WT/DS267/RW 
 Page D-269 
 
 
ANNEX D-12 
 
RESPONSES OF BRAZIL TO THE PANEL'S  
SECOND SET OF QUESTIONS 
 
(2 April 2007) 
 
 
TABLE OF CONTENTS  
 
Page   
LIST OF ABBREVIATIONS   
270 
 
TABLE OF CASES   271 
 
TABLE OF EXHIBITS   273 
 A. S
COPE OF THIS PROCEEDING   274 
 B. C
LAIMS OF BRAZIL REGARDING PRESENT SERIOUS PREJUDICE   280 
 
1. Significant price suppression - Article 6.3(c) of the SCM Agreement    280 
 
2. Increase in world market share - Article 6.3(d) of the SCM Agreement    314 
 
C. C LAIM OF BRAZIL REGARDING THREAT OF SERIOUS PREJUDICE   316 
 
D. EXPORT CREDIT GUARANTEES   326 
 1. Outstanding export credit guarantees  
 326 
 
2. Legal Bases for Brazil's export subsidies claims   328 
 3. "Benefit" under Articles 1.1 and 3.1(a) of the SCM Agreement   
 328 
 
4. Item (j) of the Illustrative List   343 
  WT/DS267/RW   
Page D-270  
 
LIST OF ABBREVIATIONS 
 
 
AMS Aggregate Measurement of Support  Arrangement OECD Arrangement on Offi cially Supported Export Credits  
AWP Adjusted World Price  
CCC U.S. Commodity Credit Corporation  CCPs Counter-Cyclical Payments  CVD Countervailing Duty  DSB Dispute Settlement Body  
DSU Understanding on Rules and Procedures Governing the Settlement of Disputes  
ECG Export Credit Guarantee  FAIR Act Federal Agricultural Impr ovement and Reform Act of 1996  
FAPRI Food and Agricultural Policy Research Institute  FAS USDA's Foreign Agriculture Service  
FCRA Federal Credit Reform Act  
FSRI Act Farm Security and Rural Investment Act of 2002  FY Fiscal Year  GATT General Agreement on Tariffs and Trade  GAO Government Accountability Office  GSM 102 General Sales Manager 102  
GSM 103 General Sales Manager 103  
MPRs Minimum Premium Rates  MY Marketing Year  NCC National Cotton Council of America  NPV Net Present Value  
OECD Organization for Economic Co-operation and Development  
SCGP Supplier Credit Guarantee Program  
SCM Agreement Agreement on Subsidies and Countervailing Measures  
SPS Agreement Agreement on Sanitary and Phytosanitary Measures  TBT Agreement Agreement on Technical Barriers to Trade  
U.S. United States  USDA U.S. Department of Agriculture  
WTO World Trade Organization    WT/DS267/RW 
 Page D-271 
 
