.31 61.69 100.00 
2002 11.266 15.796 27.062 41.63 58.37 100.00 2003 11.225 17.690 28.915 38.82 61.18 100.00 
 
169. Brazil will address the US arguments that th e world market share means share of world 
consumption in detail in its comments on the following questions. 
 
237. Could a phenomenon that remains at approximately the same level over a given period 
of time be considered a "consistent trend" within the meaning of Article 6.3(d)?  Do parties have any suggestions as to how to determine a "c onsistent trend", statistically or otherwise?  
BRA, USA 
 
Brazil’s Comment: 
 
170. As noted in its 22 December 2003 response to this question, Brazil agrees that a phenomenon 
that remains at approximately the same level over a given period cannot be c onsidered a consistent 
trend.
355  However, as detailed in that answer, this is  not the situation facing this Panel.  The data 
clearly establishes that, in MY 2001, 2002 and 2003, th ere is an increase in the US world market share 
over the previous three-year average, and that th is increase follows a consistent trend since MY 1996 
(and MY 1986).356  In response to this question, the Un ited States again relies on an utterly wrong 
interpretation of the term “world market share” in  Article 6.3(d) of the SCM Agreement.  The term 
                                                      
 355 Brazil’s 22 December 2003 An swers to Questions, para. 134. 
 356 Brazil’s 22 December 2003 Answers to Questions , paras. 133-139;  Br azil’s 27 October 2003 
Answers to Questions, paras 123-129.  Brazil further note s the new information presented by the United States 
concerning US upland cotton exports in MY 2002 and 2003.  These figures (11.9 million bales and 13.2 million 
bales respectively) would replace Brazil’s latest informati on, as contained in Exhibit Bra-302 (11.3 million bales 
and 11.2 million bales respectively).  These new facts st rengthen Brazil’s threat of  serious prejudice claim under 
Article 6.3(d) and footnote 13 of the SCM Agreement.  See US 22 December 2003 Answers to Questions, 
para. 15 and Brazil’s comment to US 22 December 2003 Answer to Question 197, above. WT/DS267/R/Add.2 
Page I-524  
 
does not mean “world consumption share”, but world market share of exports, as detailed by Brazil many times, including in these comments.   
238. According to the US interpretation of the term "world market share": 
 
(a) should the domestic consumption of closed  markets be added into the denominator?   
 Brazil’s Comment:  
171. Brazil understands that the Panel’s question referred to the distinction between “competitive 
markets,” where world upland cotton producers/e xporters compete for available share of world 
exports, and “closed markets”, where no competition for export market share can take place because 
of subsidies like the domestic Step 2 programme, tariffs, or non-tariff barriers.
357  The US 
22 December 2003 response, at paragraph 140, affi rms that the United States would greatly increase 
and distort the Article 6.3(d) denominator by including, inter alia , all sales of US upland cotton in the 
US market.  Yet, there is little “international tr ade” in the US domestic upland cotton market, because 
there were only marginal imports during MY 1999-2002.358  The effect of the US argument is to 
obscure and hide the huge volume and market share increase in US exports in “competitive” markets 
during MY 1998-2003.  As Brazil has argued, the US focus on “consumption” as opposed to “trade” is contrary to the text, context, and object and purpose of Article 6.3(d).
359  Article 6.3(d) focuses on 
“trade”, not domestic consumption, and thus i nvolves competitive world markets where exports and 
trade take place.360   
 172. It is noteworthy that the US answer ignores un-rebutted evidence that USDA’s top economists and analysts repeatedly use the phrase “world ma rket share” to describe and analyze how US 
agricultural exporters are performing in  competitive world markets for exports.
361  The United States 
never provided a single instance in which USDA ec onomists – or any other Member’s economists – 
included domestic US consumption in their analysis of  the US “world market share”.  This is because 
the unique US notion of “consumption” (which co mbines exports, domestic use, and imports as part 
of “consumption”) simply does not exist (in the literature or trade statistics) outside of the US arguments in this case.    (b) if US production and consumption increased  by the same percentage, whilst the rest of 
the world's production and consumption remai ned steady, would this imply an increase 
in the US "world market share" by a different percentage?   
 Brazil’s Comment: 
 
173. The US 22 December 2003 response in effect ack nowledges, at paragraph 142, that the US 
subsidies could be subject to a challenge under Ar ticle 6.3(d) even though those subsidies did not 
cause any increase in US exports.  Under the US theory, even though none of the non-subsidized 
producer/exporters of upland cott on would have lost any world export market share, these producers 
could initiate a claim against the United States under  Article 6.3(d), in addition to Article 6.3(a), 
because the US domestic production and domestic consumption increased.  This US response 
                                                     
 
 357 Brazil detailed its arguments concerning the focu s of Article 6.3(d) on competitive markets and 
where “trade” takes place in its 7 October 20 03 Oral Statement, paras. 38-41.   
 358 For example, between MY 1999-2001, US imports represented only 0.2 percent of total US mill use 
of upland cotton.  See Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4-5). 
 359 Brazil’s 7 October 2003 Oral Statement, paras 38-41;  Brazil’s 27 October 2003 Answers to 
Question, paraa. 202-206;  Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 170-172;  Brazil’s 2 December 2003 Oral Statement, paras. 62-65.   
 
360 Brazil’s 7 October 2003 Oral Statement, para. 39.   
 361 Brazil’s 7 October 2003 Oral Statement, note 78.   WT/DS267/R/Add.2 
Page I-525 
 
 
highlights the disconnect between its theory and the rea lity of what Article 6.3(d) really is about – the 
impact of subsidies on trade in the product in qu estion in competitive international markets.     
 174. Of course, the Part III of the SCM Agreemen t discipline addressing th e Panel’s hypothetical 
factual situation is Article 6.3(a).  The United Stat es argues in paragraph 143 that “Brazil’s approach 
… would allow a larger or even dominant upland cotton consumer to provide huge per-unit 
production subsidies that increased the share of its own domestic consumption that its production supplied without any disciplines under Article 6.3(d) , regardless of the impact on other Members who 
could potentially supply that increasing domestic c onsumption” (emphasis added).  But what the US-
posited hypothetical outlines is a classic “displacement  or impedence” case under Article 6.3(a).  “But 
for” the “huge per-unit production subsidies”, th e non-subsidized Member exporters would have 
increased or maintained their export market share in  the market of the subsidizing Member.  Thus, 
interpreting Article 6.3(d) to mean the “world ma rket share of exports” does not leave non-subsidized 
Member producers who are squeezed out of the subsid izing Member’s market without a remedy.  And 
the fact that Article 6.3(d) does not also discipline the situation covered by Article 6.3(a) is hardly 
surprising, since negotiators presumably intended differ ent provisions to cover different situations.     
 175. Indeed, the US argument in paragraph 143 high lights the fallacy of its interpretation.  It 
argues that “the ordinary meaning of ‘world market  share’ in Article 6.3(d) … would capture impacts 
both on the market of the subsidizing Member (as in Article 6.3(a)) and in third-country markets 
(Articles 6.3(b) and 6.3(c))”.
362  But if that were true, then ther e would be no need for Articles 6.3(a) 
and 6.3(b).363  The US interpretation would render one of the sets of disciplines a nullity, in violation 
of the customary rules of treaty interpretation as codified in the Vienna Convention .   
 176. Finally, rather than capturing all the po ssible instances where subs idies can cause serious 
prejudice in world markets, the US “consumption” interpretation of “world market share” leaves a 
gaping hole in the serious prejudice remedies.  The facts of this case show how the US interpretation 
would completely hide the huge US increase in wo rld market share of exports – from 25 per cent in 
MY 1999 to 41.6 per cent in MY 2002.  Where a Me mber uses subsidies to capture export market 
share in the competitive world market, it causes serious prejudice by limiting the opportunities for 
non-subsidized Members to increase their exports.
364  The record shows that African upland cotton 
producers, with among the lowest world production costs, actually lost world market share to the 
United States between MY 1998-2002.365  Yet, the US interpretation of Article 6.3(d) would deny 
them, as well as Brazil, any remedy to challenge su ch an increase in the US world market share of 
exports.    
                                                     
 
 362 US 22 December 2003 Answer s to Questions, para. 143. 
 363 Article 6.3(a) disciplines the situation described in the Panel’s question:  a Member using subsidies 
to increase the share of domestic consumption satisfied by domestic supply ( i.e., displacing or impeding imports 
into the market of the subsidizing Member).  Article 6.3(b) disciplines such effects of a Member’s subsidies 
(displacing or impeding exports) in a third country market.  Article 6.3(c) disciplines significant price effects of 
a Member’s subsidies in all markets.  Brazil’ s 2 December 2003 Oral Statement, para. 63. 
 364 See Brazil’s 9 September Further Submission, paras. 451-456; paras 444-453 (facts supporting the 
interconnected relationship between the serious prejudiced due to price suppression and the serious prejudice 
due to increased world market share); Annex III Stat ements by Brazilian producers Christopher Ward, Jaime 
Naito, Aloysio Lerner and Ronaldo Spir landelli de Oliveria, among others.   
 365 Brazil’s 9 September 2003 Further Rebuttal Submission, Section 7.1 and Figure 26 following 
para. 282.   WT/DS267/R/Add.2 
Page I-526  
 
(c) does Saudi Arabia have a small wo rld market share for oil?  USA   
 Brazil’s Comment: 
 
177. Contrary to the US 22 December 2003 response, Brazil has no difficulty appreciating the 
relevance of the Panel’s question.  Even accep ting the US figures, which include Saudi Arabian 
consumption of crude oil to produce refined produc ts that are then exported, the US response 
highlights the significant (25 per cent) differenc e between their “consumption” methodology and a 
world market share of exports methodology.
366   
 239. How does the US respond to Brazil's assertions  that, under the US interpretation of the 
term "world market share":   (a) there would be no WTO disciplines on production-enhancing subsidies that increase a 
Member's world market share of exports?  (see paragraph 64 of Brazil's 2 December 
oral statement); 
 Brazil’s Comment: 
 
178. The US 22 December 2003 response confirms Br azil’s arguments that the US interpretation 
leaves no direct remedy for a Member who either loses or is not able to increase its world market 
share of exports as a result of another Member’s subsidies.
367  The United States asserts in 
paragraph 147 of its answer, that Article 6.3(b)  provides such a remedy.  But that provision only 
addresses a non-subsidizing Member’s right to contest the effects of subsidies in, inter alia , increasing 
a subsidizing Member’s export market share in an individual third country market.  The EC – Sugar 
Exports I (Australia) and EC- Sugar Exports II (Brazil)368 disputes demonstrated how difficult it can 
be for a non-subsidizing Member to demonstrate disp lacement or impedence in an individual third 
country market.  Article 6.3(d) helped to addr ess this legal vacuum by providing clear, objective 
guidelines for subsidizing Members to know when th eir increase in world market share of exports 
would be subject to disciplines, and to provide an objective basis for the injured non-subsidized 
exporting Member to evaluate and protect its rights.     
179. The United States further argues, in paragraph 147 of its response, that Article 5(a) of the 
SCM Agreement would provide a remedy for a non-s ubsidized Member who lost world market share 
in exports.  But while that provision relates to “i njury to the domestic industry of another Member”, 
footnote 11 of the SCM Agreement qualifies that the “i njury” “is used in the sam e sense as it is used 
in Part V”.  “Injury” is defined in Article 15.1 et seq.  of the SCM Agreement as that caused by (a) the 
volume of the subsidized imports  and the effect of the subsidized imports on prices in the domestic 
market for like products, and (b) the consequent im pact of these imports on the domestic producers of 
such products.  In the context of this dispute, this remedy would appear to apply only to US 
subsidized exports to the Brazilian market ( i.e., the “domestic” market).  Contrary to the US 
argument, Article 5(a) would not address the situ ation covered by Article 6.3(d), where Brazilian 
exporters suffer serious prejudice by an increase in the US world market share of exports.   
 
180. Finally, the United States claims, at paragr aph 147 of its response, that Article XVI:1 of 
GATT 1994 would provide Brazil with the right to challenge the US world market share for exports.  Brazil agrees that GATT Article XVI:1, as read in conjunction with GATT Article XVI:3, provides 
for a very analogous recourse as that provided for in Article 6.3(d), i.e., any subsidies that increase 
exports and lead to an inequitable share of world export trade.  But the United States contradicts itself 
                                                     
 
 366 US 22 December 2003 Answer s to Questions, para. 145. 
 367 See e.g. Brazil’s 2 December 2003 Oral Statement, para. 64.  
 368 GATT Panel Report, EC – Sugar Exports I (Australia) , L/4833 – 26S/290, para . 4.26-4.27 ; GATT 
Panel Report, EC – Sugar Exports II (Brazil), L/5011-27S/69, para. 414. WT/DS267/R/Add.2 
Page I-527 
 
 
in offering up an Article XVI:1 remedy (which  is inexorably linked to Article XVI:3, second 
sentence) in paragraph 147, while arguing elsewhere  that this provision is no longer applicable and 
has been replaced by Article 6.3.369   
 181. In sum, the Panel is left with the US interp retations that (a) there is no longer any disciplines 
for a Member suffering from a decr ease in its world market share for exports under Article XVI:3, 
second sentence on the one hand
370, and (b) Article XVI:3’s presumed successor, Article 6.3(d), does 
not apply to the world market share of exports.  In effect, Members are left without any explicit protection for their loss of world market share of expor ts due to massive subsidization.  Such a result 
defies the text, context, and object and purpose of Artic le 6.3(d), as Brazil has repeatedly argued.    
 
