WT/DS267/R/Add.1 
 Page E-55 
 
 
ANNEX E-5 
  
CANADA'S FURTHER THIRD PARTY SUBMISSION 
 
3 October 2003 
 
  Canada’s systemic interest in this case lies in the interpretation of the provisions of Article 13 
and Annex 2 of the Agreement on Agriculture , as they related to certain US domestic support 
measures.  It also lies in the interpretation of the export subsidy provisions of both the Agreement on 
Agriculture  and the SCM Agreement , as they related to US export credit guarantee programmes. 
  Regarding US domestic support measures, were the Panel to accept the evidence presented by 
Brazil, it would find that US PFC payments and di rect payments do not satisfy the policy-specific 
criteria in paragraph 6 of Annex 2 of the Agreement on Agriculture .  The Panel should also count US 
counter-cyclical payments going to US producers of upland cotton as “support to a specific commodity” under Article 13(b)(ii) of the Agreement.   Regarding US export credit guarantees, were the Panel to find that the programs provide 
export subsidies within the meaning of Article 1(e) of the Agreement on Agriculture , then it would 
also find that the United States has violated Articles 8 and 10.1 at the very least in respect of exports 
of upland cotton.  In this respect, the Panel should confirm that neither the Agreement on Agriculture  
nor the SCM Agreement  contain an exemption for any US export credit guarantee subsidy found to 
exist in this case.  
 Canada has no further views to provide to the Panel at this point in the proceedings. 
 WT/DS267/R/Add.1 
Page E-56  
 
 ANNEX E-6 
 
 
FURTHER THIRD PARTY SUBMISSION 
OF THE EUROPEAN COMMUNITIES 
 
 
3 October 2003 
  
TABLE OF CONTENTS 
 
1. Introduction ............................................................................................................... ........... 57 
 
2. The meaning of “significant” in Article 6.3 (c) of the SCM Agreement ......................... 57  3. Continuing effects of recurring subsidies .......................................................................... 58  
4. World Market Share in  Article 6.3(d) ................................................................................ 59 
 5. Threat of injury ........................................................................................................... ......... 59 
 6. Per se  claims ....................................................................................................................... .. 62 
  WT/DS267/R/Add.1 
 Page E-57 
 
 
  
1. Introduction  
 
1. The European Communities (the “EC”) makes this submission because of its systemic interest in the correct interpretation of the Agreement on Subsidies and Countervailing Measures  (the “SCM 
Agreement” ), the Agreement on Agriculture  (the “AA”) and the General Agreement on Tariffs and 
Trade 1994  (the “GATT”). 
 2. This submission provides the views of the EC with respect to Brazil’ s further submission of 
9 September 2003.  Due to the short deadline imparted to third parties, this submission does not 
address the further submission made by United St ates on 30 September 2003.  The EC intends to 
provide its comments on the US submission at the meeting with the Panel.  3. Many of the issues raised in Brazil’s furt her submission concern factual matters on which the 
EC is not in a position to comment.  Accordingly, the EC will limit itself to provide its views with 
respect to a number of issues of legal interpretation to which it attaches particular importance.  More 
specifically, the EC will argue in this submission that:  
 in assessing the “significance” of price depression or suppression for the purposes of 
Article 6.3 (c) of the SCM Agreement , only their impact on the producers concerned 
is relevant; 
 
 Brazil cannot complain about the continui ng effects of recurring subsidies while 
expensing the full amount of such subsidies to  the year in which they were granted; 
 
 the phrase “world market share” in Article 6.3(d) of the SCM Agreement  includes 
also the market of the subsidising Member;  
 
 the mere fact that a subsidy is not subject to “pre-established limitations” is not 
sufficient for a finding of “threat of serious prejudice”; 
 
 Articles 5 and 6 of the SCM Agreement  do not prohibit per se  legislation that 
mandates subsidies that threaten serious  prejudice “in certain circumstances”. 
 4. The EC reserves the right to address other issu es raised by Brazil’s further submission at the 
meeting with the Panel. 
 
2. The meaning of “significant” in Article 6.3 (c) of the SCM Agreement  
 
5. Brazil argues that, in assessing the “significance” of price depression or suppression for the 
purposes of Article 6.3 (c), it is relevant to consid er not only their impact on the producers concerned, 
but also on the Government of the complaini ng Member.  Specifically, Brazil contends that 
 
A developing country Government facing foreign reserve or fiscal problems may find the loss of foreign exchange or tax revenue  from its producers to be significant even 
if the level of price suppression is relatively small. In this regard, the amount of actual 
and potential revenue losses suffered by a complaining Member as a result of price 
suppression may be evidence of the significance of the price suppression.
1 
                                                      
1 Brazil’s submission, para. 96. WT/DS267/R/Add.1 
Page E-58  
 
 6. The EC takes issue with this interpretation.   As rightly argued by Brazil elsewhere in its 
submission
2, the existence of serious prejudice must be presumed whenever it is established that the 
effect of the subsidy is to cause inter alia  significant price depression or suppression, without it being 
necessary to show, as an additional and separat e requirement, that such price depression or 
suppression causes a serious prejudice to the inte rest of the Member concerned. Brazil’s 
interpretation, however, amounts to reading such a se parate requirement into the term “significant”. 
 7. In Indonesia – Autos , which is cited with approval by  Brazil, the panel held that  
 
Although the term ‘significant’ is not defi ned, 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 m eaningfully affect suppliers of the imported product whose 
price was undercut are not considered to rise to serious prejudice …
3  
8. The above interpretation takes into account only the effects of price undercutting on the 
performance of the domestic producers of the complaining party, to the exclusion of any indirect 
effects on Government revenue.  By the same token,  where serious prejudice takes the form of price 
suppression or price depression, its significance should be evaluated only with respect to the producers concerned.   9. In any event, the EC rejects Brazil’s sugg estion that the threshold for establishing the  
existence of serious prejudice should be lower when  the complaining party is a developing country 
Member. Article 6.3 (c) is not a provision on Special and Differential Treatment.  There is no basis for 
giving different meanings to the term “significant”  depending on the identity of the parties to a 
dispute.   
3. Continuing effects of recurring subsidies 
 
10. Brazil alleges that the effects of the s ubsidies paid during Marketing Years (“MY”) 1999-
2002 continue after they have been provided.  Mo re precisely, according to Brazil, by providing 
farmers with a significant source of income, these  payments result in increased investment and 
production.   
11. The EC finds it difficult to understand what point , if any, Brazil is trying to make. Brazil does 
not seem to be arguing that part of the benefit conferred by the subsidies granted during MY 1999-
2002 should be allocated to subsequent years.  Th at position would depart from the usual practice of 
most countervailing duty authorities, which is to consider that recurring subsidies must, in principle, be deemed “expensed” during the time period in whic h they are made.  Similarly, the report of the 
Informal Group of Experts concerning Article 6.1(a) of the SCM Agreement  recommended that 
subsidies should be expensed rather than allocated unless:  (1) the purpose of the subsidy is linked to 
the purchase of fixed assets;  (2) the subsidy is non- recurring or large;  (3) the subsidy is oriented 
towards future production;  (4) the subsidy consists  of equity;  or (5) is carried forward in the 
recipient’s accounting records.
4 
 
12. Elsewhere in its submission Brazil appears to  have expensed the full amount of the subsidies 
paid during each marketing year to that marketi ng year, rather than allocate it over a number of 
marketing years.  Brazil cannot have it both ways. If it considers that part of the benefit should be 
allocated to subsequent marketing years, it should ju stify that position in light of the criteria outlined 
                                                      
2 Ibid., paras 437-443. 
3 Panel report,  Indonesia – Automobiles , WT/DS54/R, para. 14.254. 
4 Report by the Informal Group of Experts to the Committee on Subsidies and Countervailing 
Measures, 25 July 1997, G/SCM/W/415, paras. 5-12.  WT/DS267/R/Add.1 
 Page E-59 
 
 
 above and provide the Panel with  a detailed allocation.  Moreove r, Brazil should deduct the amounts 
allocated to subsequent years from the yearly am ounts for the period 1999-2001, so as to avoid any 
“double counting” of benefits.  Needless to say, th is could make more difficult for Brazil to establish 
that the subsidies paid during MY 1999 – 2001 ha ve caused serious prejudice during that period. 
 
13. In any event, while Brazil cl aims that the subsidies continue  to have effects after MY 1999-
2001, the alleged continuing effects (increased i nvestments and production) do not of themselves 
amount to “serious prejudice” within the meaning of  Article 5. Brazil has not explained, let alone 
proved, how those effects translated into one of  the categories of ”serious prejudice” described under 
Article 6.3 after 2001.  
 