 
TABLE OF CASES 
 
Short Title Full Case Title and Citation 
Argentina – 
Footwear  Appellate Body Report, Argentina – Safeguard Measur es on Imports of Footwear , 
WT/DS121/AB/R, adopted 12 January 2000, DSR 2000:I, 515 
Brazil – Aircraft (21.5 II) Panel Report, Brazil – Export Financing Programme for Aircraft – Second 
Recourse by Canada to Article 21.5 of the DSU , WT/DS46/RW/2, adopted 
23 August 2001, DSR 2001:X, 5481 
Canada – Aircraft Appellate Body Report, Canada – Measures Affecting the Export of Civilian 
Aircraft , WT/DS70/AB/R, adopted 20 August 1999, DSR 1999:III, 1377 
Canada – Aircraft 
(21.5) Appellate Body Report, Canada – Measures Affecting the Export of Civilian 
Aircraft – Recourse by Brazil to Article 21.5 of the DSU , WT/DS70/AB/RW, 
adopted 4 August 2000, DSR 2000:IX, 4299 
Canada – Aircraft 
Credits and 
Guarantees Panel Report, Canada – Export Credits and Loan Guarantees for Regional 
Aircraft , WT/DS222/R and Corr.1, adopted 19 February 2002, DSR 2002:III, 
849 
Canada – Dairy 
(21.5 I) Appellate Body Report, Canada – Measures Affecting th e Importation of Milk and 
the Exportation of Dairy Products – Reco urse to Article 21.5 of the DSU by 
New Zealand and the United States , WT/DS103/AB/RW, WT/DS113/AB/RW, 
adopted 18 December 2001, DSR 2001:XIII, 6829 
Dominican Republic 
– Import and Sale of Cigarettes Appellate Body Report, Dominican Republic – Measures Affecting the 
Importation and Internal Sale of Cigarettes , WT/DS302/AB/R, a dopted 19 May 
2005 
EC – Asbestos Appellate Body Report, European Communities – Meas ures Affecting Asbestos 
and Asbestos-Containing Products , WT/DS135/AB/R, adopted 5 April 2001, 
DSR 2001:VII, 3243 
EC – Bed Linen (21.5) Appellate Body Report, European Communities – Anti-Dumping Duties on 
Imports of Cotton-Type Bed Linen from India – Recourse to Article 21.5 of the 
DSU by India , WT/DS141/AB/RW, adopted 24 April 2003, DSR 2003:III, 965 
EC – Chicken Cuts Appellate Body Report, European Communities – Customs Classification of 
Frozen Boneless Chicken Cuts , WT/DS269/AB/R, WT/DS286/AB/R, and 
Corr.1, adopted 27 September 2005 
EC – CVDs on 
DRAMs Panel Report, European Communities – Countervailing Measures on Dynamic 
Random Access Memory Chips from Korea , WT/DS299/R, adopted 3 August 
2005 
EC – Hormones Appellate Body Report, EC Measures Concerning Meat and Meat Products 
(Hormones) , WT/DS26/AB/R, WT/DS48/AB/R , adopted 13 February 1998, 
DSR 1998:I, 135 
EC – Sardines Appellate Body Report, European Communities – Trade  Description of Sardines , 
WT/DS231/AB/R, adopted 23 October 2002, DSR 2002:VIII, 3359 
EC – Selected Customs Matters Appellate Body Report, European Communities – Selected Customs Matters , 
WT/DS315/AB/R, adopted 11 December 2006 
Japan – Alcohol II Appellate Body Report, Japan – Taxes on Alcoholic Beverages , WT/DS8/AB/R, 
WT/DS10/AB/R, WT/DS11/AB/R, adop ted 1 November 1996, DSR 1996:I, 97 
Korea – Commercial 
Vessels Panel Report, Korea – Measures Affecting Tr ade in Commercial Vessels , 
WT/DS273/R, adopted 11 April 2005 WT/DS267/RW   
Page D-272  
 