182. In any event, whether there may be – outside Article 6.3(d) of the SCM Agreement – indirect 
disciplines that may provide some relief to non-s ubsidizing Members whose rights have been nullified 
and impaired by a subsidizing Member’s increase in world market share of exports does not free the Panel from its obligation to interpre t the term “world market share” in Article 6.3(d) in accordance 
with its “ordinary meaning, in their context and in light of the treaty’s object and purpose”.  Brazil 
demonstrated that under a Vienna Convention analysis, the term “world market share” means world 
market share of exports – not consumption.
371 
 
(b) a Member's exports would have to be disregarded in calculating their "world market 
share" in terms of "world consumption"? (see e.g. paragraph 65 of Brazil's 2 December 
oral statement)  USA 
 Brazil’s Comment: 
 
183. In paragraph 148 of its 22  December 2003 response, the United States does not address the 
substance of the Panel’s question or Brazil’s earlie r arguments.  That is, the United States does not 
respond to the fact that its methodology double counts e xports as part of the world market share of the 
exporting country and the importing country.
372  In effect, the United States requires this Panel to 
ignore this illogical conceptual error in its interpre tation of the term “world market share”.  Instead, 
the United States insists that it is not incumbent upon the Panel “to interpret the term ‘domestic 
consumption’”.373  Brazil agrees, but that is because the term “domestic consumption” is nowhere to 
be found in the text or context of Article 6.3(d) of  the SCM Agreement.  Nor is it consistent with the 
object and purpose of Article 6.3(d).  But since the United States would read “consumption” into that 
text, then the Panel must closely examine its mean ing, using appropriate context to do so.  And it 
should reject the use of that term if it leads to an interpretation that is illogical, leads to absurd results, 
and otherwise fails to live up to the standards on th e interpretation of international treaties, as set out 
in the Vienna Convention .   
 
240. Does Article XVI:3 of GATT 1994 provide context in interpreting Article 6.3(d) of the 
SCM Agreement ?  Do these provisions apply separately?  If not, could it indicate that "world 
market share" is intended to mean the same  as "share of world export trade"?  USA 
 
                                                      
 369 US 22 December 2003 Answer s to Questions, para. 149. 
 370 US 22 December 2003 Answer s to Questions, para. 146. 
 371 Brazil’s 7 October 2003 Oral Statement, paras. 38-41;  Brazil’s 27 October 2003 Answers to 
Question, para. 202-206;  Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 170-172;  Brazil’s 2 
December 2003 Oral Statement, parass 62-65.  
372 The United States admits that its methodology counts imports as part of domestic consumption. See 
US 22 December 2003 Answ ers to Questions, Table at para. 15 and note 24. 
 373 US 22 December 2003 Answer s to Questions, para. 148. WT/DS267/R/Add.2 
Page I-528  
 
Brazil’s Comment: 
 
184. Regarding the first question, Brazil has previ ously detailed the basis for its arguments that 
Article XVI:3, second sentence of GATT 1994 provid es very important context for interpreting 
Article 6.3(d).
374  In response to the Panel’s second questi on, Brazil has demonstrated that these 
provisions do apply separately, for the reasons Brazil has earlier stated.375  With respect to the third 
question, the phrase “world market share” in the text of Article 6.3(d) is intended to mean the same 
thing as “share of world export trade”.376 
 185. The United States points out several differen ces between Article XVI:3 and Article 6.3(d), 
one of which is its faulty interpretation that Ar ticle XVI:3, second sentence only deals with “export” 
subsidies.  Brazil has earlier demonstrated that the p ool of subsidies that could cause serious prejudice 
is the same for Article 6.3(d) and Article XVI:3, second sentence.
377   
 186. The United States further argues that Brazil ag reed in the Tokyo Round Subsidies Code that 
GATT 1994 Article XVI:3 is limited to export subsidies.
378  This is not correct, as demonstrated by 
the text of the Tokyo Round Code.379  It uses the language “shall include” and “export subsidy” in 
connection with the notion of a more than equitable share of world trade.380  Thus, an inequitable 
share of world trade may result from export subsidies, but it is not limited to that source.  Moreover, 
whatever the interpretation of these terms may ha ve been in the now extinct plurilateral Tokyo Round 
Subsidies Code, the only text that continues to exis t is the ordinary meaning of the words used in 
Article XVI:3, second sentence, which must be inte rpreted according to its ordinary meaning in its 
context, and in light of the object and purpose of the GATT.  Yet, the United States argues that even 
that provision is “incapable of definition or application”.381 
 187. The United States argues in paragraph 151 that  the use of the term “market” provides the 
fundamental key to its interpretation.  The US argument would include all markets where upland 
cotton is produced, consumed, or used when it states that Article 6.3(d) is not limited to “markets in 
international trade”.  But this argument ignores th e fundamental focus of Article 6.3 (as well as 
Part III of the SCM Agreement itself) on international  trade and the impact of subsidies on 
competition between subsidized and non-subsidized pro ducers and their products.  For example, 
Article 6.3(a) involves situation, in which exporters  are impeded or displaced from the market of the 
subsidizing Member.  Articles 6.3(b) and 6.4 involv e the situation, in which the export share of a 
subsidizing Member squeezes out or limits the expor t share of the non-subsidizing Member in a third 
                                                     
 
 374 Brazil’s 18 November 2003 Further Rebuttal Submission, para. 172.   
 375 Brazil’s 27 October 2003 Answer to Question 161, para. 130 and Question 196(b), paras. 202-206.  
 376 Brazil’s 18 November 2003 Further Rebuttal Submission, paras 170-172; Brazil’s 7 October Oral 
Statement, paras. 38-41.   
 377 Brazil’s 27 October 2003 Answer to Question 185, paras. 194-201;  Brazil’s 18 November 2003 
Further Rebuttal Submission, paras 178-179.    
378 US 22 December 2003 Answer s to Questions, para. 149. 
 379 US 27 October 2003 Answers to Questions, para. 130.  For purposes of Article XVI:3 of 
the General Agreement and paragraph 1 above: 
 
(a)  “more than an equitable share of world 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 bearing in mind the developments on world markets; 
 (b)  with regard to new markets traditional 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 ‘equ itable share of worl d export trade’[.] 
 
380 See US 27 October 2003 Answers to Questions, para. 130. 
 381 US 22 December 2003 Answers to Questions, para. 149;  US 27 October 2003 Answers to 
Questions, paras. 131-132. WT/DS267/R/Add.2 
Page I-529 
 
 
country market.  And the United States has argued that Article 6.3(c) only involves situations, in 
which prices are suppressed in markets where comp etition between the subsidized products and the 
non-subsidized like products take place.382  In essence, the key to initiating a claim under all three of 
these provisions is demonstrating that “trade” and “competition” have been affected through the use 
of subsidies.   
 
188. The Panel must ask how is it possible that Artic les 6.3(a) – (c) only apply to situations where 
international trade and competition actually take  place (or are impeded from taking place), while 
Article 6.3(d) is totally different – it is to be read without any reference to competition and trade at 
all?  The United States asserts that the “world” in  “world market share” means the “entire world,” 
without regard to whether there is trade or comp etition between subsidizi ng Member products and 
those of non-subsidizing Members.383  But this slavishly literal reading goes too far.  Brazil submits 
that read in this context, along with the other cont extual provisions such as “trade” in footnote 17 of 
the SCM Agreement, and Article XVI:3, second sentence,  that the US interpretation is simply wrong.  
 
189. The United States further argues, at paragraph 149 of its response, that “Brazil has not offered 
any objective definition” of “equita ble share”.  This is incorrect.384  Further, the fact that certain 
GATT and WTO provisions express disciplines in broad terms, such as “equitable” or “reasonable” or “serious” or “significant,” does not mean that a treaty interpreter can simply throw up his or her hands and find, as the United States urges, that a provision is  incapable of interpretation.  Article 31 of the 
Vienna Convention provides that “the words of a treaty are to be given their ordinary meaning, in their 
context and in light of the treaty’s object and purpose”.
385  Further, the Appellate Body held in US – 
Gasoline  that “an interpreter is not free to adopt a r eading that would result in reducing whole clauses 
or paragraphs of a treaty to redundancy or inutility”.386  Thus, the Panel should reject this US attempt 
to condemn Article XVI:3.   
 
190. However, should the Panel decide that GA TT Article XVI:3, second sentence is, indeed, 
inapplicable, then this certainly strengthens the basis for the Panel to in terpret the phrase “world 
market share” in Article 6.3(d) as meaning the “share of world export trade”.  It is inconceivable that 
negotiators – who certainly did not expressly te rminate the application of Article XVI:3, second 
sentence – would also intend, without making it e xplicit, that there would be no disciplines for 
subsidies that allowed Members to seize world mark et share of exports in competitive markets.   
 
241. How does the US reconcile it s data on consumption for 2002 in US Exhibit 40, Table 1 
with the "consumption" data it refers to in it s 30 September submission, paragraph 34, Exhibit 
US-47 or US-71?  USA  
Brazil’s Comment:  
191. The US 22 December 2003 response appears to ha ve clarified that the graph in paragraph 34 
of its 30 September 2003 Further Submission relates to  US finished cotton fibre consumption, while 
the “consumption” referred to in Exhibits US-40,  US-47 and US-71 relates to upland cotton lint 
consumption by US textile mills.  Brazil has demons trated the irrationality of the US world market 
share of upland cotton consumption data in terms of Article 6.3(d).  Brazil has also demonstrated the 
irrelevance of the US arguments concerning the US consumption of finished textile products.
387   
                                                      
 382 US 18 November 2003 Further Rebuttal Submission, paras.  37-40.   
 383 US 22 December 2003 Answer to Questions, para. 151.   
 384 Brazil refers the Panel and the United States to its  oral answers to the Chairman’s questions during 
the October 2003 meeting of the Panel, paragraphs 17-18 of Brazil’s 9 October 2003 Closing Statement, and 
paragraphs 189-193 of Brazil’s 27 October 2003 Answers to Questions.    
385 Appellate Body Report, US. – Gasoline, WT/DS2/AB/R, p. 17. 
 386 Appellate Body Report, US – Gasoline, WT/DS2/AB/R, p. 23. 
 387 Brazil’s 7 October 2003 Oral Statement, para.25.   WT/DS267/R/Add.2 
Page I-530  
 
 
242. How much of the benefits of PFC, MLA, CCP and Direct Payments go to land owners?  
If not all of the benefits go to land own ers, what proportion goes to producers?  USA 
 Brazil’s Comment: 
 
192. The Panel’s question is set out in a sec tion entitled “Serious Prejudice” and uses the word 
“benefit” relating to contract payments.  Brazil will address its comments to the US 
22 December 2003 response in two senses of the word “benefit”.  First, Brazil will address its 
comment with respect to the definition of the term “b enefit” as it is used in Article 1.1(b) of the SCM 
Agreement.  Second, the question also appears to address “benefit” in a more generic sense, as it 
relates to the effects of contract payments on US  production, exports, and the world price of upland 
cotton.  Brazil believes it is this second sense of the term “benefit” to which the Panel’s question was 
directed.  However, the United States’ answer conc ludes by asserting that “35 per cent of the value of 
decoupled payments would be nefit upland cotton producers”
388, suggesting that it interpreted the 
Panel’s question as directed at the term “benefit ” in the sense of Article 1.1(b) of the SCM 
Agreement.  The United States also suggests that the remaining 65 per cent of the US contract 
payments do not constitute a benefit within the m eaning of Article 1.1(b) of the SCM Agreement. 
 “Benefit” under Article 1.1(b) of the SCM Agreement 
 
193. As set forth below, for the purposes of Artic le 1 of the SCM Agreement, the record shows 
that 100 per cent of contract payments are pa id to the bank accounts of current upland cotton 
producers on terms that constitute “benefits”.    194. Under the 2002 FSRI Act, direct and counter-cyclical payments are only paid to “producers 
on farms for which payment yields and base acres are established”.
389  “Producers” are defined in the 
Act as “an owner, operator, landlord, tenant, or sharecropper that shares in the risk of producing a 
crop and is entitled to share in the crop availability for marketing from the farm, or would have shared 
had the crop been produced”.  A similar defin ition of “producer” existed for the 1996 FAIR Act .390  
As implemented, USDA acknowledges that contract pa yments “are paid only to farm operators rather 
than farmland owners, with payment benefits split between the operator and owners in the case of 
crop-share rental arrangements”.391  Thus, the only “landlords” or “owners” who directly receive 
contract payments are those who are producers of upland cotton, i.e., those that share in the risk of 
producing an upland cotton crop.392  The USDA study further states that “[t]he operators' receipt of the 
PFC payments compensates for higher land costs that may result from the effects of the PFC 
programme”.393   
 
195. Brazil has proved that without the receipt of the PFC, market loss assistance, direct and counter-cyclical payments in their bank accounts, US upland cotton producers could not meet their 
costs – including their lease and land-related costs.  Even if these current producers may subsequently 
write checks to their landlords who do not share in the risk of producing a crop, that does not mean that the subsidies that the producers are legally entitled to receive from USDA do not provide them 
with a “benefit”, within the meaning of Article 1. 1(b) of the SCM Agreement, as the United States 
appears to argue.  Rather, the full amount of th e payment is made to the current producers.   
 