4. World Market Share in Article 6.3(d) 
 
14. Brazil contends that the phrase “world market share” in Article 6.3(d) of the SCM Agreement  
means the “share of world market for exports”.5  The EC sees no basis for this proposition.  The 
ordinary meaning of “world market” is the su m of all the geographical markets for the product 
concerned, including also the domestic market of the subsidising Member. 
 15. This reading is supported by the context.  As  evidenced by paragraph (a) of Article 6.3, the 
notion of “serious prejudice” may include also the prejudice suffered in the market of the subsidising Member.  There is no reason, therefore, why the effects of a subsidy in that market should be 
excluded from the analysis under paragraph (d).  
 16. The phrase “world market share” may be c ontrasted with the phrase “share of world export 
trade”, which is used in Article XVI:3 of the GATT. Surely, if the drafters of Article 6.3(d) had meant 
the “share of world market for exports”, as argued by Brazil, they would have used the same terms as 
in Article XVI:3.  Moreover, in the context  of  Article XVI:3, it makes perfect sense to use as a 
benchmark the “share of the world market fo r exports” because that provision is concerned 
exclusively with export subsidies, which have no  direct effect on the domestic market of the 
subsidising Member.  In contrast, the disciplines on “serious prejudice” contained in Articles 5 and 6 
of the SCM Agreement  apply equally to both export and domestic  subsidies and, in practice, are meant 
to address primarily the effects of the latter, since export subsides are prohibited by Article 3 (except 
where provided in conformity with the Agreement on Agriculture or Article 27 of the SCM 
Agreement ).  
 
5. Threat of injury 
 17. Brazil sets forth two legal standards in order to analyse the existence of threat of serious 
prejudice.  According to the first standard, ther e is threat of serious prejudice whenever “the 
legislation and practice of granting subsidies has no e ffective limits in terms of the volume of exports 
or domestic subsidies production eligible to receive subsidies”.
6  Brazil contends that this standard can 
be “distilled” from the two GATT panel reports in EC – Sugar  and from the Appellate Body report in 
US – FSC .7 
 
18. For the reasons explained below, the EC consid ers that, while the fact that a subsidy is not 
subject to any “pre-established limitations” is certain ly a relevant factor in considering the existence 
of threat of serious prejudice, it is not necessarily dispositive.  
                                                      
5 Brazil’s submission, para. 265. 
6 Brazil’s submission, para. 301. 
7 Ibid. WT/DS267/R/Add.1 
Page E-60  
 
 19. The two GATT reports in EC – Sugar are of questionable authority on this point.  Neither of 
the panels made any attempt to provide a generally a pplicable interpretation of the notion of “threat of 
serious prejudice”.  The findings cited by Brazil are just bare assertions, without any supporting 
reasoning.  Furthermore, other passages of the report s indicate that both panels took the view that the 
unlimited availability of subsidies could not be, of it self, a cause of serious prejudice.  Thus, the panel 
in EC – Sugar (Australia)  noted that 
 
The Panel felt that since the Community sugar exporters were leading the world 
market for white sugar, traditionally covering more than half of the world market for 
refined sugar, the availability of exportab le Community surpluses of sugar combined  
with the possibility of non-limited amounts available to cover export refunds, may 
well have had a depressing effect on world market prices for both white and raw sugar.
8 
 Similarly, the panel in EC – Sugar (Brazil)  observed that 
 
The Panel concluded that in view of the Community sugar made available for export 
with maximum refunds and the non-limited f unds available to finance export refunds, 
the Community system of granting export refunds on sugar had been applied in a manner which in the particular situati on prevailing in 1978 and 1979contributed to 
depress sugar prices in the world market, and that this constitutes a serious prejudice to Brazilian interests, in terms of Article XVI:1.
9 
20. The above passages suggest that both panels c onsidered that the unlimited availability of the 
EC subsides was a cause of serious prejudice only because, in conjunction w ith the availability of 
supplies of sugar in the EC and with the “partic ular situation” prevailing during the years 1978 and 
1979, it had a depressing effect on prices.  It follows  that, unless the same or similar  circumstances 
were also present or imminent in this case, the mere  availability of subsidies could not be considered 
to pose, as such, a threat of serious prejudice. 
 21. Brazil’s arguments based on US – FSC are also without merit. Unlike Articles 5 and 6 of the 
SCM Agreement , Article 10.1 of the Agreement on Agriculture  is not subject to a “trade effects” test.  
It prohibits any export subsidies not covered by Article 9, which exceed, or threaten to exceed, a 
Member’s reduction commitments (in terms of budgeta ry outlays or exported volumes), regardless of 
the trade effects of the subsidy.  In contrast, Articles 5 and 6 do not stipulate any limitations on the 
volume or value of subsidies.  Rather, they prohibit the granting of subsidies in so far as they have 
certain “adverse effects” for the interests of another Member.  Whether or not a subsidy has such effects will depend not only on the amount of the subs idy or the volume of subs ided goods but also on 
other circumstances.  For that reason, the mere fact that a subsidy is not subject to “pre-established 
limitations” is not a sufficient reason to conclude  that it threatens to cause serious prejudice.  
 22. Brazil appears to agree with the view that the elements of a threat of serious prejudice injury 
are the same as those of a serious prejudice case, th e only difference between the two being that “in a 
serious prejudice case, all the elements already exist,  whereas in a threat of serious prejudice case, all 
of the elements need not have come to pass.”
10  Yet that view cannot be reconciled with Brazil’s first 
standard.  Article 6 of the SCM Agreement  makes it clear that the existence of “serious prejudice” 
cannot be established by looking only at the value of  the subsidy (with the exception of the no-longer 
operational presumption in Article 6.1 (a)) or to th e absolute volume of subsidised goods (as opposed 
                                                      
8 Panel report, European Communities – Refunds on Exports of Sugar (Australia) , BISD 26S/290, 
para. 4.31 
9 Panel report,  European Communities –Refunds on Exports of Sugar (Brazil) , BISD 27S/69, V(f). 
10 Brazil’s submission, para. 304.  WT/DS267/R/Add.1 
 Page E-61 
 
 
 to their market share).  Therefore, a determination of threat of serious prejudice cannot be based on 
those factors alone either.   23. The EC considers that Article 15.7 of the SCM Agreement  provides relevant context for the 
interpretation of the notion of “threat of serious prejudice”.  Both “injury to the domestic industry” 
and “serious prejudice” are “adverse effects” within the meaning of Article 5.  There is no good 
reason why the threshold for establishing the existence of  “threat of injury” shou ld be higher than the 
threshold for establishing the existence of “threat of serious prejudice”.  The EC is of the view, 
therefore, that the requirements set out in Article 15.7 of the SCM Agreement  must be deemed implicit 
in the notion of “threat of serious prejudice”.  Accordingly, a determination of threat of serious 
prejudice, like a determination of injury,  must “be based on facts and not merely on allegation, 
conjecture or remote possibility”.  Also, the rele vant “changes in circumstances” must be “clearly 
foreseen and imminent”.  24. As recalled by Brazil, Article 15.7(i) of the SCM Agreement  provides that the “nature of the 
subsidy or subsidies in question and the trade effect s likely to arise therefrom” is one of the factors 
that should be considered for the purposes of a threat of injury determination.
11  The EC agrees that 
this is also one of the factors that should be consid ered for the purposes of a determination of threat of 
serious prejudice.  But it is not the only relevant  factor.  Brazil glosses over the last sentence of 
Article 15.7, which provides that no one of the fact ors listed in that provision “can necessarily give 
guidance”.  Rather, “the totality of the factors cons idered must lead to the conclusion that further 
subsidised exports are imminent and that, unless pr otective action is taken, material injury would 
occur”.  This confirms that, while the absence of “p re-established limitations” is a relevant factor, it is 
not necessarily dispositive.  25. Brazil further asserts that the other factors liste d in Article 15.7 “are not directly relevant to a 
threat of serious prejudice case because they address the situation of imports that would harm the 
domestic industry in the country of importation.”
12  This is, of course, correct. Nonetheless, 
Article 15.7 suggests that analogous factors may be re levant for a determination of serious prejudice.  
For example, the following factors could be releva nt for establishing the existence of serious prejudice 
in an export market:   
 a significant rate of increase of subsidised exports to the export market;  
 
 sufficiently freely disposable, or an immine nt, substantial increase in, capacity of the 
exporter indicating the likelihood of substantia lly increased subsidised exports, taking 
into account the availability of other export markets to absorb any additional exports; 
 
 whether subsidised exports are entering into the export market at prices that will have 
a significant depressing or suppressing effect in prices, and would likely increase 
demand for further imports; and 
 
 inventories of the product investigated. 
 26. In  sum,  the EC is of the view that, while the fact that a subsidy is not subject to any “pre-
established limitations” as regards the value of the subsidies or the volume of subsidised goods is a 
relevant factor in order to establish the existence of threat of serious prejudice, it is not necessarily 
dispositive.  Other factors, including in particular factors analogous to those listed in Article 15.7 (ii)-
(v) of the SCM Agreement , may also be relevant and should be examined as well. 
                                                      
11 Ibid., para. 302. 
12 Ibid., para. 303. WT/DS267/R/Add.1 
Page E-62  
 
  
6. Per se  claims 
 
27. Brazil claims that the US legislation conf erring the subsidies at issue in this case is 
inconsistent  per se  with Article 5(c) of the SCM Agreement  and Article XVI:3 of the GATT because 
it mandates  the payment of subsidies that will necessarily threaten serious prejudice in certain 
circumstances .  This claim is based on the assumption that   
 