Short Title Full Case Title and Citation 
Korea – Various 
Measures on Beef Appellate Body Report, Korea – Measures Affecting Im ports of Fresh, Chilled and 
Frozen Beef , WT/DS161/AB/R, WT/DS169/AB /R, adopted 10 January 2001, 
DSR 2001:I, 5 
Mexico – Corn Syrup 
(21.5) Appellate Body Report, Mexico – Anti-Dumping Inves tigation of High Fructose 
Corn Syrup (HFCS) from the United States  – Recourse to Article 21.5 of the DSU 
by the United States , WT/DS132/AB/RW, adopted 21 November 2001, 
DSR 2001:XIII, 6675 
U.S. – CVDs on 
Certain EC Products Appellate Body Report, United States – Countervai ling Measures Concerning 
Certain Products from the European Communities , WT/DS212/AB/R, adopted 
8 January 2003, DSR 2003:I, 5 
U.S. – CVDs on 
Certain EC Products Panel Report, United States – Countervailing Measures Concerning Certain 
Products from the European Communities , WT/DS212/R, adopted 8 January 
2003, modified by Appellate Body Re port, WT/DS212/AB/R, DSR 2003:I, 73 
US – FSC Appellate Body Report, United States – Tax Treatment for "Foreign Sales 
Corporations" , WT/DS108/AB/R, adopted 20 March 2000, DSR 2000:III, 1619 
U.S. – FSC (21.5 II) Panel Report, United States – Tax Treatment for "Foreign Sales Corporations" – 
Second Recourse to Article 21.5 of the DSU by the European Communities , 
WT/DS108/RW2, adopted 14 March 2006, upheld by Appellate Body Report, 
WT/DS108/AB/RW2 
U.S. – OCTG Sunset Reviews Appellate Body Report, United States – Sunset Reviews of Anti-Dumping 
Measures on Oil Country T ubular Goods from Argentina , WT/DS268/AB/R, 
adopted 17 December 2004, DSR 2004:VII, 3257 
U.S. – Softwood Lumber IV Appellate Body Report, United States – Final Counter vailing Duty Determination 
with Respect to Certain Softwood Lumber from Canada , WT/DS257/AB/R, 
adopted 17 February 2004, DSR 2004:II, 571 
U.S. – Softwood Lumber IV Panel Report, United States – Final Counterva iling Duty Determination with 
Respect to Certain Softw ood Lumber from Canada , WT/DS257/R and Corr.1, 
adopted 17 February 2004, modifi ed by Appellate Body Report, 
WT/DS257/AB/R, DSR 2004:II, 641 
U.S. – Softwood 
Lumber IV (21.5) Appellate Body Report, United States – Final Countervailing Duty 
Determination with Respect to Certain Softwood Lumber from Canada – 
Recourse by Canada to Article 21.5 of the DSU , WT/DS257/AB/RW, adopted 
20 December 2005 
U.S. – Softwood Lumber V Appellate Body Report, United States – Final Dumping Determination on 
Softwood Lumber from Canada , WT/DS264/AB/R, adopt ed 31 August 2004, 
DSR 2004:V, 1875 
U.S. – Softwood 
Lumber VI (21.5) Appellate Body Report, United States – Investigation of the International Trade 
Commission in Softwood Lumber from Canada – Recourse to Article 21.5 of the 
DSU by Canada , WT/DS277/AB/RW, adopted 9 May 2006 
U.S. – Upland 
Cotton Appellate Body Report, United States – Subsidies on Upland Cotton , 
WT/DS267/AB/R, adopted 21 March 2005 
U.S. – Upland Cotton Panel Report, United States – Subsidies on Upland Cotton , WT/DS267/R, and 
Corr.1, adopted 21 March 2005, modifi ed by Appellate Body Report, 
WT/DS/267/AB/R 
  WT/DS267/RW 
 Page D-273 
 