                                                     
 
 388 US 22 December 2003 Answer s to Questions, para. 158. 
 389 Exhibit Bra-29 (Sections 1103 and 1104 of the 2002 FSRI Act).   
 390 Exhibit Bra-28 (Section 111(b) of the 1996 FAIR Act).  
 391 Exhibit US–78, p. 44.  
 392 See Brazil’s 22 July 2003 Oral Statement, para. 57;  Brazil’s 22 August 2003 Rebuttal Submission, 
paras. 19, 24. 
 393 Exhibit US–78, p. 44. WT/DS267/R/Add.2 
Page I-531 
 
 
196. The Appellate Body has held that a “benefit” ex ists if a financial contribution is received by a 
“recipient” or a “producer” of the subsidized good on terms more favourable than those available to 
the recipient in the market.394  Producers of US crops who have contract base acreage receive these 
payments from USDA.  In Canada – Aircraft , the Appellate Body established that “a benefit does not 
exist in the abstract, but must be received and enjoyed by a beneficiary or a recipient”, noting that 
“the term benefit, therefore, implies that there must be a recipient”.395  The Appellate Body in US – 
CVD’s on EC Products held that “the focus of any analysis of whether a ‘benefit’ exists should be on 
‘legal or natural persons’ instead of on productive operations”.396  Contrary to the US arguments, it is 
legally irrelevant for purposes of determining the existence of a “benefit” under the SCM Agreement 
whether a benefit received by a “recipient” is sub sequently transferred to other non-recipients.   
 
197. The United States’ 22 December 2003 response con tinues its efforts to transform this dispute 
into a countervailing duty investigation based on now -defunct Annex IV of the SCM Agreement.  The 
United States alleges in paragr aph 158 of its 22 December 2003 response that only 35 per cent of 
PFC, market loss, CCP and direct payments “w ould benefit upland cotton producers”.  If the 
United States is using the word “benefit” in the sen se of Article 1.1(b) of the SCM Agreement, then 
the statement is legally as well as factually wrong.  As Brazil has demonstrated above, 100 per cent of 
the four types of contract payments are paid to  the bank accounts of current upland cotton producers.  
Thus, there is no doubt that each of the four contr act payment subsidies confers a “benefit” to upland 
cotton producers.    
198. Finally, even if this case was a counter vailing duty investigati on, under existing CVD 
procedures, 100 per cent of the contract payments  – not 35 per cent – would be allocated across the 
production value of the producers.  This is, again, b ecause, first, the total amount of benefits to the 
company producing the subsidized goods would be calculated.  No deductions  are made depending on 
how the subsidy is used by the recipients ( i.e., to pay rents).  100 per cent of the subsidy is 
countervailable.  Only in case the subsidy is not de facto tied to the production of the subsidized 
product, is there in a second step an  allocation of the benefit (100 pe r cent) over the total value of the 
company’s production. 
 
Use of “benefit” to assess the amount of s ubsidies that could cause serious prejudice 
 199. The more likely use of the term “benefit” in  the Panel’s question is the extent to which 
contract payments contributed to and will contribut e to the serious prejudice suffered by Brazil.  In 
other words, to what extent do contract payments  enhance and support the production and exports of 
US upland cotton, and to what extent do they su ppress world prices?  Braz il has produced evidence, 
inter alia , through Professor Sumner’s analysis, that the contract payments have various effects on 
production, exports and world prices.  The isolated effects of these contract payments are less than 
those created by the marketing loan programme.  Brazil acknowledged that one reason why the serious prejudice effects of PFC payments are relatively small is because a certain percentage of the payments were capitalized into land va lues and subsequently into land rents.
397  Brazil noted that this 
                                                      
 394 In Canada – Aircraft , the Appellate Body found that: 
…the word “benefit”, as used in Article 1.1(b), implie s some kind of comparison.  This must be so, for 
there can be no “benefit” to the r ecipient unless the “financial contribution” makes the recipient “better 
off” than it would otherwise have been, absent that contribution.  In our view, the marketplace provides 
an appropriate basis for comparison in determining whether a “benefit” has been “conferred” because 
the trade distorting potential of a “financial contribution” can be identified by determining whether the 
recipient has received a “financial contribution” on terms more favourable than those available to the 
recipient in the market. ”(emphasis in original and underlining added) 
Appellate Body Report, Canada – Aircraft , WT/DS70/AB/R, para. 157; The same language is included in 
Appellate Body Report , US – CVD’s on EC Products , WT/DS212/AB/R, para. 106. 
 395 Appellate Body Report, Canada – Aircraft , WT/DS70/AB/R, para. 154. 
 396 Appellate Body Report , US – CVD’s on EC Products , WT/DS212/AB/R, para. 110. 
 397 Brazil’s 27 October 2003 Answer to Question 179, paras. 164-167.   WT/DS267/R/Add.2 
Page I-532  
 
evidence is supported by Professor Sumner’s c onclusions because significant amounts of the PFC 
payments (approximately two thirds) were  available to generate production effects.
398  Finally, Brazil 
also demonstrated that the total USDA-estimat ed increase in land values from PFC payments 
translated into less than one per cent of  an upland cotton producers’ total costs.399   
 
200. The United States 22 December 2003 response now claims for the first time that only 35 per 
cent of the value of decoupled payments benef ited upland cotton production during the period of 
investigation.400  Having asserted this fact, the United States bears the burden of proving it.401  But 
even a cursory look at the evidence proffered by th e United States shows that this assertion is simply 
not true.   
 
201. The US assumption is that every dollar of ev ery contract payment placed into the bank 
accounts of producers leasing land (approximately 65 per cent of upland cotton land is “leased” or 
“rented”) is immediately required to  be paid to non-producer landlords.402  The United States 
produced no evidence that 100 per cent of even PFC paym ents (let alone market loss assistance, direct 
or counter-cyclical payments) to cash rent cott on producers were consumed by increased rents during 
the period of investigation or since contract payments began in 1996.403  Further, the United States 
produces no evidence that 65 per cent of the upland co tton land is cash-rented.  In fact, only 25 per 
cent of the US upland cotton land is cash-rented, whereas 40 per cent is share-rented.404  As 
established above, share-rent lease agreements mean  that the landlord is considered a producer of 
upland cotton.  Therefore, even under the flawed US theory, much more than just 35 per cent, in fact 
at least 75 per cent, should be consider ed benefits to upland cotton producers. 
 202. But do the facts even support the US allegati on that rents increased because of the contract 
payments?  Indeed, the most rece nt USDA cotton cost of production data shows that the opportunity 
cost of land decreased from $58.33 per acre in MY 1997 to $46.76 per acre in MY 2002.
405  This data 
was reinforced by testimony in 2001 by the NCC President, who disagreed with the suggestion that 
“the payments that we are receiving are increasing land values or holding them up”.406  Instead of PFC 
payments, the NCC President stated  his belief that the “strong economy outside of agriculture … has 
supported land values … ”.407  This cotton-specific cost data and testimony by the recipients of PFC 
payments contradicts the US “35 per cent” assumption.   
                                                      
 398 Brazil’s 27 October 2003 Answer to Question 179, para. 167.   
 399 Brazil’s 27 October 2003 Answer to Question 179, para. 167.   
 400 US 22 December 2003 Answer s to Questions, para. 157. 
 401 As the party asserting this fact, the United States bears the burden of proving it.  See e.g. Appellate 
Body Report, Japan – Apples , para. 157  (“It is important to distinguish, on the one hand, the principle that the 
complainant must establish a prima facie case of inconsistency with a provision of a covered agreement from, 
on the other hand, the principle that the party that asserts a fact is responsible for providing proof thereof.”).  
402 US 22 December 2003 Answer s to Questions, para. 158. 
 403 Furthermore, even cash-rent landlords also make decisions that affect production such as land 
levelling, irrigation installation and related investments.  Therefore benefits to landlo rd have significant effects 
on yields and acreage planted to cotton. 
 404 Exhibit Bra-16 (Characteristics and Production Costs of US Cotton Farms, USDA, October 2001, p. 
23).  
405 Exhibit Bra-323 (Costs and Returns of US Upland Cotton Farmers, MY 1997-2002, USDA). 
 406 Exhibit Bra-41 (Congressional Hearing, “The Future of the Federal Farm Commodity Programmes 
(Cotton),” House of Representatives, 15 February 2001, Testimony of Robert McLendon, p. 21).  
Mr. McLendon responded to a question by Congressman Dooley who stated:  “I am concerned that a significant 
portion of that is going to be capitalized in rents, land values – and, you know, I hope we find ways in which we 
can structure our program so … we can actually see asse t valuations that are more commensurate with actual 
market conditions … .” 
 407 Mr. McLendon was accompanied at the Congressional Hearing by now-President of the NCC, 
Mark Lange (then Chief NCC Economist), who said nothing to contradict Mr. McLendon’s sworn testimony.  
See Exhibit Bra-41 (Congressional Hearing, “The Future of the Federal Farm Commodity Programs (Cotton),” 
House of Representatives, 15 February 2001, p. 6).   WT/DS267/R/Add.2 
Page I-533 
 
 
 203. It is also possible to test the US “35 pe r cent” assumption by examining non-cotton-specific 
cash rent and land value data.  If the US assumption we re correct, then cash land rents for cropland in 
states where upland cotton is produced should have increased significantly since the guaranteed PFC 
payments started in MY 1996.  Further, it would be presumed, if the Unite d States is correct, that 
65 per cent of all the PFC upland cotton-related pa yments (as well as the other three contract 
payments) were captured by increased cash rents fo r cropland during MY 1996-2002.  But this is 
simply not the case, as demonstrated below.    204. USDA carefully tracks cropland cash rents in all US states.  In almost all of the 16 states 
where cotton is produced, land rents for cropland increased only slightly between MY 1996 and MY 
2003.
408  This is in contrast to the value of cr opland which increased to a far greater extent.409  The 
United States seeks to have the Panel assume that  both cropland values and cash rents increased 
significantly by stating, in paragraph 156 of its 22 December 2003 response, that “land rent data … 
follows the same trend” as land values.  This is  a misleading statement because, while cash rents 
increased, they did so at a much lower rate.  For example, in Texas, cash rents for land increased 
13.5 per cent ($18.50 to $21.00 per acre) during 1996-2003 while the value of an acre of cropland 
increased 28 per cent, from $674 in 1997 to $937 in 2003.410  The increase in cash rents in Texas is 
less than the inflation rate (17 pe r cent) for the seven-year period.411   
 205. Cash rents in other US states produci ng upland cotton increased by similar amounts:
412 
 
US State413 Cash Rent 1996 Cash Rent 2002 Difference Percentage Change 
Texas $18.50 $21.00 $2.50 13.5 per cent 
Oklahoma $25.60 $27.00 $1.40 5.5 per cent 
Arkansas $48.80 $53.00 $4.20 8.6 per cent 
Louisiana $53.00 $57.00 $4.00 7.5 per cent 
Mississippi $45.00 $54.00 $9.00 20.0 per cent 
Alabama $39.00 $36.00 - $3.00 -7.7 per cent 
Florida $30.00 $32.00 $2.00 6.7 per cent 
Georgia $36.40 $39.00 $2.60 7.1 per cent 
South Carolina $23.80 $28.50 $4.70 19.7 per cent 
 
                                                      
 408 Exhibit Bra-413 (USDA, NASS “Agricultural Cash Rents, July 1999, p. 2-3); Exhibit Bra-414 
(USDA, NASS “Agricultural Land Values and Cash Rents,” August 2003, p. 12-13.)(examining cropland cash 
rent values).    
409 Exhibit Bra-415 (USDA, NASS, “Agricultural Land  Values”, April 1999, p. 4); Exhibit Bra-414 
(USDA, NASS, “Agricultural Land Values and Cash Rents,” August 2003, p. 12-13).   
 410 Exhibit Bra-413 (USDA, NASS “Agricultural Cash Rents, July 1999, p. 2-3); Exhibit Bra-414 
(USDA, NASS “Agricultural Land Values and Cash Rents”, August 2003, p. 12-13.)(examining cropland cash 
rent values).    
411 http://woodrow.mpls.frb.fed.u s/research/data/us/calc/   ($1.00 in 1996 is worth $1.17 in 2003).   
 412 Exhibit Bra-413 (USDA, NASS “Agricultural Cash Rents, July 1999, p. 2-3); Exhibit Bra-414 
(USDA, NASS “Agricultural Land Values and Cash Rents”, August 2003, p. 12-13.)(examining cropland cash rent values). 
 
413 Data for several other states is distorted by the f act that cash rents for irrigated land, which is not 
used for upland cotton production, are shown. WT/DS267/R/Add.2 
Page I-534  
 
206. As the figures demonstrate, the increase in cash re nts is below the inflation rate of 17 per cent 
in most of the states.  The highest numerical increase between 1996 and 2 002 is $9 in Mississippi.  
Being extremely conservative, Brazil has assume d that this Mississippi increase represents the 
increase in cash rents for all US upland cotton cropland.  It follows that for MY 2002 (with 
13.8 million acres planted to upland cotton) and w ith about 25 per cent of upland cotton land cash-
rented, these $9 mean that $31 million of the total of $454.5 million
414 in direct payments found their 
way into increased cash rent s for upland cotton land.415  Thus, USDA’s own data shows that only 
6.8 per cent of the MY 2002 direct payments could have been attributable to increased cash rents – 
not 65 per cent as the United States asserts.    207. It should be noted that none of this analys is includes CCP payments.  If CCP payments were 
included with direct payments, the percentage share would be even lower.  Generally, the 
United States agrees that cash rents also reflect long-term expectations about crop prices and 
programme benefits.  While direct payments are pa id regardless of prices, CCP payments vary with 
prices.  Therefore, one can expect that the paym ents will be discounted by a margin reflecting the 
uncertainty about the availability of CCP payments in  future years for which cash rents are fixed.   
 