It is established under WTO law that a Me mber can challenge measures of another 
Member on a per se basis when those measures mandate, in certain circumstances, a 
violation of its WTO obligations.
13 
28. The above proposition, however, is nowhere stated in the WTO Agreement and, as noted 
already in its first submission14, the EC disputes its validity.  True, some panels have asserted this 
position on the basis of an erroneous in terpretation of the panel report in US - Superfund .  Other 
panels, however, have taken a contrary , or at least more qualified view.15 In  particular, the panel in 
US – Section 301  observed that 
 
we believe that resolving the dispute as to which type of legislation, in abstract , is 
capable of violating WTO obligations is not germane to the resolution of the type of 
claims before us.  In our view the appropriate method in cases such as this is to 
examine with care the nature of the WTO obligation at issue and to evaluate the 
Measure in question in the light of such ex amination. The question is then whether, 
on the correct interpretation of the specific WTO obligation at issue, only mandatory 
or also discretionary national laws are pr ohibited.  We do not accept the legal logic 
that there has to be one fast and hard rule covering all domestic legi slation.  After all, 
is it so implausible that the framers of the WTO Agreement, in their wisdom, would 
have crafted some obligations which would render illegal even discretionary 
legislation and crafted other obligations prohibiting only mandatory legislation? 
Whether or not Section 304 violates Article  23 depends, thus, first and foremost on 
the precise obligations contained in Article 23.16  
29. The Appellate Body has not pronounced it self yet clearly on this issue.  Thus, in US – 1916 
Act, which is sometimes cited erroneously as an endor sement of the principle invoked by Brazil, the 
Appellate Body noted that  
… the 1916 Act is clearly not discretionary legislation, as that term has been understood for purposes of distinguishing between mandatory and discretionary 
legislation. Therefore, we do not find it necessary to consider, in these cases, whether 
                                                      
13 Brazil’s submission, para. 417. 
14 EC’s First Third Party Submission, paras. 4-7. 
15 See e.g. the Panel report on United States – Countervailing Measures Concerning Certain products 
from the European Communities , WT/DS212/R, para. 7.123:  
While only legislation that mandates a violation of WTO obligations can be WTO-
inconsistent, we are of the view  that the existence of some fo rm of executive discretion alone 
is not enough for a law to be prima facie WTO - consistent, what is important is whether the 
government has an effective discretion to interpret and apply its legislation in a WTO-
inconsistent manner. 
16 Panel report, United States – Sections 301-310 of the Trade Act of 1974 , WT/DS152/R, para. 7.53.  
[footnotes omitted]  WT/DS267/R/Add.1 
 Page E-63 
 
 
 Article 18.4, or any other provision of the Anti-Dumping Agreement, has supplanted 
or modified the distinction between ma ndatory and discretionary legislation.17 
30. The Appellate Body was even more cautious in a subsequent case, US – Lead and Bismuth II , 
where it noted that   
We are not, by implication, precluding the possibility that a Member could violate its 
WTO obligations by enacting legislation granting discretion to its authorities to act in violation of its WTO obligation. We make no finding in this respect.
18 
31. The EC agrees with the panel in US – Section 301 that whether or not discretionary 
legislation may be subject to cha llenge depends on the specific oblig ations imposed by each provision 
of the WTO Agreement.  Thus, for example, it is ar guable that Article XI:1 of the GATT prohibits not 
only mandatory legislation, but also legislation wh ich authorises expressly the executive branch to 
apply an import restriction under well specified circ umstances, because such authorisation, of itself, 
may have a chilling effect on imports.  
32. For the same reasons, it would be mistaken to  assume, as Brazil does, that legislation which 
mandates action that would result in a violation of a WTO provision in certain circumstances  is 
necessarily inconsistent with that provision.  As illustrated by the present case, this notion would have 
absurd and unacceptable results when applied to WTO provisions which, like Article 5(c) of the SCM 
Agreement  and Article XVI:3 of the GATT, incorporate a “trade effects” test.  The EC considers that, 
once again, whether or not legislation that mandates a violation in certain circumstances  can be 
challenged per se  will depend on the specific obligations impose by the WTO provision at issue. 
 33. It is often overlooked that in US– Superfund the panel justified its finding that the tax 
legislation at issue could be challenged, even tho ugh it had not entered into effect, by reasoning that 
Article III of the GATT is not concerned with  trade volumes, but rather with competitive 
opportunities
19: 
 
The Panel noted that the United States objected  to an examination of this tax because 
it did not go into effect before 1 January 1989, and  - having no immediate effect on 
trade and therefore not causing nullification or impairment – fell outside the framework of Article XXIII. […] 
[…] The general prohibition of quantitative restrictions under Article XI, which the 
Panel on Japanese Measures on Imports of Leather examined, and the national treatment obligation of Article III … have essentially the same rationale, namely to 
protect expectations of the contracting parties as to the competitive relationship between their products and those of the other contracting parties. Both articles are not 
only to protect current trade but also to cerat e the predictability need ed to plan future 
trade. That objective could not be attained  if contracting parties could not challenge 
existing legislation mandating actions at variance with the General Agreement until 
the administrative acts implementing it had actua lly been applied to their trade. Just 
as the very existence if a regulation providing for a quota, without it restricting particular imports, has been recognized to constitute a violation of Article XI;1, the 
                                                      
17 Appellate Body report, United States – Anti-Dumping Act of 1916 , WT/DS136/AB/R, 
WT/DS162/AB/R, para. 99.  
18 Appellate Body report, United States – Countervailing Measures Concerning Certain Products from 
the European Communities , WT/DS212/AB/R,  footnote 334. 
19 Panel report, United States – Taxes on Petroleum and Certain Imported Products , BISD 34/136, 160, 
paras.5.2.1-5.2.2. WT/DS267/R/Add.1 
Page E-64  
 
 very existence of mandatory legislation provi ding for an internal tax, without it being 
applied to a particular imported product, should be regarded as falling within the 
scope of Article III:2, first sentence. …  
34. It is also a common mistake to assume that , like Articles III or IX of the GATT, all other 
WTO provisions are concerned also with competitive opportunities.  Some WTO provisions, 
however, are not concerned with competitive opportuniti es, but instead with trade effects. Article 5(c) 
of the SCM Agreement  and Article XVI:3 of the GATT fall within that category.  They prohibit the 
granting of subsidies only to the extent that the subsidies cause “adverse effects” in the form of 
“serious prejudice”.  Such effects must be act ual or threatened, not just theoretical.  
 
35. The “mandatory” standard invoked upon by Brazil would result in the creation of third 
category of prohibited adverse effects in addition to  actual and threatened serious prejudice, which is 
nowhere mentioned in Article 5(c): the mere  possibility of threat of serious prejudice in certain 
circumstances .  Furthermore, as a result, Brazil’s inte rpretation would render redundant the two 
categories of effects which are mentioned in Article  5(c).  As explained above, threat of serious 
prejudice must be imminent  and foreseeable .  Yet, on Brazil’s interpretation, it would be sufficient, in 
order to establish a per se  violation, to show that the legislation at issue mandates action that threatens 
serious prejudice in certain circumstances , no matter how remote the likelihood that such 
circumstances will ever materialise.  For exampl e, on Brazil’s interpretation, it would be enough to 
show that the legislation mandates the payment of s ubsidies that will threaten serious prejudice in a 
purely hypothetical situation where world prices fall to an extremely low level, even if the chances 
that prices may actually fall to such level are negligible in practice. 
 36. In sum, Brazil’s per se  claim is an ingenious but misguide d attempt to avoid the requirements 
of Article 5(c) of the SCM Agreement , which  should be rejected by the Panel.  
  WT/DS267/R/Add.1 
 Page E-65 
 
 
 ANNEX E-7  
 
 
FURTHER THIRD PARTY SU BMISSION OF NEW ZEALAND 
 
3 October 2003 
  
TABLE OF CONTENTS 
 
 
I. INTRODUCTION ...............................................................................................................  66 
 
II. PRESENT SERIOUS PREJUDICE ................................................................................... 66 
 
 1. The effect of the United States subsidies is significant price suppression ............. 67    
  (i) Interpretation of Article 6.3 ............................................................................... 68 
   (a) "Significant" ............................................................................................ 70 
   (b) Time-period for Demonstrating Causal Effects ...................................... 72   2. The effect of the United States subsidies is an increase in the 
  United States world market share ............................................................................ 73   3. The United States has a "more than  equitable share" of world export 
  trade in upland cotton ............................................................................................... 73 
 
 4. Issues relating to particular  United States subsidies .............................................. 74 
   (i) Market Loan Payments ...................................................................................... 74 
  (ii) Step 2 Payments ................................................................................................. 74   (iii) Market loss assistance/Counter-cyclical payments ........................................... 74  
 
III. THREAT OF SERI OUS PREJUDICE .............................................................................. 75 
 IV. EXPORT CREDIT GU ARANTEE PROGRAMMES ..................................................... 76 
 