 
TABLE OF EXHIBITS 
 
Upland Cotton Prices, March 2007. Exhibit Bra-673 
Cotton Marketing Weekly, 23 Ma rch 2007, accessed March 2007 at 
http://www.cottonexperts.com/solutions/cottonmktweekly.html . Exhibit Bra-674 
Updated Program Crop Comparison,  March 2007. Exhibit Bra-675 
USDA Cotton and Wool Outlook, 12 March 2007, accessed March 2007 at 
http://usda.mannlib.cornell.edu/usda /current/CWS/CWS-03-12-2007.pdf . Exhibit Bra-676 
Cotton Marketing Weekly, 9 March 2007, accessed March 2007 at 
http://www.cottonexperts.com/solutions/cottonmktweekly.html . Exhibit Bra-677 
Cotton Marketing Weekly, 16 February 2007, accessed March 2007 at 
http://www.cottonexperts.com/solutions/cottonmktweekly.html . Exhibit Bra-678 
"US Cotton Industry To Face Challenges In Global Market," 2006 
AgWeb.com, accessed March 2007 at 
http://www.cattlenetwork.com/ content.asp?contentid=103318 . Exhibit Bra-679 
"NCC urges disaster assistance for cotton producers," High Plains / Midwest 
AG Journal, 15 March 2007, accessed March 2007 at 
http://www.hpj.com/archives/2007/mar07/mar19/NCCurgesdisasterassistanc
ef.cfm?title=NCC%20urges%20disaster %20assistance%20for%20cotton%2
0producers . Exhibit Bra-680 
Upland Cotton Direct and counter-cycli cal Payment Program and Marketing 
Assistance Loans, Farm Se rvice Agency Fact Sheet, 
March 2006, accessed March 2007 at 
http://www.fsa.usda.gov/FSA/prin tapp?fileName=p f_20060301_insup_en_  
cottdcp06.html&newsType=prfactsheet . Exhibit Bra-681 
Risk Management, 2007 Farm Bill Theme Paper, May 2006, accessed 
March 2007 at http://www.usda.gov/documents/Farmbill07riskmgmtsum1.doc . Exhibit Bra-682 
Marketing Loan Subsidies and Average AWP. Exhibit Bra-683 
CoBank presentation, accessed March 2007 at 
http://www.cottoninc.com/2005EFSConfere ncePresentationsSingapore/Finan
cingUSACottonImportsUnderGSM/ . Exhibit Bra-684 
USDA FAS publication, "Will you get paid for the sale you just made", 
accessed March 2007 at http://www.fas.usda.gov/excredits/LOANS.PDF . Exhibit Bra-685 
Statement of Professor Sundaram. Exhibit Bra-686 
Cash Basis Accounting Worksheet. Exhibit Bra-687 
  
 WT/DS267/RW  
Page D-274  
 
A. S
COPE OF THIS PROCEEDING  
 
Questions to both parties  
 
44. The European Communities argues in respect of the preliminary objection raised by the 
United States regarding the claims of Brazil relating to export credit guarantees for pig meat and 
poultry meat under the GSM 102 programme that "the important issue is the nexus or the degree of 
interrelatedness or interdependence between different elements of the measure".  (Oral Statement of 
the European Communities, para. 6)  The Europe an Communities submits in this regard that:   
 
"the Panel should examine the original meas ure at issue and the 'measures taken to 
comply', and, with particular  reference to the 'elements of the measure' that the United 
States argues are outside the Panel's terms of  reference, enquire into the extent to 
which these are inter related  or inter dependent  with measures or 'elements of 
measures' that the United States accepts are within the Panel's terms of reference".  
(Oral Statement of the European Communities, para. 11)    
 Do the parties agree with the approach suggest ed by the European Communities and with the 
considerations in paragraph 13 of the Oral Statement of the European Communities?   
1. The compliance Panel asks Brazil to co mment on the "EC's suggested approach for 
addressing the United States' objection regarding Brazil's claims concerning the use of GSM 102 
export credit guarantees ("ECGs") to circumvent U.S. export subsidy commitments for pig meat and 
poultry meat.  The EC's approach for addressing the U.S. objection is based on an assessment of the 
"nexus" between the original measure and the measur e taken to comply, with particular reference to 
the "elements" of the measure that the United St ates argues are not within the Panel's terms of 
reference.
1    
 