208. The United States claims that cash rents are “sticky” and do not respond quickly to the increased net revenue from the use of the land.
416  The United States further suggests that the 
estimated 34-41 per cent of PFC payments capture d for MY 1997 as set out in an August 2003 ERS 
study will be higher for later years.417  But the evidence outlined above  suggests that cash rents for 
cropland did not increase significantly between MY 1996- 2002, and thus do appear  to reflect to any 
considerable extent the effects of PFC or other contract acreage payments.  The US assertion amounts 
to speculation, as the authors of the August 2003 study properly acknowledge.418  Cash rents may be 
just as easily, if not more, affected by expected low prices for upland cotton, as suggested by the NCC 
President419, or other factors such as interest rates.  The absence of evidence of significant cash rent 
increases more than seven years after enactment of the 1996 FAIR Act suggests that whatever 
production effects from direct payments and CCP paym ents exist presently will continue to exist in 
the future – supporting Brazil’s threat of serious prejudice claims.    209. The above discussion has focused on PFC payments , since that is the only type of contract 
payment for which the United States presented eviden ce.  However, the United States “35 per cent” 
assumption also was made regarding CCP payments and market loss assistance payments.
420  T h e  
Panel will look in vain for any evidence produced by the United States that only 35 per cent of MY 
2002 CCP payments benefited upland cotton prod ucers who cash rent upland cotton cropland.  
Because CCP payments are triggered on a year-by-year basis depending on low prices for upland cotton, a non-producing landlord cannot know in what  amount CCP payments will be made.  Further, 
as Brazil has demonstrated repeatedly, given the high non-land-related production costs involved in 
producing cotton, most US producers simply could not profitably produce cotton without CCP 
                                                     
 
 414 Brazil’s 22 December 2003 Answer to Question 196, para. 8.   
 415 13.8 million acres times 0.25 times $9 equals $31,050,000. 
 416 US 22 December 2003 Answer to  Question 242, para. 157.   
 417 US 22 December 2003 Answer to Question 242, para. 157.  
 418 Exhibit Bra-310 (“The Incidence of Government Program Payments on Agricultural land Rents: 
The Challenges of Identification,” Roberts, Kirwan, Hopkins, p. 769) (“It could be … [and] [m]ore research is 
needed to verify these incidence estima tes to ascertain the time it takes for re nts to reflect changes in associated 
government payments and to measure how incidence is ultimately capitalized into land values.”).    
419 Exhibit Bra-41 (Testimony of Roberto McLendon, p. 7)(“I think people that are professional farm 
managers have been concerned for the last 2 or 3 years that we are going to have a decrease in land values 
because they saw it in the 1980’s.  We had low prices a nd a bad situation.  Again, in my opinion, we have had 
such a strong economy outside of agriculture it has supported land values, but that support won’t last forever … 
.”) 
 420 US 22 December 2003Answer to  Question 242, para. 158.  WT/DS267/R/Add.2 
Page I-535 
 
 
payments.  Therefore, there is little, if any, b asis for a non-producing landlord to demand increased 
rents to capture CCP payments.    210. The evidence that is before the Panel indi cates that every eligible upland cotton producer 
planting on upland cotton base acreage (approximately 75 per cent of such producers), received a 
CCP check in MY 2002.
421  The record shows that the high co sts of these producers meant that they 
had to use this money to cover their production cost s, including the costs related to the cash rents they 
were required to pay.  Thus, in an immediate “c over your annual costs” sense, 100 per cent of the 
payments each year of the period of investig ation “benefited” the producers of upland cotton.422 
 
211. Similarly, the United States provides no evidence concerning how much of the market loss 
assistance payments during MY 1998-2001 did not benefit upland cotton farmers.  Brazil demonstrated that all producers (not non-producing landlords) planting on upland cotton or other base 
acreage were entitled to receive market loss assistance  payments.  The producers had the legal right to 
receive these payments.  Thus, the United States did not meet its burden of showing that only 35 per 
cent of the market loss payments “benefited” upland cotton production.  
 212. Finally, the United States provides no evidence to support its argument that only “35 per cent” of the amount of direct payments unde r the 2002 FSRI Act “benefit” producers of upland 
cotton.  As Brazil demonstrated, in MY 2002, US cotton producers needed all of the direct payment 
subsidies to cover their production cost s and to re-coup losses from MY 2001.   
 
213. Brazil recalls its showing that even under th e US approach, the percentage should be 75 per 
cent rather than 35 per cent, i.e., including land that is owned or share rented by producers.  However, 
also for producers that cash rent their upland co tton land, not all of their contract payments are 
capitalized in land values and translated into higher  cash rents.  Thus, by far the greatest portion of 
contract payments is available to cause productio n effects along the lines discussed in the literature 
and by Professor Sumner
423, as well as by Brazil.424  
 214. In conclusion, 100 pe r cent of the contract payments paid  to, received, and deposited in the 
accounts of current “producers” of upland cotton (a pplying Brazil’s allocation methodology) in MY 
1999-2002 constituted a “benefit” within the meani ng of Article 1.1(b) of the SCM Agreement.
425  
The relevant issue regarding “benefit” to producti on is not, as the United States argues, the amount of 
the funds paid; this dispute does not involve a counte rvailing duty investigation.  Rather, the focus of 
any generic “benefit” analysis is on the effects of the subsidies.  The record shows that the various 
types of contract payments stimulated US produc tion of upland cotton to different extents, ranging 
from 15 per cent for PFC payments to 40 pe r cent for CCP payments, as estimated by 
Professor Sumner.426   
 
243. Can the Panel assume that any support at all, even marketing loan programme 
payments, benefits upland cotton if an upl and cotton producer has other agricultural 
production besides upland cotton?  USA  
                                                     
 
 421 Brazil’s 18 November 2003 Further Rebuttal Submission, Section 2.1, para. 23;  Brazil’s 
9 September 2003 Further Submission, paras. 59-331;  Brazil’s 22 August 2003 Rebuttal Submission, para. 50 
citing  Exhibit Bra-173 (Revised Estimate of Support Granted by Commodity via Counter-Cyclical Payments). 
 422 Brazil’s 27 October 2003 Answers to Question 125(c), paras. 15-25.   
 423 Brazil’s 9 September 2003 Further Submission, Annex I, paras. 37-42 and Exhibits Bra-280 and 
Bra-345 (paras. 18-34). 
 424 Brazil’s 18 November 2003 Further Rebuttal Submission, Section 3.7.5. 
 425 Similarly, 100 per cent of the contract payments , as allocated by Brazil,  were “support to” upland 
cotton, within the meaning of Article 13(b)(ii) of the Agreement on Agriculture.  
 426 Brazil’s 9 September 2003 Further Submission, Annex I, paras. 43-51.   WT/DS267/R/Add.2 
Page I-536  
 
Brazil’s Comment: 
 
215. Contrary to the assumption permeating the US  22 December 2003 response, Brazil reiterates 
that there is no legal requirement for a claimant  under Part III of the SCM Agreement to quantify on 
an ad valorem basis the amount of the challenged US subsidies.
427  Annex IV – which the US 
response shows is the only legal basis for its arguments – is dead.  Even when alive, it only applied to 
Article 6.1(a), not Article 6.3 of the SCM Agreemen t.  The Panel’s obligation under Part III of the 
SCM Agreement is to conduct an objective assessment  of the evidence regarding the “effects” of the 
challenged subsidies.  This means it must first ex amine the evidence regarding whether each of the 
supports is a “financial contribution,” confers a “benefit,” and is “specific”.   
 
216. Detailing the precise amount of the financial contribution ending up in the bank accounts of 
US upland cotton producers is not a legal pre-requisite  to Brazil’s actionable subsidy claims.  If the 
Panel finds that Brazil is legally required to examine the exact amount of the subsidies in order to 
assess their “effects,” then it need only ask why the United States h as refused to produce the evidence 
to determine such an amount.428  In the absence of the most ac curate evidence, withheld by the 
United States, Brazil refers the Panel to eviden ce and the allocation of the amount of “support to 
upland cotton” it has presented in the peace clause portion of its various submissions.429  T h i s  
evidence is part of the record pursuant to Brazil’s alternative arguments and is offered as evidence of 
the amount of such subsidy payments.  
217. With the above-referenced qualifications, Br azil would answer the Panel’s question with a 
qualified “yes”.  First, Brazil agrees with the United States’ assumption, in paragraph 159 of its 
22 December 2003 response, that the full amount of  marketing loan payments for upland cotton 
production “benefits” US producers even if they al so produce other crops.  The logic of the US 
assumption means that the full amount of crop insu rance and Step 2 payments, which are also de jure 
linked to production, sale or export of upland cotton,  would “benefit” upland cotton production.  With 
respect to contract payments, Brazil’s allocati on methodology first considers every acre of upland 
cotton grown on an acre of upland co tton contract base to “benefit”  (or constitute “support to”) upland 
cotton.
430  In other words, Brazil’s allocation methodol ogy does assume that all such cotton to cotton 
matches do “benefit” upland cotton, regardless of the other agricultural production of the farm.431  
Brazil notes that the cotton to cotton matches accounts for most of the contract payments to current 
upland cotton producers.432  However, for those cotton producers growing cotton on non-upland 
cotton base acres, Brazil does not ignore other agricultural production of the particular farm.  Rather, 
it allocates the payments attributable to upland co tton based on the overall composition of programme 
crops for that particular farm.433  Of course, Brazil’s methodology could not be fully applied because 
of the refusal of the United States to prod uce the necessary farm-specific information.434   
 
                                                      
 427 Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 96-107;  Brazil’s 2 December 2003 
Oral Statement, paras. 4-6.  See also Brazil’s comment on Question 231, above. 
 428 US 18 and 19 2003 December Letters to the Pa nel;  US 20 January 2004 Letter to the Panel;  See 
also Brazil’s 28 January 2004 Comments and Requests Regarding US Data. 
 429 These facts are summari zed in Annex 1 to Brazil’s 9 October 2003 Closing Statement, but are also 
contained in a number of Brazil’s earlier submissions to the Panel beginning with its 24 June 2003 First 
Submission; S ee also  Brazil’s 18 November 2003 Further Rebuttal Submission, Sections 2.1 and 2.4; Brazil’s 
2 December 2003 Oral Statement, Sections 5.1 and 5.3.   
 430 Brazil’s 20 January 2004 Answers to Additional Questions, para. 47.   
 431 Brazil’s 20 January 2004 Answers to Additional Questions, paras. 44-48. 
 432 See Electronic PFC and DCP Summary Files provided on 18 and 19 December 2003 respectively.  
See also Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 22-24. 
 433 Brazil’s 20 January 2004 Answers to Additional Questions, paras. 48-55.  Thus, contrary to the US 
assertions in the last sentence of paragraph 163, Brazil does not advocate allocating a non-tied payment across 
the total value of the recipients production.   
 434 Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Sections 4, 8 and 9. WT/DS267/R/Add.2 
Page I-537 
 
 
218. The US 22 December 2003 response highlights th e differences between the parties on how to 
allocate the “benefit” for payments made under the four  types of contract payments.  Further, the US 
response reflects the parties’ differences over whethe r the quantification exercise is relevant for the 
peace clause “support to cotton,” or whether it is in stead relevant for assessing Brazil’s claims under 
Part III of the SCM Agreement.   
 
219. Brazil’s position is that the allocation435 of contract payments is required in the peace clause 
portion of the proceeding.  Brazil has set forth in  considerable detail the factual evidence supporting 
the de facto link between the contract payments and the production of upland cotton.436  Brazil further 
provided considerable detail concerning its allo cation methodology and the application of that 
methodology.437  Brazil even attempted to apply the US “across the value of the farm” methodology, 
based on the incomplete and scrambled US data.438  Brazil presented extensive legal arguments 
supporting the requirement under Article 13(b)(ii) to  collect and tabulate any and all support for a 
specific commodity such as upland cotton.439  For example, Brazil’s 22 August 2003 Rebuttal 
Submission stated:   
 
[T]he phrase “support to a specific commodity” … read in its context, requires the Panel to tabulate any non-green box domest ic support payments that are linked in 
some manner to the production of upland cotton.  Contrary to the US arguments,
440 
there is nothing in the text of Article 13(b)(ii) limiting the support to only that provided to a single commodity.  Nor does the text limit support to only that 
requiring  a recipient to produce or to produ ce a specific commodity as the United 
States alleges.
441  Rather, it requires examining whether a specific commodity 
receives support from a domestic support measure identified in the chapeau of Article 13(b) and whether there is some sort of link between the support at issue and the specific commodity.
442  Thus, the question of “support to a specific commodity” is 
fundamentally a factual question requiring an examination of different types of 
support set out in the chapeau of Article 13(b).443   
                                                      
 435 Brazil’s 11 August 2003 Answer to Question 40 provided detailed analysis regarding the application 
of its 14/16th methodology.  Brazil explained in its Rebuttal Submission that:  “Necessarily, this process requires 
allocation of support that may be provided to producers of more than one type of agricultural product, but which 
is not provided to producers in general .”  See Brazil’s 11 August Answer to Qu estion 40.  An allocation process 
is also required with respect to Annex 3 paragraph 7 support to processors of agricultural products,” ‘to the extent that such measures benefit the producers of the basi c agricultural product.”  Brazil’s 22 August 2003 
Rebuttal Submission, note 33.   
 