V. CONCLUSION ................................................................................................................. ... 77 
 WT/DS267/R/Add.1 
Page E-66  
 
 I. INTRODUCTION 
1.01 Although New Zealand is not a producer or exporter of cotton, New Zealand has a systemic 
interest in ensuring the continued integrity of im portant WTO disciplines applicable to agricultural 
trade and has therefore joined this dispute as a th ird party.  As outlined in New Zealand’s First 
Submission to the Panel
1, New Zealand is concerned to ensure that Members are able to utilise their 
rights under the Agreement on Subsidies and Countervailing Measures  (the SCM Agreement ) and 
GATT 1994 to take action in respect of domestic support measures and export subsidies where the 
requirements of the “peace clause” have not been respected.   
 1.02 New Zealand believes that Brazil has demons trated that the “peace clause” has not been 
respected in relation to domestic support and export subsidies provided by the United States to upland 
cotton in the marketing years (“MY”) 1999, 2000,  2001 and 2002, and that accordingly Brazil is 
entitled to bring actionable and prohibited subsid y claims against the United States under the GATT 
1994 and the SCM Agreement .   
 1.03 In its Further Submission to the Panel,
2 Brazil has provided the legal and factual basis upon 
which the Panel should conclude that the United Stat es subsidies cause or threaten to cause serious 
prejudice to the interests of Brazil within the mean ing of Articles 5(c), 6.3(c) and 6.3(d) of the SCM 
Agreement  and violate GATT Article XVI.  New Zealand therefore considers that the Panel should 
make the findings and recommendations requested by Brazil.    1.04 This submission addresses issues raised in the Further Submissions of Brazil and the United States
3 and should be read in conjunction with  New Zealand’s First Submission.  As 
recognised by the Panel in its communication of  24 September 2003, New Zealand has had only 
limited time to consider the Further Submission of the United States and therefore reserves the right present arguments in addition to those set out in th is written submission in its oral statement to the 
Panel on 8 October 2003.  
 
II. PRESENT SERIOUS PREJUDICE  
 
2.01 Brazil has demonstrated that the United States subsidies
4 cause serious prejudice to the 
interests of Brazil within the meaning of Articles 5(c), 6.3(c) and 6.3(d) of the SCM Agreement  and 
violate GATT Article XVI.    
2.02 Brazil has demonstrated that the United St ates subsidies during marketing year (MY) 1999-
2002:  
 cause present significant price suppression
5 in the world and Brazilian markets, as well as in 
markets where Brazilian producers export, within  the meaning of Article 6.3(c) of the SCM 
Agreement ; 
                                                      
1 United States – Subsidies on Upland Cotton , Third Party Submission of New Zealand, 15 July 2003 
(“New Zealand’s First Submission”). 
2 United States – Subsidies on Upland Cotton, Brazil’s Further Submission to the Panel, 
9 September 2003 (“Further Submission of Brazil”). 
3 United States – Subsidies on Upland Cotton , Further Submission of the United States of America, 
30 September 2003 (“Further Submission of the US”). 
4 New Zealand uses that term as it is used by Brazil in its Further Submission (para 7).  Details of these 
programmes were provided  by Brazil in its First Submission to th e Panel Regarding the “Peace Clause” and 
Non-“Peace Clause” Related Claims, 24 June 2003 (“Firs t Written Submission of Brazil”), paras 45 – 106. 
5 New Zealand uses the term as it is used by Brazil in its Further Submission to also encompass 
circumstances showing price depression characteristics.  WT/DS267/R/Add.1 
 Page E-67 
 
 
  had the effect of increasing the United States shar e of the world upland cotton market within the 
meaning of Article 6.3(d) of the SCM Agreement , and 
 
 contributed significantly to the United States having more than an equitable share of world export 
trade within the meaning of GATT Article XVI:3. 
 
New Zealand will focus in particular on Brazil’ s claim that the United States subsidies cause 
“significant price suppression”.   
1. The effect of the United States subsidies is significant price suppression 
 
2.03 Brazil has demonstrated that the United St ates subsidies during marketing year (MY) 1999-
2002 cause present significant price suppression in the Brazilian and world markets, including in 
markets where Brazilian a nd United States producers export, within the meaning of Article 6.3(c) of 
the SCM Agreement  and thus cause serious prejudice.  Brazil has demonstrated that the United States 
subsidies suppressed A-index prices by an  average of 12.6% over MY 1999-2002.
6  That translates 
into a total amount of lost revenue for Brazilian producers of $478 million7 and suppressed revenue 
worldwide of $3.587 billion.8 
 2.04 With subsidisation at levels of 95 per cent on average
9, subsidies are the greater part of 
farmers’ incomes and have a major impact on farm ers’ production decisions.  Producers of upland 
cotton in the United States are thereby largely insu lated from the effects of the market.  Thus, when 
prices for upland cotton were falling10, and the value of the United States dollar11 and costs of 
production were rising12, production of upland cotton and United States exports of upland cotton 
significantly increased.13  United States farmers planted 13.5 per cent more acres with upland cotton.14  
United States production hit a record high.15  United States exports and the United States share of the 
world market increased.16    
 
2.05 Professor Sumner estimates that if all United States government support to upland cotton 
were eliminated, United States exports would have been 41 per cent less in MY 1999-2002.17  B y  
contrast, with the subsidies the United States world market share in fact more than doubled over that 
period.18 
 
2.06 This subsidy-fuelled produ ction and export growth resulted in significant price suppression 
within the meaning of Article 6.3(c).  Prices were  suppressed by the increased world supply of upland 
cotton and increased competition from United States upl and cotton in world markets.  Brazil has also 
outlined the influence that the United St ates has on world prices for upland cotton19 - the sheer size of 
                                                      
6 Further Submission of Brazil, para 229. 
7 Ibid, para 446. 
8 Ibid, para 256. 
 9 Ibid, para 105. 
 10 Ibid, part 3.3.4.2. 
 11 Ibid, part 3.3.4.4. 
 12 Ibid, Part 3.3.4.3.  Brazil has demonstrated that by the end of MY 2001 the cost-revenue gap had 
increased to 39 cents per pound (para 121).  
13 See Ibid, para 105.  Between 1998 and 2001 production increased by 45.5 per cent and exports by 
161 per cent. 
 14 Ibid, para 130. 
 15 In MY 2001 United States production reached 19.603 million bales ( Ibid, para 131). 
 16 Ibid, para 132. 
17 Ibid, para 288. 
18 Ibid, para 283. 
 19 Ibid, para 3.3.4.6. WT/DS267/R/Add.1 
Page E-68  
 
 the United States share of total world production
20 and of world exports magnifies the trade distorting 
effects of the United States subsidies.  Any doubt about the impact that United States subsidies have 
on the world market for upland cotton should be quick ly dispelled by the graphic demonstration of 
United States dominance of the world market  illustrated by Brazil in Figure 26.   
 
2.07 New Zealand agrees with Brazil that the absolu te size and average subsidisation level of the 
United States subsidies creates a strong de facto  presumption of production, export and price effects.21  
However Brazil has not simply relied on such a presumption.  Brazil has produced econometric 
analysis demonstrating that the United States s ubsidies caused significant price suppression, as actual 
market prices throughout MY 1999-2002 would have  been higher but for the effects of the 
United States subsidies.22   
 2.08 At no point in its submission does the United States dispute the accuracy of this econometric analysis.  Instead, in response to Brazil’s claims , the United States seeks to argue that Brazil’s case 
“suffers from a failure of factual proof”
23 and that Brazil has failed to make a prima facie  case of 
serious prejudice or more than equitable market  share because Brazil has done no more than assert 
that causation is established because there were large United States outlays during marketing years 
with low prevailing upland cotton prices.24  According to the United States, factors other than 
United States subsidies “were the causes of the dramatic plunge in cotton prices experienced in recent 
years,”25 namely: competition from low price polyester; flat retail consumption of cotton outside of 
the United States; slow world economic growth; bur geoning United States textile imports leading to 
more United States cotton exports; a stronger Unite d States dollar leading to weakened commodity 
prices and China’s trade position.  2.09 However Brazil’s argument is not that declini ng cotton prices were due solely to the impact of 
the United States subsidies.  Nor does Article 6.3(c) require that to be the case.  It is Brazil’s 
contention, backed up by sound econometric anal ysis, that the United States subsidies have a 
significant price-suppressing effect.  And that effect exists regardless of whether cotton prices are rising or falling.
26  Nor did Brazil’s analysis fail to take into account the impact of other adverse 
factors affecting upland cotton prices as alleged by the United States.27  The econometric models used 
by Brazil, in particular FAPRI, hold other relevant factors affecting the price of cotton constant while 
cotton subsidies are removed, thereby isolating the effect of those subsidies.  Therefore Brazil’s 
analysis did not attribute to cotton subsidies the effects of other factors affecting cotton prices.  As 
noted above, at no point in its submission does th e United States question the integrity of the models 
referred to by Brazil and upon which the estimated impacts of the removal of United States cotton 
subsidies is based.    (i) Interpretation of Article 6.3(c) 
 