2. Brazil agrees that the nexus between a measure  allegedly taken to comply and the original 
measure may, in certain circumstances, be relevant  is assessing the scope of Article 21.5 proceedings.  
This approach was adopted by the Appellate Body in U.S. – Softwood Lumber IV (21.5)  in assessing 
whether a periodic review was a measure taken to comply with DSB recommendations to an original 
determination.2  The Appellate Body relie d on the panels' findings in Australia – Salmon (21.5)  and 
Australia – Leather (21.5)  in support of this approach.  
 3. Brazil does not believe that it is necessary to  employ this approach to resolve the U.S. 
objection, however.  As far as Brazil understands, the United States ' objection is premised on  the 
view that there are separate ECG measures  that apply on a product-specific basis, e.g., to pig meat, 
and to poultry meat.  The United States conte nds that the separate ECG measures for these 
two products are not " measures  taken to comply".  
 4. The United States is incorrect in assuming that different ECG measures apply to different products.  The ECG measure taken to comply is the amended GSM 102 program, which applies in 
precisely the same way to a range of products, incl uding pig meat and poultry meat.  Thus, a single 
amended subsidy program applies ge nerally to numerous products.  (In paragraph 13 of its Opening 
Statement, the EC itself notes that there is a si ngle subsidy program, with a single revised guarantee 
fee schedule.)   5. Contrary to the United States' arguments in  its 16 March comments, the measures taken to 
comply are not the individual ECGs granted to pig meat and poultry meat pursuant to the amended 
                                                     
 
1 EC's Oral Statement, para. 11. 
2 Appellate Body Report, U.S. – Softwood  Lumber  IV (21.5), paras. 79, 80-93.  WT/DS267/RW 
 Page D-275 
 
 
GSM 102 program.3  Unlike the revised GSM 102 fee sche dule, the guarantees issued under the 
amended program were not adopt ed to implement the Dispute Settlement Body's ("DSB") 
recommendations.  Rather, guarantees issued by the Commodity Credit Corporation ("CCC") 
represent simply the routine, day-to-day opera tion, of the amended program in response to 
applications from U.S. exporters.  The fact that the measure taken to comply is the amended GSM 102 
program does not mean that the measure is chal lenged "as such" because, under Article 10 of the 
Agreement on Agriculture , the issue is the application of the amended program.  
 6. Moreover, although the United States admits  that it chose to change the guarantee fee 
schedule for all eligible products, it seeks to evade the consequences of that choice.
4  An 
implementing Member must ensure that the chang es it makes to WTO-inconsistent measures comply 
fully with all of the Member's WTO obligations.5  Article 21.5 proceedings are the appropriate forum 
for examining whether a Member has done so.   7. Under Article 10 of the Agreement on Agriculture , Brazil's claim is that this measure is 
applied in a manner that circumvents the United St ates' export subsidy commitments regarding certain 
agricultural products, including pig meat and pou ltry meat.  Although Brazil made claims regarding 
these products in the original proceedings, these clai ms were not definitively resolved, and are not 
therefore excluded in these proceedings.  In sum,  therefore, Brazil makes product-specific claims 
regarding the application of a general subs idy measure – the amended GSM 102 program.   
 
8. The United States appears to acknowledge th at the amended GSM 102 program constitutes a 
"measure taken to comply".  In these circumstances,  it does not appear to be necessary for the Panel to 
rely on a nexus-based approach to establish that the amended GSM 102 program is covered by these 
compliance proceedings.  Instead, the Panel must  decide whether the amended GSM 102 program 
applies in the same way to all eligible products, in cluding pig meat and poultry meat.  If so, the Panel 
must decide whether there is any limit on the claims  that Brazil can make regarding these products.  
 9. Despite asserting that there are separate ECG measures for pig meat and poultry meat, the 
United States has not contradicted Braz il's arguments that the amended GSM 102 program  applies in 
the same way to all eligible products.  The Un ited States has, therefore, failed to establish a 
fundamental element of its objection;  namely, that  there are separate ECG me asures applicable to pig 
meat and poultry meat.  For this reason alone, the compliance Panel must reject the United States' 
objection.   
45. Could the parties comment on the observati ons made by the Eu ropean Communities in 
paras. 15-24 of its Oral Statement on the issue of  whether the marketing loan and counter-cyclical 
payment programmes are within the scope of the Panel's proceeding?  
 