436 The United States has refused to produce the most relevant information – the precise amount of 
contract payments received by current US upland cotton producers.  Brazil summarized much of the available 
evidence, demonstrating that the contract payments are, de facto , tied to the production of  upland cotton, in its 9 
October 2003 Closing Statement, Annex I.    
437 Brazil’s 11 August 2003 Answer to Question 40.  Brazil’s 22 December 2003 Answer to Question 
258, paras. 43-55;  Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Sections 9 and 10.  
See also Brazil’s 11 August 2003 Answer to Question 40.  An  allocation process is also required with respect to 
Annex 3 paragraph 7 support to processors of agricultural products,” ‘to the extent that such measures benefit 
the producers of the basic agricultura l product.”  Brazil’s 22 August 2003  Rebuttal Submission, note 33.   
 438 Brazil’s 28 January 2004 Comments on Data Provided by United States, Section 10.   
 439 See Brazil’s 22 August Rebuttal Submission, paras. 13-22; Brazil’s 22 August 2003 Comments on 
US Answers, paras. 48-53, 58, 61;  Brazil’s 11 August 2003 Answers to Questions, paras. 54-55, 57-58, 61-64, 66-72, 129-132; Brazil’s 24 July 2003 Closing Statement, para. 8; Brazil’s 22 July 2003 Oral Statement, paras. 
13-26; Brazil’s 24 June 2003 First Submission, paras 130-134. 
 
440 US 11 August Answer 2003  to Question 38, para. 81. 
 441 US 11 August 2003 Answer to Question 38, para. 81. 
 442 Compare Brazil’s 11 August 2003 Answer to Question 41, paras. 57-58.   
 443 Brazil’s 22 August 2003 Rebuttal Submission, para. 14.   WT/DS267/R/Add.2 
Page I-538  
 
220. The US 22 December 2003 response reiterates, in paragraphs 161-163, the US peace clause 
arguments that the absence of any requirement to produce upland cotton in the statutory provisions of 
the 1996 and 2002 Farm Acts for direct and counte r-cyclical payments (as well as PFC and market 
loss assistance payments) completely insulates th ese subsidies from any actionable subsidy challenge 
during the implementation period.  Brazil demonstr ated how this extremely narrow US “production 
requirement” test is contrary to the chapeau of Article 13(b)(ii), contrary to the context of Annex 2, 
paragraph 6(e), contrary to the context of Annex 3,  paragraphs 10, 12, and 13, and contrary to the 
context of the AMS definition in Artic le 1(a) (referring to “in general”). 444  Brazil also demonstrated 
that the US “production requirement” test is cont rary to the object and purpose of the Agreement on 
Agriculture, because it carves out huge amounts of amber box subsides from any discipline of the 
SCM Agreement during the implementation period.445 
 221. The United States argues, at paragraph 163 of its 22 December 2003 response, that Brazil’s allocation methodology “eliminates the concept of non-product specific support for purposes of the 
peace clause since a non-tied payment may always  be allocated according to the recipient’s 
production”.  Brazil notes again its fundamental disagreement with the US assumption that 
$935.6 million in CCP payments and $454.5 million in  direct payments paid in MY 2002 to current 
producers of upland cotton are “untied” subsidies.
446  The overwhelming evidence in the record shows 
they are de facto “tied” to upland cotton production.447  Further, the United States incorrectly assumes 
that “non-product specific support” is the language set  out in Article 13(b)(ii).  The actual text is 
“support to a specific commodity”, which requires the tabulation – and allocation if necessary – of 
any and all support provided to producers, users, or e xporters of a particular product.  The test is not 
whether the domestic support requires production, but rather whether the domestic support provides 
support for the production of a particular commodity.448   
 222. Further, as Brazil noted in its 11 August 200 3 response, all of the domestic support measures 
challenged by Brazil have an “upland cotton specifi c link in terms of historic, updated, or present 
upland cotton acreage, present upla nd cotton production or prices, or upland cotton groups of 
insurance policies or other specific upland cotton provisions”
449  The ordinary meaning of the terms 
“non-product specific” support that is provided “in gene ral” is support to producer s of all or almost all 
commodities or agricultural products, such as irrigation, state credit programmes, and other infrastructure subsidies such as farm roads.  Thus, even if the peace clause test were “product-specific 
support,” Brazil’s interpretation does not read out any meaning to “non-product specific support”.   
 223. In sum, Brazil’s methodology for allocating th e various subsidy payments that “benefit” or 
“support” upland cotton is reasonable and based on an extensive factual record demonstrating the link 
between such payments and current upland cotton production.  If the United States disagreed, it was 
required to do more than simply assert the de jure form of the legal instruments of the contract 
payments.  Rather, it must produce the farm-specific evidence that would permit a detailed assessment 
of the “other agricultural production” (and the valu e) of each producer of upland cotton.  It has 
refused to do so.  Therefore, the US 22 Dece mber 2003 response to Question 243, besides being 
                                                     
 
 444 See, in particular, Brazil’s 22 August 2003 Rebuttal Submission, paras. 15-22 (legal arguments), as 
well as factual evidence regarding each direct payment s ubsidy, in paras. 24-52.  Since August, Brazil has 
presented considerable additional evidence establishing the de facto link between each type of contract payment 
and the production of US upland cotton.  See Annex 1 of Brazil’s 9 October 2003 Closing Statement;  Brazil’s 
27 October 2003  Answers to Questions, paras. 7-26, 37-40;  Brazil’s 18 November 2003 Further Rebuttal 
Submission, Section 3.7.5; Brazil’s 2 December 2003 Oral Statement, Section 5.3.    
445 Brazil’s 22 July 2003 Oral Statement, paras. 21-25.   
 446 Brazil’s 22 December 2003 Answers to Question 196, para 8.   
 447 See e.g. Brazil’s 9 October 2003 Closing Statement, Annex I; Brazil’s 27 October 2003 Answers to 
Question 125(2)(a), paras. 7-25;  Brazil’s 18 November 2003 Further Rebuttal Submission, Section 3.7.5.   
 448 Brazil’s 22 August 2003 Rebuttal Submission, paras. 15-22. 
 449 Brazil’s 11 August 2003 Answer to Question 41, paras. 57-58.   WT/DS267/R/Add.2 
Page I-539 
 
 
largely legally and factually wrong, is an astounding display of hubris in light of the US refusal to produce the very evidence that would permit the application of the methodology it advocates.   
244. What proportion of the 2000 cottonseed payments benefited producers of upland cotton , 
given that payments were made to first handlers , who were only obliged to share them with the 
producer to the extent that the revenue from sale of the cottonseed was shared with the 
producer? (see 7 CFR §1427.1104(c) in Exhibit US-15). BRA 
 
245. Can a panel take Green Box subsidies into  account in considering the effects of non-
Green Box subsidies in an action based on Articles 5 and 6 of the SCM Agreement ?  BRA, USA 
 
246. Can a panel take prohibited subsidies into account in considering th e effects of subsidies 
in an action based on Articles 5 and 6 of the SCM Agreement ?  BRA, USA 
 Brazil’s Comment: 
 
224. The Panel is well aware that Brazil considers Article 5 and its referen ce to “any” subsidy to 
require the Panel to take pr ohibited subsidies into account for a serious prejudice claim.
450  There is no 
contradiction between the implementing obligations  of a Member under Articles 4.7 and 7.8 of the 
SCM Agreement.  Thus, the Panel must take prohi bited subsidies into account in considering the 
effects of subsidies in an action based on  Articles 5 and 6 of the SCM Agreement. 
 
247. Can the Panel take into account trends and volatility in market and futures prices of 
upland cotton after the date of establishment of the Pa nel?  If so, how do they affect the analysis 
of Brazil's claim of a threat of serious prejudice?  BRA, USA  
Brazil’s Comment:  
225. Brazil’s 22 December 2003 response to this ques tion covers most of the points raised in the 
US 22 December 2003 response.  In response to the US argument at paragraph 149 that the Panel’s 
terms of reference as well as Brazil’s threat claims are limited to subsidy payments up to, but not after, 18 March 2003, Brazil refers the Panel to  its Comments to Question 194 above, and to its 
20 January 2004 Answer to Questi ons 257(ii), at paragraphs 17-22 .  Brazil has, further, responded to 
improper use of futures prices at the time of planti ng, instead of the adjusted world price, in its 
Comments to Questions 212 and 213, above . 
 
VI. STEP 2 
 
248. In respect of the level of Step 2 payments in certain time periods, the Panel notes, inter 
alia, footnote 129 in the US first written submission; footnote 33 in the US 18 November further 
rebuttal submission; and Exhibit BRA-350.  Have  Step 2 payments ever been zero since the 
elimination of the 1.25 cent per pound threshold in the FSRI Act of 2002?  In what circumstances could a Step 2 payment be zero?  How does the elimination of the 1.25 cent per 
pound threshold in the FSRI Act of 2002 affect your response? BRA, USA 
 Brazil’s Comment: 
 
226. Brazil notes the US admission that one of th e reasons for the elimin ation of the 1.25 cent 
threshold is to “correct for some long term changes in the valuation of currencies”.
451  T h u s ,  t h e  
United States effectively admits that Step 2 pa yments cause US exports to increase despite the 
                                                      
 450 Brazil’s 22 December 2003 Answers to Questions, pa ra. 147;  Brazil’s 27 October 2003 Answers to 
Questions, paras. 108-110. 
 451 US 22 December 2003 Answer s to Questions, para. 171. WT/DS267/R/Add.2 
Page I-540  
 
appreciation of the US dollar.  In fact, the United States has never rebutted the considerable evidence 
that one of the main effects of the US upland cott on subsidies is to cause US exports of upland cotton 
to increase even when the US dollar is appreciating rapidly.
452  
 
249. The Panel notes that the definition of eligible "exporter" in 7 CFR 1427.104(a)(2) 
includes "a producer":   
 (a) How does this reconcile with Brazil's argume nt that Step 2 "export payments" do not 
directly benefit the producer?
453  How, if at all, would this be relevant for an analysis of 
the issue of export contingency under the Agreement on Agriculture  or the SCM 
Agreement ?  BRA 
 (b) How does this reconcile with Dr. Glauber's stat ement in Exhibit US-24, p. 3 (referring to 
"the 1990 Farm Bill and subsequent legi slation") that Step 2 payments do not go 
directly to the producer?  USA 
 
(c) What proportion of Step 2 "export p ayments" go to producers?  Please supply 
supporting evidence.  USA 
 
VII. REMEDIES 
 
250. Does Brazil seek relief under Article XVI of GATT 1994 in respect of expired measures?  
What type of recommendation would the Panel be authorized to make?  (Brazil further submission, paragraph 471 (iii))  BRA  251. In light, inter alia , of Article 7.8 of the SCM Agreement , if the Panel were to find that any 
subsidies have resulted in adverse effects to the interests of another Member within the meaning 
of Article 5 of the SCM Agreement , should it make any recommendation other than the one set 
out in the first sentence of Article 19.1 of the DSU?  BRA  252. Without prejudice to any findings by the Panel, if the Panel were to find that any of the challenged measures constitute prohibited subs idies within the meaning of Article 3 of the SCM 
Agreement , what are the considerations that should guide the Panel in making a 
recommendation under Article 4.7 of the SCM Agreement  relating to the time period "within 
which the measure must be withdrawn"? What should that time period be? BRA  VIII. MISCELLANEOUS 
 
253. Regarding the adjustment authority related to Uruguay Round compliance in s.1601(e) 
of the FSRI Act of 2002 (the so-called "circuit-breaker provision"):  (a) Does it relate to export credit guarant ees, crop insurance and cottonseed payments? 
 
(b) Does it relate only to compliance with AMS commitments? 
 (c) Is the authority discretionary?  If so, can its exercise be limited by the legislative branch 
of government?  
 