2.10 New Zealand disagrees with the United States  interpretation of Article 6.3.  Essentially the 
United States reached the wrong conclusion from its comparison of the language of Article 6.1 with 
that of Article 6.3.  The United States conc luded that because Article 6.3 used the phrase “ may arise in 
                                                      
 20 19.5 per cent in MY 2002 ( Ibid, para 135). 
 21 Ibid, paras 106 and 107. 
 22 Evidence adduced by Brazil, specifically the Quantitative Simulation Analysis by Professor Daniel 
Sumner, shows that but for the United States subsidies A-Index prices between MY 1999-2002 would have 
been, on average, 12.6 per cent higher. 
23 Further Submission of the US, para 16. 
24 Ibid, para 17. 
25 Ibid. 
26 Further Submission of Brazil, para 231. 
27 Further Submission of the US, para 80.  WT/DS267/R/Add.1 
 Page E-69 
 
 
 any case where one or several of the following apply”, whereas Article 6.1 states “serious prejudice 
shall be deemed to exist  in the case of …”, that this means that  serious prejudice “need not arise even 
under Article 6.3 even where one of the listed effects is found”.28  The United States goes on to infer 
from this difference in language th at a complainant, in addition to demonstrating the existence of one 
of the listed effects, must also meet a separate “serious prejudice” standard – the content of which is 
undefined by the SCM Agreement .  The United States states that a complainant must show that the 
“prejudice” suffered is “serious”.29  
 2.11 First, the example given by the United Stat es in footnote 43 seems to be covered by the terms 
of Article 6.4.  Second, and more importantly, there is no basis for drawing from a comparison of 
language used in Articles 6.1 and 6.3 the conclusion th at there is some other standard, independent of 
Article 6, that must be demonstrated in order to show “serious prejudice”.  In fact, as New Zealand will show, a comparison of both the language and substance  of Articles 6.1 and 6.3, in the context of 
Articles 5 and 6 of the SCM Agreement , supports the contrary conclusion – that if a complainant has 
demonstrated the existence of one or more of the effects enumerated in Article 6.3 there is “serious 
prejudice” that is an adverse effect of the subsidy within the meaning of Article 5. 
 2.12 That is because the difference in language simply reflects the different way in which both 
Article 6.1 and Article 6.3 give meaning to the term “serious prejudice”.  Both must be seen in the context of concern in this part of the SCM Agreement  with the effects of subsidies on other Members.  
In relation to Article 6.1, “serious prejudice” was given meaning by reference to specific types of 
subsidies or qualities of a subsidy that were “deeme d” to have effects that were adverse to the 
interests of other Members.  However, it was ope n to a subsidising Member under Article 6.2 to 
overturn that presumption by showing that in fact the subsidy did not cause serious prejudice – i.e. that the subsidy had not resulted in any of the effects enumerated in Article 6.3 . 
 
2.13 The terms of Article 6.2 make it clear that the effects enumerated in Article 6.3 equate to 
“serious prejudice” and that nothing more than demonstration that one of those effects exists is necessary to find serious prejudice.    2.14 Further, by contrast with Article 6.1, Artic le 6.3 looks more broadly at the effects of the 
subsidy, rather than its specific characteristics.  Th ere is thus no need to “deem” certain effects to 
arise from certain types or characteristics of a subsid y as there was in Article 6.1.  Instead Article 6.3 
is more broadly cast to take an effects-based a pproach – in essence it is d esigned to encompass any 
kind of subsidy that has the adverse effects enumerated and is therefore “actionable”.  However there is no basis to draw from this difference in appro ach, and therefore in language, the conclusion that 
more is required under Article 6.3 than simply de monstrating that one or more of the prescribed 
effects exists in order show that there is serious  prejudice.   Such an interpretation undermines the 
careful structure of Article 6 and the clear intent of Article 5 and must be rejected.  2.15 Nor does the use of the word “may” in Article  6.3 lead to any other conclusion.  In that 
respect it is important to note that Article 5(c) incorporates, as specified in Footnote 13 to the 
Agreement , GATT Article XVI.1 which includes inter alia  the threat of serious prejudice.  Therefore 
it was appropriate to state that serious prejudice in the sense of paragraph (c) of Article 5 may arise 
where any of the listed effects ex ists because there may be other circumstances in which serious 
prejudice can be demonstrated, including, for example, where there is a threat of serious prejudice.  If 
the word “shall” had been used this would have been taken to mean that Article 6.3 provides the 
definitive set of circumstances in which serious prejudi ce can arise.  By virtue of Footnote 13 that is 
not the case. 
 
                                                      
28 Ibid, para 77. 
29 Ibid, para 79. WT/DS267/R/Add.1 
Page E-70  
 
 2.16 Consideration of Article 6.3 in the context of  the rest of Article 6 provides further support for 
the interpretation outlined above.  First, it makes little  sense to have gone to such detail in Article 6.4 
to describe what is required to meet the requirement s of Article 6.3(b) if there is another set of 
undefined requirements that must also be demons trated in order to find serious prejudice.   
 
2.17 Second, in terms of Article 6.2, if there were  other elements outside those in Article 6.3 that 
had to be demonstrated to show serious prejudice, why would a subsidising Member not also have had 
to show that those elements were not present in order to avoid the presumption in Article 6.1?   
 2.18 Third, Article 27.8 (although now defunct b ecause Article 6.1 is no longer in effect), also 
provides that serious prejudice arising from subs idies by developing country Members “shall be 
demonstrated by positive evidence,  in accordance with the provisions  of paragraphs 3 through 8 of 
Article 6”.  This makes it clear that serious pr ejudice need only be determined by reference to 
Articles 6.3–6.8 of the SCM Agreement .   
 
2.19 Finally, Article 6.8 provides that “in the absen ce of circumstances referred to in paragraph 7, 
the existence of serious prejudice should be determined on the basi s of the information submitted in 
accordance with the provisions of Annex V”.  This confirms that paragraph 7 of Article 6 outlines the 
only set of circumstances in which it is not possible to make a determination as to the existence of 
serious prejudice when one of the situations in Article  6.3 is demonstrated to exist.  The direction in 
Article 6.8 to determine the “existence” of serious  prejudice on the basis of the record would be 
deprived of meaning if a determin ation of serious prejudice also had to be made by reference to 
additional criteria not specified by the SCM Agreement  that could lead to a materially different 
outcome as a matter of fact and law.   2.20 Serious prejudice is not the abstract con cept the United States attempts to portray it as.  
Serious prejudice refers to the c oncrete adverse effects of a subsidy on the interests of another 
Member that are clearly elaborated in Article 6.3.  However, even if the United States is right and a 
complainant, having demonstrated the existence of significant price suppression within the meaning 
of Article 6.3(c), must also meet a separate test of “serious prejudice” under Article 5(c), Brazil has demonstrated that serious prejudice exists by providing the Panel with additional information 
outlining the harm caused to its upland cott on producers as well as to the Brazilian economy.
30 
 
(a) “Significant”  2.21 Article 6.3(c) of the SCM Agreement  requires that the level of price suppression caused by the 
United States subsidies must be “significant”, that is , it may not be so small as to have no meaningful 
effect on other producers or suppliers of the same product.
31  Logically, price suppression that is so 
small as to have no meaningful effect could not give rise to serious prejudice.  However, such an interpretation does not mean that a very small le vel of price suppression may not have a meaningful 
effect, for example where large volumes of a product may be traded.
32  As Brazil demonstrates, even a 
1 cent per pound price-suppressing effect can redu ce worldwide export revenue by $552 million.  
Average price declines of 12.6 per cent for uplan d cotton clearly have a meaningful affect on 
                                                      
30 Further Submission of Brazil, Part 6. 
 31 Panel Report, Indonesia – Certain Measures Affecting the Automobile Industry, WT/DS54/R, 
WT/DS55/R, WT/DS59/R, WT/DS64/R, adopted 23 July 1998 (“ Indonesia – Automobiles ”).  The Panel 
considered (at para 254) the meaning of “significant”  in the context of Article 6.3(c) and concluded: 
Although the term “significant” is not defined, th e 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 effect suppliers of the imported product whose price was being undercut are not considered to give rise to serious prejudice.  
 
32 Further Submission of Brazil, para 95and para 256.  WT/DS267/R/Add.1 
 Page E-71 
 
 
 Brazilian producers of upland cotton.  New Zeala nd fully agrees with Brazil that such price 
suppression is thus “far beyond any le gitimate threshold of ‘significance’”.33 
 2.22 The United States argues that Brazil’s interp retation of “significant” collapses the concept of 
“significant price suppression or depression” with the concept of “serious prejudice”  because Brazil’s 
assessment of the significance of the price suppr ession has wrongly focussed on the effect of the 
subsidy on producers rather than on prices.   As outlined in paragr aphs 2.10–2.20 above, in 
New Zealand’s view the construction of Articles 5 and 6 makes it clear that “significant price suppression or depression” is simply a form or manifestation of “serious prejudice” and therefore it is artificial to make into two separate inquiries what is clearly meant to be only one.   
 