10. Brazil agrees, generally, with the EC's comment s in paragraphs 15-24 of its Oral Statement.  
However, as stated in its answer to question 78 be low (as well as in paragraph 114 of its 26 February 
answers to questions), Brazil also agrees  with the United States' observation in EC – Selected Customs 
Matters  that certain claims under the covered agreements  are "not readily classifiable in the categories 
of 'as such' and 'as applied.'"
6  An "as such" claim is typically un derstood to involve an examination of 
a general rule or norm in the abstract.  However, as the original panel found, an examination of the 
"effects " of the general statutory and regulatory provisions establishing a subsidy program " cannot be 
conducted in the abstract " because they must be considered in li ght of the market-based effects of the 
                                                      
3 U.S. 16 March Comments on Brazil's Response to Question 6, paras. 10-17. 
4 U.S. 16 March Comments on Brazil's Response to Question 6, paras. 22-26. 
5 Appellate Body Report, Canada  – Aircraft  (21.5), paras. 41 and 42. 
6 Appellate Body Report, EC – Selected  Customs  Matters , para. 165. WT/DS267/RW  
Page D-276  
 
measures.
7  Thus, Brazil considers that serious prej udice claims are among those that cannot be 
readily classifiable as "as such" and "as applied."   11. Brazil also agrees, generally, with the EC's  comments in paragraphs 16-18 of its Oral 
Statement.  As explained in other submissions, Brazil's present serious prejudice claims, and the 
original panel's rulings, covered both the Step 2,  marketing loan and counter cyclical subsidy 
programs  and subsidy payments  mandated by those programs.
8  The original panel's approach was, 
therefore, appropriately based on the design, stru cture and operation of the programs, as well as the 
general magnitude of the payments made under the programs during a reference period adopted by the 
panel as a tool to examine the evidence.  
 
12. In its 16 March comments, the United States suggests that the original panel's findings of 
present serious prejudice pertained solely to subs idy payments made in MY 1999-2002 – although the 
United States' table in paragraph 60 of its 16 Marc h comments actually states that the findings related 
to "programs ".  The United States' arguments mischaracterize the original panel's findings from 
beginning to end.   
 13. First , in describing the measures at issue in para graph 8.1 of the original panel report, the 
United States, in the table at paragraph 60 of its 16 March comments, wrongly assumes that "U.S. subsidies" does not include the legislative a nd regulatory provisions – the subsidy programs – 
mandating the subsidy payments.  In fact, the origin al panel said expressly that the measures at issue 
included the " legislative and regulatory provisions currently  providing " for the subsidy payments.
9  
The United States suggestion that this reference merely included the " application " of these provisions 
makes no sense.10  The "application" of these "provisions" is the payments, which were already 
separately listed as measures.  Thus, there was no n eed to refer again to the "application" of the 
"provisions".  Moreover,  the "legislative and regulatory  provisions" were separately identified 
without any limiting reference to their "application".  
 14. Second , the United States' arguments also mischaract erize the original panel's examination of 
the measures at issue.  According to the United States, the "subsidies" are the payments, not the 
programs.  Moreover, it contends that the operati on of the programs was examined merely to assess 
the effects of the payments.  However, the original pa nel stated that it would "undertake an analysis of 
the existence and nature of the subsidies in question  by examining their structure, design and 
operation  with a view to discerning their effects."
11  However, it is programs, not individual 
payments, that have "design, structure and operation" .  Thus, the original panel's use of the word 
"their" indicates that the "subsidies in question" includ ed the programs.  Consistent with this view, the 
original panel found that "the structure, design and operation  of the marketing loan  programme  has 
enhanced production and trade-distorting effects".12  
 15. With respect to both the marketing loan and Step 2 programs, the original panel found that "the structure of the measure , directly linked to A-index, affects the world market generally."
13  The 
only " measure " that includes a direct link to the A-Index is the Farm Security and Rural Investment 
Act ("FSRI Act") of 2002.  Individual payments themselves do not have "structure", and do not 
include references to the A-Index.  Thus, the original panel again refers to the subsidy programs  as 
among the "measures" at issue.   
                                                     