(d) How would the Secretary exercise her auth ority to prevent serious prejudice to the 
interests of another Member?  How would she exercise her authority to prevent a threat 
                                                     
 
 452 Brazil’s 9 September 2003 Further Submission, paras. 124-128 and the Exhibits cited therein;  
Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 78-80. 
 453 For example, Brazil's response to Panel Question 125, paragraph 14.  WT/DS267/R/Add.2 
Page I-541 
 
 
of serious prejudice to the interests of another Member?  At what time and on the basis 
of what type of information would she exercise her authority?   
 (e) What does "to the maximum extent practica ble" mean?  In what circumstances would it 
not be practicable for the Secretary to exercise her adjustment authority? USA 
 
Brazil’s Comment: 
 
227. In its arguments at paragraphs 176, 178 and 180 of its 22 December 2003 response, the 
United States speculates about the “thoughts,” “antic ipations,” “contemplati ons,” “understandings”, 
and “belief” of the US Congress.  Yet it provid es no citation to the extensive Congressional debates 
on the 2002 FSRI Act.  Speculation about legislative (or negotiators’) intentions not backed up by 
reference to the record of the debates is not po sitive evidence.  Further, if any Member could 
successfully plead compliance with WTO rules by simply inserting language asserting the provision 
“provides assistance to producers in a way that is  consistent with [its] obligations under the Uruguay 
Round Agreement on Agriculture”
454, then there would be little role for any WTO panel.  The only 
“evidence” of US legislators’ intent before th e Panel is the text of the 2002 FSRI Act.   
 228. In sum, the record now shows that both Br azil and the United States agree that (1) Section 
1601(e) applies only to Total AMS
455, (2) Section 1601(e) does not apply to serious prejudice caused 
to US trading partners by US subsidies to  upland cotton covered by the 2002 FSRI Act456, and, (3) the 
2002 FSRI Act does not provide any discretion for the USDA Secretary specifically to limit the 
amount of upland cotton  marketing loan, Step 2, direct or counter-cyclical payments.457 
 
254. Would payments made after the date of panel establishment be mandatory under the 
marketing loan, direct payments, counter-cyclical payments and user marketing certificate (step 2) programmes, but for the circuit-breaker provision?  USA 
 
Brazil’s Comment: 
 
229. Brazil established that mark eting loan, Step 2, direct and counter-cyclical payments are 
mandatory, within the traditional mandatory/discretionary distinction under GATT/WTO law.
458  In its 
20 January 2004 Answers to Additional Questions , Brazil has responded to US arguments that 
conditions attached to the payment of subs idies would make these subsidies non-mandatory.459   
 230. Brazil notes further that the listed programmes are not only mandatory within the meaning of WTO law, but are also mandatory under US budget  law.  They create a legal entitlement to the 
payment.
460  While the United States now argues that payments depend on the availability of funds461, 
                                                      
 454 US 22 December 2003 Answer to  Question 253(a), para. 176. 
 455 US 22 December 2003 Answer to Question 253(b), para. 178.   
 456 US 22 December 2003 Answer to  Question 253(d), para. 180. 
 457 US 27 October 2003 Answer to Question 162, para 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 paym ents to qualified recipients.”), para . 97 (“there is no present limit on the 
total amount of payments that can be made under each of these programs although for counter-cyclical 
payments a maximum total outlay can be calculated using the base acres, base yields, and maximum payment 
rate for each commodity produced during  the historical base period.”).   
 458 See Brazil’s 20 January 2004 Answers to Additional Questions, paras. 17 (with further references), 
24-30. 
 459 Brazil’s 20 January 2004 Answers to Additional Questions, paras. 27-30. 
 460 Exhibit Bra-416 (“What Is A Farm Bill,” Congressi onal Research Service, Report for Congress, 5 
May 2001) (“Commodity programmes are entitlements.  Expenditures are based upon programme rules and 
commodity market conditions.  Eligible farmers are guara nteed legislatively-specified support based on these 
rules and conditions.”).  USDA noted with respect to an earlier commodity program – the deficiency payment WT/DS267/R/Add.2 
Page I-542  
 
the legal entitlement nature of these programmes m eans that payments must be made – if necessary 
after CCC funds have been replenished.  231. Finally, Brazil recalls that the United States argued in the peace clause portion of this dispute that is has no control over the flow of the upland cotton subsidies.
462  In fact, there is no legal 
mechanism to stem, or otherwise control, the fl ow of these upland cotton subsidies, which cause a 
permanent source of uncertainty in  the world upland cotton market.463  Thus, the US subsidies cause a 
threat of serious prejudice, in violation of Articles 5(c), 6.3(c) and 6.3(d) as well as footnote 13 of the 
SCM Agreement, and GATT Articles XVI:1 and 3.  255. How does Brazil respond to US assertions concerning the circuit-breaker provision? (see 
US 2 December oral statement, paragraph 82).  Does this mean that US subsidies cannot be "mandatory" for the purposes of WTO dispute settlement?  BRA  256. The United States submits that the Panel ca nnot make rulings without allocating precise 
amounts of payments to upland cotton production .  However, to the extent that such precise 
data is not on the Panel record, to what extent  can the Panel rely on less precise data, and on 
reasonable assumptions, in fulfilling its duty under Article 11 of the DSU  in this case?  USA 
 Brazil’s Comment: 
 232. Because the United States has refused to co operate in producing the most precise data 
concerning the amounts of contract payments to upland cotton producers, the Panel should (1) first 
draw adverse inferences from the US refusal to c ooperate, and (2) use the best information available 
in making its determination.
464  Brazil presents the factual and le gal basis permitting the Panel to make 
findings based on reasonable assumptions in its separate 28 January Comments and Requests 
Regarding US Data.  These separate comments address most of the points raised in the extensive – 
and largely unresponsive – US answer to Question 256.465  Additional points are set out below.     
 233. First, there is relevant WTO jurisprudence th at provides a legal basis for the Panel to draw 
inferences from the best information available in the record in order to comply with the requirements 
of Article 11 of the DSU.
466  For example, in the US – Wheat Gluten  case , the panel requested that the 
United States supply it with certain information that  had been redacted from the public version of a 
USITC Report, but despite several requests, the United States refused to submit the information.467  
The panel decided that while having access to all the requested information from the United States 
would have furnished a more extensive basis for its examination and have facilitated an objective 
assessment of the facts, there were other facts of re cord that the panel was required to include in its 
“objective assessment”.468  Ultimately, the panel determined that the United States violated provisions 
of the Agreement on Safeguards on the b asis of the available factual record.469  W h e n  t h e  
                                                                                                                                                                     
program – that “[d]eficiency payments are entitlements; that is, spending is determined by rules that define 
eligibility and govern benefit levels rather than by the annual appropriations process.  USDA and Congress have 
no control over deficiency payment outlays.”  (Exhib it Bra-417 (“Commodity Program Entitlements: Deficiency 
Payments”, USDA, May 1993).  
461 US 22 December 2003 Answer s to Questions, para. 182. 
 462 In the context of the peace clause  arguments, the United States ar gued that it could not control the 
amount of budgetary outlays under the programmes. 
 463 Brazil’s 20 January 2004 Answers to Additional Questions, paras. 18-22 (with further references). 
 464 Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Section 6. 
 465 See also Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Section 11. 
 466 Brazil’s 9 October 2003 Closing Statement, paras. 2, 9 ( citing  Panel Report, Argentina – Textiles 
and Apparel , WT/DS56/R, para. 6.39). 
 467 Appellate Body Report, US – Wheat Gluten , WT/DS166/AB/R, para. 168. 
 468 Panel Report,  US – Wheat Gluten , WT/DS166/R, para. 8.12. 
 469 Panel Report,  US – Wheat Gluten , WT/DS166/R, para. 8.12. WT/DS267/R/Add.2 
Page I-543 
 
 
United States appealed this decision, the Appellate Body affirmed the panel, stating that “where a 
party refuses to provide information requested by a pane l, that refusal will be one of the relevant facts 
of record, and indeed, an important fact, to be taken into account in determining the appropriate 
inference to be drawn”.470  The Appellate Body further indicated that it “deplored the conduct of the 
United States” in refusing to cooperate and provid e information that was within its exclusive 
control.471  
 234. Another example of a panel using the best in formation available when a Member refused to 
provide documents within its exclusive control is the Argentina – Textiles  and Apparel case.  In that 
case, the United States requested Argentina to produ ce complete original customs documents of all 
footwear imports to demonstrate that Argentin a was imposing and requiring payment of specific 
duties in excess of its bound duty rates of 35 per cent ad valorem .
472  Argentina refused to provide the 
complete (or any) documents.473  The United States then provided examples of customs documents, 
which Argentina contested on a variety of authenticity and relevance grounds.474  The panel rejected 
these Argentine arguments and found that “the United States has provided sufficient evidence ”.475  In 
so holding, the panel noted that “[i]n situations wh ere direct evidence is not available, relying on 
inferences drawn from relevant facts of each case f acilitates the duty of inte rnational tribunals in 
determining whether or not the burden of proof has been met”.476  The panel further held that there is a 
requirement for collaboration of the parties in the presentation of the facts and evidence to the panel, 
and emphasized especially the role of the respondent in that process.477   
 
235. Applying these concepts to the allocation i ssues involved in the p eace clause portion of this 
dispute indicates that the Panel has more than suffici ent evidence in the record  to support a reasonable 
estimate of the amount of contract payment s upport provided to upland cotton in MY 1999-2002.478  
Brazil detailed its views concerning the appropriate  allocation methodology for purposes of the peace 
clause.479  Faced with the US refusal to provide the data necessary to calculate the precise amount of 
support to upland cotton from the US contract pa yments using Brazil’s (and the US) allocation 
methodology, Brazil offered extensive circumstantial evidence in support of its alternative so-called 
“14/16th methodology”.480  The Panel may properly draw advers e inferences that the United States 
data would, if produced, have shown that Brazil’s 14/16th methodology undercounted the amount of 
support to upland cotton.481  Such an adverse inference supports the other extensive evidence that the 
14/16th methodology provides a reasonable estimate.482   
 
                                                      
 470 Appellate Body Report, US – Wheat Gluten , WT/DS166/AB/R, para. 174. 
 471 Appellate Body Report, US – Wheat Gluten , WT/DS166/AB/R, para. 171. 
 472 Panel Report, Argentina – Textiles and Apparel , WT/DS56/R, para. 6.54. 
 473 Panel Report, Argentina – Textiles and Apparel , WT/DS56/R, para. 6.56. 
 474 Panel Report, Argentina – Textiles and Apparel , WT/DS56/R, para. 6.33. 
 475 Panel Report, Argentina – Textiles and Apparel , WT/DS56/R, para. 6.65 (emphasis added). 
 476 Panel Report, Argentina – Textiles and Apparel , WT/DS56/R, para. 6.39. 
 477 Panel Report, Argentina – Textiles and Apparel , WT/DS56/R, para. 6.40. 
 478 Brazil recalls that the United Stat es has invoked the peace clause of  Article 13 of the Agreement on 
Agriculture.  As demonstrated by Brazil,  the peace clause is in the nature of an affirmative defense.  And even if 
the Panel were to disagree, Brazil established a prima facie case of inconsistency of the US measures with 
Article 13(b)(ii) of the Agreement on Agriculture.  Neith er the claim nor the measur es to which it relates are 
outside the Panel’s terms of reference, within the meaning of the Appellate Body decision in Japan – 
Agricultural Products , paras. 129-130. 
 479 Brazil’s 20 January 2004 Answers to Additional Questions, paras. 43-55. 
 480 These facts are summari zed in Annex 1 to Brazil’s 9 October 2003 Closing Statement, but are also 
contained in a number of Brazil’s earlier submissions to the Panel, beginning with its 24 June 2003 First 
Submission.  See also Brazil’s 18 November 2003 Further Rebuttal Submission, Sections 2.1 and 2.4; Brazil’s 
2 December 2003 Oral Statement, Sections 5.1 and 5.3.   
 481 Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Section 6. 
 482 Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Section 6. WT/DS267/R/Add.2 
Page I-544  
 
236. Turning to its claims of serious prejudice and threat thereof, Brazil remains of the firm view 
that neither Part III of the SCM Agreement nor GA TT Article XVI requires an exact determination of 
the amount of subsidies involved.
483  Rather, Brazil must demonstrate their effects .484  Nevertheless, 
and as an alternative legal argument, Brazil presented extensive evidence concerning the amounts as 
well as the effects  of each challenged subsidy.  This is th e same evidence Brazil used to demonstrate 
the amount of support to upland cotton.   
 237. The United States asserts that Brazil has to a llocate all contract payments received by an 
upland cotton producing farm over the total value of that farm’s sales.
485   However, even though the 
United States alone is in exclusive control of the in formation that would permit such an allocation, it 
has refused to produce that informa tion.  Even if it would be Brazil’s burden to establish this fact, the 
United States has done everything to frustrate Brazil’s ability to do so.  In particular, the United States 
first wrongly asserted that data on plantings of farms was not available to it and – after Brazil 
demonstrated that this was incorrect486 – refused to produce the evidence.487 
 
238. Indeed, even if the Panel were of the view  that the US allocation methodology would provide 
the best means of evaluating the amount of support to  upland cotton, the refusal of the United States 
to produce the requested data prevents the Panel fro m applying that methodology.  In the face of this 
lack of cooperation, the Panel is required to appl y some other methodology to estimate the amount of 
contract payment support, i.e., Brazil’s 14/16th methodology, or some variant thereof.  To hold 
otherwise would obviously penalize Br azil, who sought the information, inter alia , for the purpose of 
demonstrating that the US methodology would rev eal amounts of support similar to those estimated 
by Brazil’s own 14/16th methodology.    
 239. It is ironic that among the evidence that supports Brazil’s 14/16
th methodology is the 
incomplete summary data provided by the United States.   Brazil attempted to use that data to perform 
a simplified version of the (improper) US allocation methodology.488  Brazil does not believe, as the 
Panel’s question suggests, that it can make reasona ble assumptions using this methodology based on 
the fragmented summary data provided by the Unite d States.  Nevertheless, although Brazil cautions 
against the use of its results, and although this me thodology is not relevant for purposes of the peace 
clause, Brazil notes that these results are only margin ally smaller than the results of Brazil’s own 
14/16th methodology.489 
 
240. Thus, contrary to the US 22 December 2003 arguments490, there is evidence provided by 
Brazil in the record on which the Panel can rely in  making an objective assessment of the facts and in 
deciding on Brazil’s claims under Part III of the SCM Agreement and GATT Article XVI (as well as 
under Article 13(b)(ii) of the Agreement on Agriculture ).  Brazil has also met its burden of proof in 
establishing a prima facie case concerning its claims of inconsistency of the US measures with these 
provisions.  
                                                     
 
 483 See Brazil’s comment on Question 243, above. 
 484 See inter alia  Brazil’s 2 December 2003 Oral  Statement, paras. 4-6 (a nd the references cited 
therein).  
485 See US 22 December 2003 Answers to Questions, paras. 185-186, 10-11, 160-164. 
 486 Brazil’s 18 November 2003 Further Rebuttal Submission, Section 2.2;  Exhibits Bra-368 – Bra-369. 
 487 See generally  Brazil’s 28 January 2004 Comments and Requests Regarding US Data. 
 488 Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Section 10. 
 489 Brazil’s 28 January 2004 Comments and Requests Regarding US Data, Section 10. 
 490 US. 22 December 2003 Answers to  Questions, paras. 185-186. WT/DS267/R/Add.2 
Page I-545 
 
 
IX. ADDITIONAL QUESTIONS PO SED ON 23 DECEMBER 2003 AND 
12 JANUARY 2004 
 
257. The Panel takes note of the Appellate Body Report in United States – Sunset Review of 
Anti-Dumping Duties on Corrosion-Resistant Carbon Steel Flat Products from Japan (DS244), 
which was circulated to WTO Members on 15 Dece mber 2003.  The Panel is aware that this 
report has yet to be adopted by the Dispute Settlement Body.  Nevertheless, the Panel asks the parties to respond to the fo llowing related questions. 
 