2.23 In any event the United States argument that the significance of the price suppressive effect of 
the subsidy can only be determined by reference to the effect on ‘price’ should be rejected. Articles 5 
and 6 are concerned with the adverse  effects  of a subsidy – Article 5 states that “no Member should 
cause, through the use of any subsidy … adverse effects  to the interests of other Members.”  Therefore 
it is entirely appropriate under Article 6.3(c) to consider whether price suppression is “significant” by 
reference to the effect of the price suppression on the Member alleging adverse effects to its interests.  
In other words, what renders price suppression signi ficant or insignificant is whether or not it causes 
adverse effects to the Member concerned, not whether or not an arbitrary level of numeric significance is achieved as implied by the United St ates.  Under the United States approach, a 
numerically small suppressive effect on prices coul d be disregarded, even though it may have 
significant adverse effects on the complainant Member.  Thus, using the example given by Brazil, 
price suppression by only 1 cent per pound may not be “significant” enough under the United States standard and therefore could not give rise to serious prejudice, even though that level of price 
suppression would reduce worldwide e xport revenue by $552 million.
34    
 
2.24 Nor does the United States explain how ‘signi ficance’ is to be determined under its proposed 
approach.  That is because such an  approach would require Panels to apply some kind of arbitrary 
standard of significance – would 5 per cent be signi ficant? Would 10 per cent or 20 per cent?  Would 
the level of required significance vary from case to case, and if so how is a Panel to determine what that level should be?   
2.25 By contrast, the approach taken by Brazil of  interpreting “significant” as requiring the level of 
price suppression to be “meaningful” in its e ffect, reflecting the Panel’s reasoning in Indonesia – 
Automobiles , provides a more logical and consistent basis upon which to determine whether the price 
suppression is “significant”.  It is also consistent with the objective of Articles 5 and 6 which is to 
address subsidies that have an adverse effect on the interests of other WTO members.  Nor is such an 
approach inconsistent with the United States assertion that the drafters of Article 6.3(c) used the term 
“significant” to create a threshold to ensure that not just “any theoretical price effect”
35 would suffice.  
In fact the Panel in Indonesia – Automobiles  appears to have made th e same assessment of the 
intention of the drafters when it stated that   
the inclusion of this qualifier (ie “significant”) in Article 6.3(c) presumably was 
intended to ensure that margins of unde rcutting so small that they could not 
                                                      
 33 Ibid, para 95. 
34 This example is of course based on the effect of subsidies on “like products”, which, as Brazil has 
demonstrated (Further Submission of  Brazil, part 3.3.2), United States  upland cotton and Brazilian upland 
cotton are. 
35 Further Submission of the US, para 84. WT/DS267/R/Add.1 
Page E-72  
 
 meaningfully affect suppliers of th e imported product whose price was being 
undercut are not considered to give rise to serious prejudice.
36 
2.26 Nor does the United States argument find support in the reference to the price suppression 
being “in the same market” in Article 6.3(c).  Th e United States argues this means that the price 
suppression must be significant in “market terms” and th erefore the question is the effect of the price 
suppression on the market and not on the Member concerned.37  While New Zealand agrees that the 
effect of the price suppression on the market may be  relevant to considering whether that price 
suppression is “significant”, New Zealand notes that th e phrase “in the same market” simply serves to 
locate the price suppressive effects rather than defi ne their substance.  In fact the United States 
acknowledges as much further on it in its submission.38  Further, the United States has not attempted 
to claim that its exports are not to the same market as exports from Brazil.  And of course it cannot, 
because, as Brazil has demonstrated, Brazilian upla nd cotton and United States upland cotton are like 
products and are treated by upland cotton traders as interchangeable and substitutable.39 
 2.27 Finally, New Zealand notes that the United States arguments do not seek to suggest that the 
level of price suppression found to exist in the pr esent case - 12.6 per cent - is not “significant” within 
the meaning of Article 6.3(c).  Therefore the Panel should find that “significant price suppression” exists as a result of the United States subsidies a nd that therefore the United States subsidies cause 
serious prejudice to the interests of Brazil.  (b) Time Period for Demonstrating Causal Effects 
 
2.28 The United States argues that “a past subsidy no longer exists as of the time a new subsidy 
payment in respect of current production is made”.
40  Therefore, argues the United States, subsidies 
prior to the most recent period, MY 2002, can have no “effect” within the meaning of Article 6.3 and 
the “effect of the subsidy must be demonstrated  in each year and for each year that Brazil has 
challenged”.41 
 2.29 By the United States reasoning a complainan t may only take a serious prejudice case in the 
year in which the serious prejudice is caused.  To say that a “past subsidy no longer exists” once a 
further payment is made under the same subsidy sch eme is entirely artificial.  Leaving aside the 
practical difficulties the United States approach would pose given the nature of the evidence that is 
required and the timelines for WTO dispute settle ment – which would effectively preclude any 
Members from ever taking serious pr ejudice cases – this approach ignores that fact that the subsidy 
programmes are in existence for a period of years and have effects on the decisions of producers beyond simply the year in which they have been paid.
42  Producers expectations of continued 
subsidies are integral to planting decisions and it is clear that United States producers expect ongoing 
subsidies as these have been legislatively mandated until MY 2007.   
 2.30 Similarly the serious prejudice caused to a WTO Member over the lifetime of a subsidy programme is not easily compartmentalised into a par ticular year and such an artificial constraint on 
the appropriate time period for consideration by a Panel would seem to undermine the object and 
                                                      
36 Panel Report, Indonesia – Automobiles , para 14.254. 
37 Further Submission of the US, para 87. 
38 Ibid, para 90. 
39 Further Submission of Brazil, para 80. 
40 Further Submission of the US, para 94. 
41 Ibid, para 95. 
42 Brazil has demonstrated that the effects of the United States subsidies continue after they have been 
provided because, for example, they have “wealth” and “investment” effects (Further Submission of Brazil, part 
3.3.4.7.7).  WT/DS267/R/Add.1 
 Page E-73 
 
 
 purpose of the disciplines on actionable subsidies in the Agreement.  New Zealand therefore agrees 
with Brazil that MY 1999-2002 is a reasonable peri od for the Panel to use for the present serious 
prejudice claims.  
2. The effect of the United States subsidies is an increase in the United States world market 
share 
 
2.31 Brazil has demonstrated that the United States subsidies resulted in an increase in the 
United States world market share for upland cotton in MY 2001 within the meaning of Article 6.3(d).  The data provided by Brazil shows that the United States world market share in MY 2001 of 38.3 per 
cent is considerably higher than the previous three-year average,
43 and that this was due to the effect 
of the United States subsidies.44 
 2.32 The United States argues that the term “world  market share” refers to “all consumption” of 
upland cotton and thus would include  “consumption by a country of its own cotton production”.  The 
United States appears to suggest that Article 6.3(d) is  thus concerned with the effect of the subsidy on 
world consumption of cotton.  2.33 It is true that GATT Article XVI:3 uses th e phrase “world export trade”.  However it is quite a 
leap of logic to then conclude that because Article 6.3(d) uses the term “world market share” then it 
must refer to a Member’s share of world consumpti on.  The United States makes this leap on the basis 
that the relevant context for determining what “w orld market share” means is GATT Article XVI:3.  
However the first point of reference should in fact be  Article 6.3 itself, and Article 5 to which it is so 
integrally related.  Thus the appropriate context in  which to give meaning to “world market share” is 
the aim of Articles 5 and 6, ie to address the adverse effects of subsidies on the interests of other Members.   
 
2.34 Subsidies are the concern of WTO members to the extent that they distort trade – hence the 
differentiation in treatment of trade-distorting and non-trade distorting subsidies.  Therefore the adverse effects with which Article 6.3 is concerned is the effect of subsidies on trade in the world 
market.  Specifically, it is concerned with adver se effects to other Members caused when one Member 
uses subsidies in order to increase its  share of the world market for a particular product.  To construe 
“world market share” as referring to a Member’s  share of world consumption of a product would 
therefore completely subvert the underlying rationale of Article 6.3(d).    
3. The United States has a “more than equita ble share” of world export trade in upland 
cotton 
 
2.35 Brazil has demonstrated that the United States subsidies have operated to increase United States exports of upland cotton resulting in  the United States having a “more than equitable 
share” of world export trade in upland cotton within the meaning of GATT Article XVI:3 and has thus caused serious prejudice to the interests of Br azil within the meaning of GATT Article XVI:1.
45   
 
2.36 The United States seeks to dismiss the releva nce of GATT Article XVI:3 by reference to pre-
Uruguay Round comment by the Panel on Wheat Flour46, addressing the Tokyo Round Subsidies 
Code, in an unadopted report, that there are “di fficulties inherent in the concept of ‘more than 
equitable share’.”47  The United States also seeks to assert th at “Members are generally permitted to 
                                                      
43 Further Submission of Brazil, para 267 and Figure 24. 
44 Ibid, paras 271 – 272. 
45 Further Submission of Brazil, part 3.5. 
46 GATT Panel Report, EEC – Subsidies on Export of Wheat Flour , SCM/42, (unadopted). 
47 Further Submission of the US, paras 108 and 109. WT/DS267/R/Add.1 
Page E-74  
 
 provide subsidies.”
48  That is true up to the point at which those subsidies cause serious prejudice to 
the interests of the other Members.   And in this context the Panel should consider whether, as the 
world’s largest exporter of upland cotton with aver age levels of subsidisation of 95 per cent, the 
United States has a “more than equitable” share of  world export trade.  New Zealand submits that 
Brazil has demonstrated that the United States does. 
 