 
7 Panel Report, U.S. – Upland  Cotton , para. 7.1198. 
8 See, in particular , Brazil's 26 February response to question 11. 
9 Panel Report, U.S. – Upland  Cotton , para. 7.1107. 
10 U.S. 16 March comments on Brazil's response to question 11, para. 68. 
11 Panel Report, U.S. – Upland  Cotton , para. 7.1194. 
12 Panel Report, U.S. – Upland  Cotton , para. 7.1295. 
13 Panel Report, U.S. – Upland  Cotton , paras. 7.1296 and 7.1300.  WT/DS267/RW 
 Page D-277 
 
 
16. In examining causation, the original panel al so refers to the "design, structure and operation 
of these three measures ".14  The "three measures" must be the three (marketing loan, Step 2 and 
counter-cyclical) subsidy programs  because there are precisely three of  these.  In contrast, if the 
individual payments alone were the measures, there would obviously be many more than "three measures".  
 
17. Third , if there were any doubt that the subsid y measures includes the three programs, these 
are removed by the original panel's statements in de clining to examine a threat of serious prejudice.  
The original panel found that Brazil's claims of  present serious prejudice findings "pertain to 
measures in force  and
 subsidies granted from MY1999 – MY 2002";  it added, "our finding of 
'present' serious prejudice thus pertain[s] also to measures in force  and subsidies paid in MY 2002".  
Individual instances of payment are not "measures in force ";  only statutory and regulatory provisions 
have the normative qualities of "measures in force ".  This statement, therefore, distinguishes between:  
(1) the subsidy programs ("measures in force") " and" (2) the subsidy payments ("subsidies granted" 
and "subsidies paid").  Significantly, the original pa nel stated unambiguously that Brazil's claims, and 
its findings, "pertain[ed] to" both categories of measures .  
 18. Almost immediately afterwards, the original panel declared that its present serious prejudice 
findings " include findings of inconsistency that deal with the  FSRI Act of 2002  and
 subsidies granted 
thereunder in MY 2002".  Again, therefore, the pa nel stated that its findings pertained to two 
categories of measures:  (1) the FSRI Act ( i.e. the "measures in force") " and" (2) payments.  
 
19. Because the original panel's findings "pertain ed to", and "deal with", the three programs set 
forth in the FSRI Act of 2002, it found that the United States "was obliged  to take action concerning 
its present statutory and regulatory framework  as a result of our 'present' serious prejudice finding."15  
This is not idle speculation as to how the United States could implement, as the United States might 
wish.16  It is a statement of the United States " oblig[ations] " flowing from the panel's present serious 
prejudice findings that "pertain[ed] to the measures in  force" – that is, the "statutory and regulatory 
framework" – as well as to payments in MY 1999-2002.   20. Also, the original panel's decision not to exam ine the "as such" claims, which pertained to the 
"measures in force" alone, can only be explained on the ground that the present serious prejudice 
findings already dealt with those measures.  If th e present serious prejudice findings had dealt with 
payments alone, the dispute concerning the measures in  force would not have been resolved.  In those 
circumstances, it would have been necessary for th e panel to address the "as such" claims.  Yet, 
because of the present serious prejudice findings – whic h pertained also to the measures in force – the 
panel found that it was not necessary to examine the "as such" claims.
17  
 
21. The United States is, therefore, attempting to  rewrite the panel's findings to eliminate the 
obligation to reform the "statutory and regulatory framework".   22. With respect to the EC's comments in pa ragraph 19, Brazil agrees that, where a program 
mandates that payments be made when the recipien t fulfils certain conditions which are within the 
control of the recipient, there is a stronger nexus between the program and the payments than where a 
program authorizes payments to be made at the disc retion of the granting authority.  In the former 
case, Brazil also agrees that panels may treat the program and payments as, essentially, indivisible in 
examining the effects of the subsidies.  In this di spute, the marketing loan and the counter cyclical 
programs mandate payments when the recipient fulfills  certain factual conditions.  In this situation, 
                                                     