(a) In tht report, the Appellate Body cautioned against the "mechanistic" application of the 
so-called "mandatory/discretionary distinctio n" and stated that the import of this 
distinction may vary from case to case (para. 93).  For the Appellate Body, the question 
of whether a measure is mandatory or not is relevant "if at all" only as part of the 
assessment of whether the measure is, as such, inconsistent with particular obligations.  How, if at all, are these statements and the related findings concerning the 
mandatory/discretionary distinction in th at Appellate Body Report relevant to: 
  (i) the legal standard and elements Br azil sets out to establish its export and 
prohibited subsidy claims under the provisions of the Agreement on Agriculture  
and Articles 3.1(a) and (b) of the SCM Agreement , concerning: BRA 
 
 - Step 2 payments (see, e.g. paras. 244-245 & 250 Brazil's first written submission; 
Panel Question 109 and parties' responses/comments thereon); and 
  - export credit guarantee programmes: GSM-102, GSM-103 and SCGP (see, e.g., 
para. 90 Brazil's oral statement at second Panel meeting).  
 
 (ii) the legal standard and elements Brazil sets out to establish its serious prejudice 
and "threat of serious prejudice" claims, and in particular, its designation of 
marketing loan; crop insurance; counter-cyclical payments; direct payments and Step 2 as "mandatory"?  BRA 
 
 (iii) the legal standard and elements Brazil sets out to establish its " per se " "serious 
prejudice" claims ( e.g. Brazil's 9 September further submission, para. 417 ff; US 
oral statement at second Panel meeting, para. 86 ff.)? BRA 
 (b) How and to what extent are the legal and regulatory provisions cited in paras. 415 and 
423 of Brazil's 9 September further submissi on "normative" in nature and treated as 
binding within the US legal system (see, e.g., para. 99 of the Appellate Body Report)?  
Does your response differ depending on whether the payments are dependent upon market price conditions? BRA 
 (c) Does Brazil challenge as "mandatory" the "subsidies" themselves, the subsidy 
programmes or the legal/regulatory provisions for the grant or maintenance of those 
subsidies, or something else?  BRA 
 
(d) Does the "requirement" upon the CCC to make available "not less than" $5.5 billion 
annually in guarantees have a normative character and operation? (see, e.g. Brazil's 
response to Panel Question 142; Exhibit BRA-297, 7 USC 5641(b)(1); 7 USC 5622(a) & 
(b); paragraph 201 of US 18 November furt her rebuttal submissions).  Is this 
requirement "mandatory"?  If so, how does th e CCC have "discretion" not to make this 
amount of guarantees available in a given year?  USA 
 WT/DS267/R/Add.2 
Page I-546  
 
(e) Does the US agree that, under the Budget Enforcement Act of 1990, the Office of 
Management and Budget classifies the export credit guarantee programmes as "mandatory" (see Brazil's response to Panel Question 142, para. 89)?  Does this exempt 
the programmes from the requirement to receive new Congressional budget authority 
before it undertakes new guarantee commitments ( e.g. Exhibit BRA-117 (2 USC 
661(c)(2))?  USA  
 Brazil’s Comment: 
 
241. Brazil makes several observations with r espect to the United States’ 20 January 2004 
responses to Questions 257(d) and 257(e). 
 242. First, the evidence discussed in the Panel’s qu estions and the US responses is only relevant to 
a determination whether the United States is in compliance with Article 10.1 of the Agreement on 
Agriculture with respect to scheduled products
.  For unscheduled products, the Appellate Body held 
that it is inconsistent with Article 10.1 to provide any export subsidies.491  Brazil has demonstrated 
that CCC guarantees were extended for unscheduled products during the period  1992-2003.  Having 
also demonstrated that the CCC programmes constitute  export subsidies (under Articles 1.1 and 3.1(a) 
of the SCM Agreement, and under item (j)), Brazil h as therefore established that the United States has 
circumvented its export subsidy commitments with r espect to unscheduled products, in violation of 
Article 10.1.  Brazil has also demonstrated th at CCC guarantees continue to be available for 
unscheduled products.492  Since it is inconsistent with Article 10.1 to provide any export subsidies, the 
availability of CCC guarantees leads to a threat  of circumvention of the US export subsidy 
commitments.    243. Second, the test to determine whether the Unite d States is threatening to circumvent its export 
subsidy commitments with respect  to scheduled products is not
 whether the CCC guarantee 
programmes are “mandatory” as opposed to “discretionary.”493  Rather, to determine whether export 
subsidies result in, or threaten to lead to, ci rcumvention of the United States’ export subsidy 
commitments, the test set out by the Appellate Body in US – FSC is whether there is a “mechanism in 
the measure” for CCC to “stem[], or otherwise control[], the flow of” CCC export credit guarantees.494 
 244. Under this test, the threat
 of circumvention is not abated simply because, as the United States 
notes, the CCC is not actually required to issue  the “not less than $5,500,0 00,000 in credit guarantees” 
that it must, as a matter of law, make available  every year.495  The threat arises because, year-on-year, 
the CCC announces its plans to extend over $6 billion in guarantees, as it did for fiscal year 2004.496  
                                                      
 491 Appellate Body Report, US – FSC , WT/DS108/AB/R, para. 150. 
 492 Exhibit Bra-299 (“Summary of FY 2003 Export Credit Guarantee Program Activity,” USDA, 
covering GSM-102, GSM-103 and SCGP).  For 1999-2002, s ee also Exhibit Bra-73 (“Summary of Export 
Credit Guarantee Program Activity,” USDA, covering GS M 102, GSM 103 and SCGP for US fiscal years 1999-
2003).  For 1992-1998, see Exhibit US-41. 
 493 The Panel will recall that in addition to its threat of circumven tion claims with respect to scheduled 
products, Brazil has also demonstrated that the Un ited States has used the CCC guarantee programs to 
circumvent its export subsidy commitments with respect to rice (a scheduled product).  See Exhibit Bra-300 
(Calculation on US Rice Exports Benefiting from GSM 102, GSM 103 and SCGP).  The United States has not 
rebutted this evidence. 
 494 Appellate Body Report, US – FSC , WT/DS108/AB/R, para. 149.  Brazil’s 27 October 2003 
Answers to Questions, para.  88;  Brazil’s 18 November 2003 Further Rebuttal Submission, para. 257;  Brazil’s 2 December 2003 Oral Statement, pa ras. 90-91;  Brazil’s 20 January 20 04 Answers to Ad ditional Questions, 
para. 13. 
 
495 Brazil is aware of no other provision of US la w that provides a floor,  and not a corresponding 
ceiling, for support to US industry. 
 496 Exhibit Bra-296 (“USDA Announces $2.8 Billion in  Export Credit Guarantees,” FAS Press Release, 
30 September 2003). WT/DS267/R/Add.2 
Page I-547 
 
 
It is required to do so by law.497  It is, moreover, altogether exem pt from any ceiling on the amount of 
guarantees it extends, and from the normal requirement  that it receive new budget authority before 
undertaking new guarantee commitments (the progra mmes’ “mandatory” status under US law “does 
not effectively constrain credit activity”).498  The CCC uses that exem ption liberally, increasing 
allocations throughout the fiscal year to meet the needs of US exporters.499 
 
245. Even if the CCC does not reach its goal of i ssuing over $6 billion in guarantees by year end, 
the fact that US law tells it that it must  make available at least  this amount, the fact that it sets its 
sights on and actually announces this amount, and the fact that nothing in US law sets any upward 
bound on the amount of guarantees it can issue, communicates a threat that it will circumvent its 
export subsidy commitments.  Even if the CCC does not reach its goal of issuing $6 billion in export 
credit guarantees, foreign competitors of US farmers s ee that it has announced its intent to do so, that 
it has the authority to do that and an unlimited am ount more, and that there is no “mechanism in the 
measure” for CCC to “stem[], or otherwise control[], the flow of” CCC export credit guarantees.500   
 
246. Moreover, foreign competitors of US farmer s have seen how, as an historical matter, the 
United States has applied the CCC guarantee progr ammes to surpass its quantitative export subsidy 
reduction commitments – even when falling short of  its announced intent to issue $6 billion in 
guarantees.  Brazil has demonstrated how this threat  materialized for one product – rice – in fiscal 
years 2001, 2002 and 2003 (despite the fact that the CCC did not reach its announced intent of handing out $6 billion in guaran tees in any of those years).
501  Foreign producers’ fears that the threat 
will materialize in other years for other products ar e legitimate, and the threat is therefore tangible 
(regardless whether or not the CCC meets its goal of  handing out $6 billion in guarantees in any given 
year).  247. Merely having what the United States claims  is the unwritten, administrative discretion to 
“tamp down the actual issuance of guarantees” would not be enough under this test.
502  The reason the 
Appellate Body in US – FSC looked for an affirmative “m echanism in the measure ” subject to an 
Article 10.1 claim that would stem or control the fl ow of subsidies, rather than merely accepting as 
sufficient the unwritten administrative discretion to do so, is that only when such a mechanism exists, 
will foreign competitors of US farmers know with a degree of assurance that the threat of 
                                                      
 497 Brazil’s 18 November 2003 Further Rebuttal Submission, para. 261, citing Exhibit Bra-297 (7 
U.S.C. § 5641(b)(1); 7 U.S.C. § 5622(a), (b)).  See also  Brazil’s 2 December 2003 Oral Statement, para. 91, 
citing  Exhibit Bra-366 (7 U.S.C. § 5622 note, “Promotion of Agricultural Exports to Emerging Markets, para. 
(a) (“The Commodity Credit Corporation shall make availa ble for fiscal years 1996 through 2002 not less than 
$1,000,000,000 of direct credits or export credit guara ntees for exports to emerging  markets under section 201 
or 202 of the Agricultural Trade Act of 1978 (7 U.S.C.  5621 and 5622), in  addition to the amounts acquired or 
authorized under section 211 of the Act (7 U.S.C. 5641) for the program.”)).  See also Exhibit Bra-367 (Section 
3203 of the 2002 FSRI Act (extending mandate to 2007)). 
 498 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 program’s BEA classification under the Budget 
Enforcement Act (BEA) of 1990 as discretionary or mandatory”); Exhibit Bra-117 (2 U.S.C. § 661(c)(2)) 
(exempting CCC programmes from appropriations requirement); Exhibit Bra-185 (Congressional Budget Office Staff Memorandum, “An Explanation of the Budgetary Changes under Credit Reform,” April 1991, p. 7 (for 
quote provided in text above)).   
 
499 Brazil’s 27 October 2003 Answers to Questions, para. 95, citing  the archived list of USDA press 
releases announcing suppleme ntal allocations extended throughout fiscal year 2003 
(http://www.fas.usda.gov/ex credits/exp-cred-guar.asp ). 
 500 Appellate Body Report, US – FSC , WT/DS108/AB/R, para. 149. 
 501 Exhibit Bra-300 (Calculation on US Rice Exports Benefiting from GSM 102, GSM 103 and SCGP).  
The United States has never rebutted Brazil’s showing.   The CCC announced guarantee allocations of $5.762 
billion in 2001, $6.1 58 billion in 2002, and $6.247 billion in 2003, while granting guarantees in the amount of 
$3.227 billion in 2001, $3.388 billion in 2002, and $3.223 billion in 2003.  See Exhibit US-41. 
 502 US 20 January 2004 Answers to Questions, para. 3. WT/DS267/R/Add.2 
Page I-548  
 
circumvention is not real.  The purpose of the mechanis m, in other words, is to diminish the threat.  
(Had this not been the Appellate Body’s intent , it would simply have stuck to the traditional 
mandatory/discretionary formula it has used elsewhere and that the United States asserts applies in the 
analysis of an Article 10.1 claim.)  
248. In any event, the “discretionary elements” that the United States asserts
503 abate the threat 
posed by its annual announcement that it will issu e over $6 billion in CCC export credit guarantees 
are an illusion, for at least two reasons.504 
 249. First, the United States has offered no evidence that the CCC may reject “any individual 
application”
505 (much less that there is a “mechanism” to do so in order to avoid circumvention of US 
export subsidy commitments).  As Brazil has pr eviously noted, the CCC guarantee programmes are 
classified as “mandatory” under US law.506  The Congressional Budget Office (“CBO”) and the 
Congressional Research Service (“CRS”) (legislative branch agencies charged with servicing the US 
Congress) have both noted the inability of executiv e branch agencies charged with implementing 
mandatory programmes to deny support to eligible borrowers.507  The United States cites a non-
programme specific document for a generic principle that mandatory and discretionary classifications 
under the Budget and Enforcement Act “‘do not de termine whether a programme provides legal 
entitlement to a payment or benefit’”.508  Speaking specifically with respect to USDA mandatory 
programmes, however, the CRS states 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’”.509 
 
                                                      
 503 US 20 January 2004 Answers to Additional Questions, para. 3. 
 504 Brazil has elsewhere explained the CCC’s authority to  undertake an inquiry into whether particular 
countries are creditworthy, and the possibility that this in quiry 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’s 27 October 2003 Answers to Questions, para. 92.  Under the United States’ FSC measure, 
US authorities were permitted to und ertake a factual inquiry into, among other things, whether the foreign-
source income of the foreign corpora tion was “effectively connected with th e conduct of a trade or business 
within the United States.”  Appellate Body Report, US – FSC , WT/DS108/AB/R, para. 16.  This authority, and 
the possibility that the f actual inquiry 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” FSC benefits, leading to a threat of circumvention of the United States’ 
export subsidy reduction commitments. 
 