4. Issues relating to particular United States subsidies 
 
2.37 Brazil sets out arguments relating to the fu ll complement of United States subsidies and the 
serious prejudice they cause both individually and collectively.  New Zealand will comment only on 
marketing loan payments, Step 2 payments and market loss assistance/counter-cyclical payments.   
 
 (i) Marketing Loan Payments 
 
2.38 Brazil has highlighted that these payments  are considered by the USDA and by other 
economists as having the greatest production and e xport enhancing effects and thus the greatest A-
Index price suppressing effects of all the United States subsidies.49  Brazil has described how the 
effect of the marketing loan programme is to increase production, increase exports of upland cotton, 
and suppress upland cotton prices (on average by 5.75% in MY 1999-2002).50  The marketing loan 
programme is thus responsible for almost half of the estimated average price suppressing effects of the United States subsidies. 
 
 (ii) Step 2 Payments 
 
2.39 The availability of Step 2 payments in creases production in the United States, displaces 
imports of lower priced foreign upland cotton and enables additional United States exports of upland 
cotton.  The Step 2 payment programme is speci fically designed to stimulate export demand for 
United States upland cotton.  Brazil has shown that th e trade distorting effect of the Step 2 payments 
is widely acknowledged.
51  Professor Sumner estimates that Step 2 payments suppressed world prices 
between MY 1999-2002 by 3.04 per cent.52   
 2.40 Brazil has demonstrated that Step 2 dom estic payments are a prohibited subsidy under 
Article 3.1(b) of the SCM Agreement  in that the payments are contingent on the use of domestic over 
imported upland cotton and thus also violate Article III.4 of GATT 1994.  
 (iii) Market loss assistance/Counter-cyclical payments 
 2.41 The United States continues to argue that  market loss assistance payments and counter-
cyclical payments (CCP) are not linked to produc tion and accordingly cannot have “effects” for the 
purposes of Article 6.3(c) nor operate to in crease exports as required by GATT Article XVI:3.
53  The 
United States implies that their production effects are less than one percent.54  However Professor 
Sumner’s analysis shows that although their producti on effects were less than one percent in 1999, 
since then they have been significantly higher and are projected to increase in the future.55 He 
                                                      
48 Ibid, para 105. 
49 Further Submission of Brazil, para 17. 
50 Ibid, para 157. 
51 Ibid, para 287. 
52 Ibid, Table 12. 
53 Further Submission of the US, para 74. 
54 Ibid, paras 73 and 74. 
55 Further Submission of Brazil, Annex 1, Table I.4.  WT/DS267/R/Add.1 
 Page E-75 
 
 
 concluded that these payments have a production impact because their effect is to keep land in the 
production of upland cotton that would not be otherwise because of low prices.56   
 2.42 As outlined by New Zealand in its First Wr itten Submission to the Panel, the CCP payments 
create incentives for farmers with upland cotton base acreage to maintain upland cotton production.
57  
New Zealand pointed out that in fact under the CCP programme the only way a farmer can guarantee 
a particular income is to continue to grow the same  crop, otherwise the farmer runs the risk of missing 
out.  For example, if he or she chooses to prod uce wheat and cotton prices are high enough that no 
CCP payment is made but wheat prices fall, the fa rmer will make a loss they would not have made 
had they stayed with cotton production.  This, combined with other factors set out by Brazil,58 for 
example the investment by farmers in cotton-speci fic machinery, virtually guarantees farmers will 
continue to produce cotton.  The CCP payments are thus far from “de-coupled” in effect.  2.43 In fact Professor Sumner concluded that the CCP payments (as the institutionalised  marketing loss assistance payments are now known under the Farm Security and Rural Investment 
Act 2002
59) create more  production incentive than the market lo ss payments, through base and yield 
updating and the increased per pound amount of support.60  Professor Sumner determined that the 
market loss assistance payments and the CCP paymen ts stimulated production by an average of 1.34% 
during MY 1999-2002.61  And, as noted by Brazil, the full effects of the greater production incentives 
inherent in the CCP programme w ill only be realised in MY 2003. 
 III. THREAT OF SERIOUS PREJUDICE  
 
3.01 Brazil has brought evidence to show that the United States subsidies are not only causing 
serious prejudice to Brazil’s interests today, but al so threaten to cause serious prejudice to Brazil’s 
interests in the future.  Brazil has demonstrated that the United States subsidies cause a threat of 
serious prejudice to Brazil’s interests within the m eaning of Articles 5(c), 6.3(c) and 6.3(d) of the 
SCM Agreement , as well as GATT Article XVI:3 in the period MY 2003-2007 because of the 
continued operation of the Farm Security and Ru ral Investment Act 2002 and the Agricultural Risk 
Protection Act 2000.  3.02 Brazil has demonstrated that the very same factors creating present serious prejudice also 
create a threat of serious prejudice in the future .  The United States subsidies are mandated to 
continue until MY 2007.  They are effectively unlim ited.  Brazil has demonstrated that they have 
already caused serious prejudice to Brazil’s interests.   Their continued operation for a further four 
years cannot but be considered to threaten furt her serious prejudice to Brazil’s interests.   
 
3.03 The United States argues that the two standa rds proposed by Brazil are incorrect and that 
Brazil has, in any event, met neither of them.  3.04 To take Brazil’s first proposed legal sta ndard, Brazil argues, drawing on the findings of the 
GATT Panel in EC – Sugar Exports I
62 and EC – Sugar Exports II63 and the Appellate Body in US – 
                                                      
56 Ibid, para 169. 
57 New Zealand’s First Submission, para 2.20. 
58 Further Submission of Brazil, para 207. 
59 Ibid, para 62. 
60 Ibid, para 171. 
61 Ibid, para 172. 
62 GATT Panel Report, European Communities – Refunds on Exports of Sugar (Complaint by 
Australia),  L4833 – 26S/290, adopted 6 November 1979. 
63 GATT Panel Report, European Communities – Refunds on Exports of Sugar (Complaint by Brazil),  
L5011 – 27S/69, adopted 10 November 1980. WT/DS267/R/Add.1 
Page E-76  
 
 FSC,
64 that where there is effectively no limit on the provision of a subsidy a permanent source of 
uncertainty exists that threatens serious prejudice to other WTO Members.  In such circumstances 
there is no check on the provision of a subsidy th at would prevent it from causing adverse effects to 
the interests of other Members.   
3.05 That is the precise situation in the presen t case.  United States legislation requires the 
provision of the subsidies irrespective of whether or  not those subsidies have adverse effects on other 
Members.  In that respect it is important to b ear in mind that the present case involves a level of 
subsidisation of, on average, 95 per cent, with a do llar value of US$12.9 billion, being provided by a 
country that currently has a 41.6 per cent share of the world market for upland cotton.  The possibility 
that United States subsidies will continue to cause se rious prejudice to the interests of Brazil in the 
future, is a real one – it is well removed from the realm of “allegations, conjecture or remote 
possibility” alluded to by the United States.
65   
 3.06 In that respect Brazil’s second proposed legal standard for determining whether such a threat 
exists is highly relevant.  As Braz il has demonstrated, all of the factors that currently exist that mean 
that the United States subsidies cause serious prejudi ce to their interests will continue to exist in the 
future.  Furthermore, United States producers of upl and cotton will act in the expectation of future 
subsidy payments and will make their planting deci sions accordingly.  Therefore the fact that the 
legislation creating those subsidies will conti nue until 2007, and United States producers know that 
those subsidy programmes will continue  until 2007, creates a very strong prima facie  case that those 
subsidies will continue to cause serious prejudice to Brazil for the full term of their existence.   
 3.07 Finally New Zealand supports Brazil’s request  that if the Panel makes a finding of present 
serious prejudice, it should not feel constrained in making a further finding that the subsidies also create a threat of serious prejudice in the future.
66  Firstly, even though the present effects of the 
subsidies are already being felt, their future effect s have not yet eventuated and therefore necessarily 
remain a threat.  Secondly, the purpose of dispute settlement is to assist Members in the resolution of 
disputes – in this case a finding by the Panel on the threat of future serious prejudice is important to resolve this dispute.  
IV. EXPORT CREDIT GUARANTEE PROGRAMMES 
 4.01 New Zealand notes that the United States ra ises further arguments in relation to the 
negotiating history and appropriate in terpretation of Article 10.2 of the Agreement on Agriculture  in 
order to support its claim that there are currently  no export subsidy disciplines on the use of export 
credit guarantee programmes. 
 
4.02 However the United States does not address the applicability of Article 10.1.  As outlined by 
New Zealand in its First Submission, Article 10.2 does not in any way suggest that it provides an exception from the disciplines of Article 10.1.  While Article 10.1 currently provides the only 
discipline on the use of export credits, it is expect ed that the work envisaged in Article 10.2 will 
elaborate further and more specific disciplines that will presumably make identification of the extent 
to which such export credit progra mmes constitute export subsidies more  straightforward.  However it 
is incorrect to assume that there is a vacuum in th e meantime.  Item j of the Illustrative List of the 
SCM Agreement  clearly already provides guidance on when  export credit guarantee or insurance 
programmes are to be considered to be ‘export s ubsidies’ and beyond this the general definition in 
Articles 1.1 and 3.1(a) of the SCM Agreement  also applies.   
                                                      
64 Appellate Body Report, United States – Tax Treatment for “Foreign Sales Corporation ”, 
WT/DS108/AB/R, adopted 20 March 2000. 
65 Further Submission of the US, para 115. 
66 Further Submission of Brazil, para 291.  WT/DS267/R/Add.1 
 Page E-77 
 
 
  
V. CONCLUSION 
 
5.01 In conclusion, New Zealand considers that  Brazil has provided the legal and factual basis 
upon which the Panel should conclude that the United States subsidies cause or threaten to cause 
serious prejudice to the interests of Brazil within the meaning of Articles 5(c), 6.3(c) and 6.3(d) of the 
SCM Agreement  and violate GATT Article XVI.  New Zealand therefore requests the Panel to make 
the findings and recommendations requested by Brazil.   WT/DS267/R/Add.1 
Page E-78  
 
 ANNEX E-8  
 
 
SECOND WRITTEN SUBM ISSION OF PARAGUAY 
(THIRD PARTY) 
 
3 October 2003 
 
 1. Paraguay is grateful for the opportunity  to express its views in this dispute. 
 2. As already stated, Paraguay maintains that  the subsidies and support granted to cotton 
production of the type at issue are inconsistent with the Agreement on Subsidies and Countervailing 
Measures and other WTO rules. 
 3. The agricultural subsidies cause serious prejudice to the domestic industries of many WTO Members, in violation of Articles 5 and 6 of the Agreement on Subsidies and Countervailing 
Measures.  Indeed, these measures involve a financia l contribution which, by conferring a benefit, 
could adversely affect the determinati on of the world price of the product. 
 4. Article 5(c) stipulates that "no Member should cause, through the use of any subsidy [-specific and not exempted under the Agreement –] adverse effects to the interests of other Members, 
i.e.: … (c) serious prejudice to the interests of another Member."  
5. The threat of serious prejudice takes the form of price undercutting and unfairness in 
international trade, particularly as regards deve loping countries like Paraguay, which is highly 
dependent on its cotton production.  6. Article 6, which concerns serious prejudice, states that serious prejudice in the sense of 
paragraph (c) of Article 5 shall be  deemed to exist in the case of subsidies to cover operating losses 
sustained by an enterprise, other than one-tim e measures which are non-recurrent and cannot be 
repeated for that enterprise and which are given merely to provide time for the development of 
long-term solutions and to avoid acute social  problems;  and direct forgiveness of debt, 
i.e. forgiveness of government-held debt, and grants to cover debt repayment. 
 
7. Paraguay submits that the measures adopted by  the United States do not fit these descriptions 
and cause injury to its economy, Paraguay being a predominantly agricultural country.  8. Because of the amounts involved, the subsid ies granted to the cotton industry have a 
significant impact on the world market as reflected in increased production and export and price 
variations on the global market. 
 9. In the International Cotton Advisory Comm ittee (ICAC) as in other forums, governments 
have remarked on the critical situation that the world cotton industry is going through and its link to 
subsidies, stressing the need to submit complaints before the WTO for violation of the applicable 
rules.  The Committee considers that without the su bsidization, the average world cotton price would 
undergo a reasonable increase.   10. Paraguay's cotton trade is affected by such measures because cotton production has a considerable impact on its economy, and especially on its rural populations which depend on cotton 
for their livelihood.  In the sectors involved, such as  transport and related industries, the impact is 
considerable, with approximately 30 per cent of the population affected.  WT/DS267/R/Add.1 
 Page E-79 
 
 
 11. Thus, the impact on trade in countries like Paraguay is devastating and causes the migration 
of rural populations to the urban areas, furthe r aggravating the economic situation of a country 
dependent on its agriculture.  12. As shown in the attached table, cotton fibr e exports to the United States was 518 tons, for a 
value of US$898,000. 
 13. The effect is clear:  in 2001, the volume of exports to the same market practically doubled, reaching 924 tons, and yet the price decreased in equal proportions, wi th exports generating 
US$830,000.  The world cotton trade figures reflect the same trend. 
 
CONCLUSION 
 
14. There is sufficient evidence to prove th at the subsidies are causing problems to the 
international marketing of cotton a nd that the American subsidies are further aggravating the situation 
of cotton exports from Paraguay. 
 
15. We respectfully request the Panel to find th at the measure applied by the United States is 
inconsistent with the obligations laid down by  the WTO in various provisions of the GATT 1994 and 
the Agreement on Subsidies on Countervailing Measur es, and to take account of the arguments put 
forward by Brazil.  
 WT/DS267/R/Add.1 
Page E-80  PARAGUAYAN COTTON EXPORTS BY DESTINATION  
 (Tons / ThUS$) 
             
 1997   1998   1999   2000   2001   2002   
 VOLUME VALUE VOLUME VALUE VOLUME VALUE VO LUME  VALUE VOLUME VALUE VOLUME VALUE 
GERMANY 0 0 0 0 193 179 1,215 1,229 6,029 4,594 2,877 1,981
ARGENTINA 150 46 4,623 6,594 649 759 1,250 1,460 250 231 5,001 4,132
BANGLADESH 0 0 0 0 0 0 461 532 630 568 155 119
BELGIUM 0 0 0 0 0 0 0 0 266 215 149 128
BERMUDA 473 757 0 0 0 0 0 0 0 0 0 0
BOLIVIA 0 0 0 0 0 0 1,200 1,084 0 0 0 0
BRAZIL 39,898 64,492 47,267 64,914 47,115 55,93 3 56,726 61,113 31,063 29,465 29,599 22,877
COLOMBIA 0 0 0 0 0 0 1,660 1,556 200 224 0 0
SOUTH KOREA 0 0 79 102 0 0 0 0 98 92 0 0
NORTH KOREA 0 0 0 0 0 0 0 0 605 557 0 0
CHILE 845 1,509 624 938 1,107 1,208 1,183 1,309 424 404 1,675 1,262
NATIONALIST 
CHINA (TAIWAN) 0 0 191 219 0 0 0 0 2,126 1,865 579 450
CHINA, PEOPLE'S 
 REPUBLIC OF 0 0 0 0 0 0 698 769 1,310 1,230 0 0
DENMARK 0 0 0 0 0 0 0 0 0 0 128 102
SLOVAKIA 0 0 0 0 0 0 0 0 100 76 0 0
SPAIN       313 364 18 19 0 0
UNITED STATES 518 898 0 0 0 0 60 67 924 830 0 0
PHILIPPINES 0 0 0 0 102 119 33 39 569 616 155 132
FRANCE 0 0 0 0 0 0 0 0 231 187 104 83
HONG KONG 0 0 0 0 0 0 1,116 1,188 148 111 185 123
NETHERLANDS  0 0 0 0 500 606 0 0 62 41 0 0
INDIA 0 0 0 0 0 0 526 408 33,463 28,267 3,088 2,738
INDONESIA 0 0 0 0 0 0 120 116 2,461 2,295 582 453
ITALY 0 0 462 550 0 0 25 23 360 345 363 271
MALAYSIA 0 0 0 0 0 0 500 449 130 109 0 0
NIGERIA 0 0 0 0 0 0 0 0 241 229 0 0
PAKISTAN 0 0 0 0 0 0 68 65 1,006 790 0 0
PANAMA 0 0 0 0 0 0 0 0 0 0 48 29 
 WT/DS267/R/Add.1
Page E-81 1997   1998   1999   2000   2001   2002   
 VOLUME VALUE VOLUME VALUE VOLUME VALUE VO LUME  VALUE VOLUME VALUE VOLUME VALUE 
PORTUGAL 0 0 0 0 0 0 0 0 989 702 200 133
UNITED 
KINGDOM 00  00 0 0 0  0 2 1 00
SWITZERLAND 0 0 0 0 0 0 200 216 592 551 251 169
THAILAND 0 0 0 0 0 0 397 403 2,298 1,959 294 198
TURKEY 0 0 0 0 0 0 819 886 2,244 2,431 0 0
URUGUAY 2,684 3,927 1,165 1,453 501 601 475 529 198 200 65 53
VENEZUELA 720 1,227 459 649 1,942 2,140 4,403 4,687 4,035 3,731 632 528
VIETNAM 0 0 0 0 0 0 0 0 602 533 0 0
TOTAL 45,288 72,856  54,870 75,419 52,109 61,545 73,448  78,492 93,674 83,468 46,130 35,961
             
Prepared by the Paraguayan Directorate of Foreign Trade. 
Source:  Central Bank of Paraguay.