505 US 20 January 2004 Answers to Additional Questi ons, para. 3.  The United States has not offered 
any support for its assertion that CCC has the authority “to suspend the issuance of expert credit guarantees 
under any particular allocation”.  In any event, Brazil demonstrates infra  that the allocation process does not 
remotely abate the threat that the United States will circumvent its quantitative export subsidy reduction 
commitments. 
 506 Exhibit Bra-295 (2004 US Budget, Federal Cr edit Supplement, Introduction and Table 2 (CCC 
Export Loan Guarantee Program classi fied as “Mandatory” in Table 2, an d 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”). 
 507 See Exhibit Bra-117 (2 U.S.C. § 661(c)(2)); Exhibit Bra-185 (Congressional Budget Office Staff 
Memorandum, “An Explanation of the Budgetary Changes under Credit Reform,” April 1991, p. 7 and Table 2); 
Exhibit Bra-186 (Congressional Research Service Issue Brief for Congress, “Agriculture and the Budget,” 
IB95031 (16 February 1996), p. 3). 
 508 US 20 January 2004 Answers to Additional Questions, para. 7. 
 509 Exhibit Bra-186 (Congressional Re search Service Issue Brief for Congress, “Agriculture and the 
Budget,” IB95031 (16 February 1996), p. 3).  The United States made a similar error in its 30 September 2003 
Further Submission, at paragraph 156, when it cited the very same generic, non-agency-specific document 
(Circular A-11) for the principle that “the ability of CCC to issue guarantees is constrained by the apportionment process . . .”  As Brazil has demonstrated, the CCC prog rams are exempt from the requirement that to receive 
new Congressional budget authority before undertaking new guarantee commitments.  See Exhibit Bra-117 (2 
U.S.C. § 661(c)(2)). WT/DS267/R/Add.2 
Page I-549 
 
 
250. Second, the “discretionary elements” cited by the United States do not in any way abate the threat that the United States will circumvent its export subsidy commitments for scheduled products: 
 
• The existence of eligibility criteria does not abat e the threat.  The focus for deciding whether 
a measure is discretionary is on whether it provides government officials with the discretion 
to implement the measure in a WTO-consistent manner.
510  Objective conditions, such as 
objective eligibility criteria, are not appropria tely considered in determining whether a 
measure gives an implementing official “discreti on” to act in a WTO-consistent fashion.  For 
example, the FSC measure payments were only available where the income concerned was of 
foreign origin.  Despite the fact that non-fore ign sourced income would thus be excluded from 
FSC benefits, the measure was still found to th reaten the circumvention of export subsidy 
commitments.  Similarly, CCC guarantees are only available if an exporter meets the 
eligibility criteria set out in 7 C.F.R. § 1493.30.511  The fact that a CCC official cannot legally 
issue a CCC guarantee to a non-eligible e xporter does not make the CCC programmes 
“discretionary”. 
 
• The authority to limit guarantees given for exports to particular “destination[s]” and the 
authority to employ “exposure limits applicable to individual bank obligors”512, like the 
authority to determine that particular d estination countries are uncreditworthy and are 
ineligible for guarantees513, do not reduce the threat of circumvention.  The United States’ 
export subsidy commitments are undertaken on a quantitative basis, and not on a destination 
or individual bank basis.  Removing particular destination countries or banks from the list of 
those countries or banks eligible for CCC gua rantees is utterly irrelevant to the CCC 
programmes’ absolute activity levels – CCC can simply shift those guarantees to other 
countries and banks. 
 
• Nor does the authority to limit the “time within which export must occur”514 reduce the threat 
of circumvention.  A requirement that the export that is the subject of a guarantee occur within a certain period of time following i ssuance of the guarantee only matters if the 
guarantee is issued in the first place; the require ment does nothing to control the flow of those 
guarantees or to abate the threat that they will circumvent the US export subsidy commitments. 
 
• Nor does the allegedly commodity-specific a llocation process that the United States cites
515 
reduce the threat of circumvention.  More than 95 per cent of allocations are made on a 
country-specific basis only, with less than 5 per cent of 2003 allocations made on a scheduled 
product-specific basis.516  And the press release announcing initial allocations for 2004 
contains no product-specific allocations.517  More importantly, the allocations are made on a 
monetary  basis, which provides virtually no assuran ce that the United States will not surpass 
                                                      
 510 Appellate Body Report, US – 1916 Act , WT/DS136/AB/R, para. 100. 
 511 Exhibit US-6. 
 512 US 20 January 2004 Answers to Additional Questions, para. 3. 
 513 See US 30 September 2003 Further Submission, para. 154. 
 514 US 20 January 2004 Answers to Additional Questions, para. 3. 
 515 US 20 January 2004 Answers to Additional Questions, para. 3.  See also  US 30 September 2003 
Further Submission, para. 155. 
 516 See Brazil’s 27 October Answers to Questions, para. 99, note 136 and 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 fisc al year 2003 are listed as $6.025 billion, with product-
specific allocations for scheduled products as follows:  $200 million for wheat to Korea; $85 million for wheat 
to Pakistan; and, $10 million for vegetable oils for Tunisia.).  See also Brazil’s 18 November 2003 Further 
Rebuttal Submission, para. 261 (second bullet point). 
 
517 Exhibit Bra-296 (“USDA Announces $2.8 Billion in  Export Credit Guarantees,” FAS Press Release, 
30 September 2003). WT/DS267/R/Add.2 
Page I-550  
 
its quantitative  export subsidy reduction commitments.518  Brazil has demonstrated how this 
threat materialized for one product (rice)519; the threat that it might happen in some years for 
other products is therefore tangible. 
 251. Thus the “discretionary elements” cited by  the United States do not abate the threat of 
circumvention of its export subsidy commitments.  The United States erroneously states that “Brazil’s 
own approach would require a showing that the pr ogrammes mandate that the premium rates will be 
insufficient to cover long-term operating costs and losses of the programmes”.
520  The Panel will 
recall Brazil’s demonstration that the United States has exported quantities of scheduled products in 
excess of US quantitative reduction commitments.521  Thus, under Article 10.3 of the Agreement on 
Agriculture, the burden falls on th e United States to prove that those excess quantities of scheduled 
products did not receive “export subsidies,” within th e meaning of Article 10.1.  The burden is on the 
United States to show, in its own words, that the CCC programmes mandate that premium rates will 
be sufficient  to cover long-term operating costs and losses of the programmes, within the meaning of 
item (j), and  that CCC guarantees do not constitute financial c ontributions that confer benefits and are 
contingent on export, with the meaning of Ar ticles 1.1 and 3.1(a) of the SCM Agreement. 
 
252. But whomever bears the burden, Brazil has s hown that the CCC does not have the discretion 
to charge fees that will enable it to meet its  long-term operating costs and losses.  Both USDA’s 
Inspector General and the US General Accounting O ffice have noted the CCC’s failure to change its 
premium rates or to reflect credit risk in those rates – and in particular the maximum one-per cent 
premium rate imposed by US law522 – as evidence of a failure and inability to cover costs and losses.523  
There is no affirmative “mechanism” in place to  stop the CCC programmes from constituting export 
subsidies under item (j), and in fact the fee ceili ng imposed by US law is a mechanism that ensures 
that the programmes will operate as export subsidies.  253. Moreover, Brazil has demonstrated that the CCC export credit guarantee programmes confer 
“benefits” per se , within the meaning of Article 1.1(b) of the SCM Agreement (as well as that they are 
financial contributions and are contingent on export), and therefore that they constitute per se export 
subsidies for the purposes of Article 10.1.
524  Among other reasons ( e.g., the regulations for the CCC 
programmes, and a comparison to non-market be nchmarks established by the US Export-Import 
Bank)525, Brazil has made this per se  showing by demonstrating that CCC export credit guarantees are 
unique financing instruments for agricultural comm odity transactions that are not available on the 
commercial market for terms longer than the marketing cycles of the eligible commodities.526  F a r  
from an affirmative “mechanism” to prevent CCC  guarantees from constituting export subsidies, 
guarantees under the CCC programmes constitute export subsidies per se . 
 
                                                      
 518 Brazil’s 27 October 2003 Answers to Questions, para. 100. 
 519 Exhibit Bra-300 (Calculation on US Rice Exports Benefiting from GSM 102, GSM 103 and SCGP). 
 520 US 20 January 2004 Answers to Additional Questions, para. 4. 
 521 Brazil’s 2 December 2003 Oral Statement, para. 78; Brazil’s 24 June 2003 First Submission, 
para. 265. 
 522 US 11 August 2003 Answers to Questions, para. 180.  See also  Exhibit Bra-297 (7 U.S.C. § 
5641(b)(2)). 
 523 Brazil’s 22 December 2003 Answers to Questions, paras. 63-64. 
 524 See, e.g., Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 233-241. 
 525 This evidence is summarized at paragraphs 231-241 of Brazil’s 18 November 2003 Further Rebuttal 
Submission.  
526 See Brazil’s 24 June 2003 First Submission, paras. 289-292; Brazil’s 22 July 2003 Oral Statement, 
para. 116; Brazil’s 11 August 2003 Answers to Questions, paras. 139-140, 152-157, 183-187; Brazil’s 
22 August 2003 Rebuttal Submission, paras. 103-105; Brazil’s 22 August 2003 Comments, paras. 92-93, 109-113; Brazil’s 27 August 2003 Comments on US Rebuttal Submission, paras. 68-80; Brazil’s 7 October 2003 
Oral Statement, para. 72; Brazil’s 18 November 2003 Further Rebuttal Submission, paras. 230-242; Brazil’s 
2 December 2003 Oral Statement, para. 79. WT/DS267/R/Add.2 
Page I-551 
 
 
254. Everything about the CCC programmes aggravates and legitimizes the fear foreign competitors of US farmers have that the programme s will be used to circumvent the United States’ 
export subsidy commitments.  Brazil has demonstrated that under Articles 1.1 and 3.1(a) of the SCM 
Agreement, and item (j), guarantees under the programmes constitute per se  export subsidies.  The 
CCC issues these export subsidies free from the normal budgetary constraints placed on federal 
spending.  The only constraint pl aced on the programmes is one that in fact encourages fear of 
circumvention – the obligation the US Congr ess has placed on the CCC to make available a minimum 
of $6.5 billion of CCC guarantees every year.527  While the United States considers CCC’s failure to 
actually grant $6.5 billion in guarantees in a given y ear as significant to its defense, it misunderstands 
the obligation included in Article 10. 1.  Article 10.1 prohibits the threat  of circumvention.  Foreign 
competitors of US farmers see and fear the unchecked authority US farmers and the CCC have to 
circumvent US export subsidy commitments.  Their f ear is legitimate, since that unchecked authority 
has been used in the past to  circumvent those commitments.528  
 255. There is no affirmative “mechanism in the measu re” that will stem or control the flow of CCC 
guarantees in a way that will abate the threat of circumvention of the US export subsidy commitments 
with respect to scheduled products.  To abate the fe ar that makes the threat real, foreign competitors 
need to see a mechanism in place that will keep the United States from using the CCC programmes to 
provide export subsidies that surpass the US reducti on commitments.  The nature of the obligation in 
Article 10.1 – the prohibition of a threat
 – is such that it cannot be met with a showing that there is 
mere discretion to avoid surpassing those commitments.   That the Appellate Body failed to apply the 
traditional mandatory/discretionary distinction in in terpreting the standard required by Article 10.1 
demonstrates its understanding that to prevent a meas ure from posing a threat of circumvention, there 
needs to be some affirmative m echanism in place to reduce the le gitimate fear of circumvention. 
 
258. Please submit a detailed explanation of th e method by which one could calculate total 
expenditures to producers of upland cotton under th e four relevant programmes on the basis of 
the data which it seeks.  BRA  
                                                     
 
 527 For citations, see Brazil’s 2 December 2003 Oral Statement, para. 91. 
 528 Exhibit Bra-300 (Calculation on US Rice Exports Benefiting from GSM 102, GSM 103 and SCGP).