 
14 Panel Report, U.S. – Upland  Cotton , para. 7.1349. 
15 Panel Report, U.S. – Upland  Cotton , para. 7.1501.   
16 U.S. 16 March Comments on Brazil's Answer to question 11, para. 73.   
17 Panel Report, U.S. – Upland  Cotton , para. 7.1511. WT/DS267/RW  
Page D-278  
 
the original panel's reasoning and findings correctly  analyzed the programs and mandatory payments 
together.   23. As regards the EC's comments in paragraphs  20 and 21, Brazil agrees that the original panel 
found that a bundle  of subsidies cause adverse effects.  As  the EC observes, the United States' action 
in withdrawing the Step 2 program confirms that the bundle of subsidies found to be WTO-
inconsistent included the contested subsidy progra ms.  That bundle also included the marketing loan 
and the counter-cyclical subsidy programs.  Because  the United States was obliged to take action to 
withdraw the subsidy programs or remove their adverse effects, those two programs are properly 
within the compliance Panel's terms of reference.  
 
24. In the alternative, Brazil has argued that, if  the compliance Panel rules that the programs are 
not within its terms of reference, there is a suffici ent nexus between the payments found to be causing 
adverse effects in the original proceedings, and the payments subject to Brazil's adverse effects claims 
in these proceedings, for the new payments  to be subject to these proceedings.
18  In that regard, Brazil 
also agrees with the EC that, where payments are mandated by a program, there is a sufficient nexus 
between the payments and the programs for bot h to be part of compliance proceedings.  
 25. Generally, Brazil agrees with the EC's comme nts in paragraphs 22 and 23.  However, in 
Brazil's view, the scope of compliance proceedings is decided by the compliance Panel and is not, as the EC may be suggesting, determined by "what the Parties agree is w ithin the scope of the 
compliance panel".
19  
 
46. In its Oral Statement, the European Communities characterizes Brazil's and the 
United States' respective approaches as the "measure m odel" and the "element of the measure model" 
(Oral Statement of the European Communities, para.  7).  Please discuss whether you agree with this 
characterization and whether, in your view, the applic ation of a measure alleged to be a subsidy to 
different agricultural products relates to a "measure" (or elements thereof) or if, rather it relates to a 
"claim".  Would it be permissible for a complia nce panel to examine a "claim" that relates to 
subsidies (granted as part of measures taken to comply) provided to agricultural products to which 
the "initial measure" did not apply?   
 26. In its 26 February reply to question 6, Brazil set forth its understanding on the scope of 
Article 21.5 proceedings.  In Brazil's view, the compliance Panel must determine, first, whether the 
measures  challenged by Brazil fall within the scope of these proceedings.  In Brazil's view, the 
marketing loan and the counter cyclical programs, and payments made under them, are part of these 
proceedings because they are subject to the DSB's recommendations in the original proceedings and 
are identified in Brazil's panel request in these pro ceedings.  This compliance Panel may, therefore, 
examine whether these unchanged programs, and the mandatory payments made under them, continue 
to cause adverse effects.  Brazil does not consider that it would be appropriate to parse the programs 
into different "elements", because Brazil's claim re lates to the effects of these programs in their 
totality.   
27. Brazil also considers that the amended GSM 102  program, as a whole, is within the scope of 
these proceedings.  The United States has revised the original program, and maintains a new GSM 102 program.  Brazil sees no need for the complia nce Panel to parse the amended program into 
sub-elements, and to rule that the measure at issue c onsists solely of certain elements of the program.  
Brazil's approach is consistent w ith the Appellate Body's finding in Canada – Aircraft (21.5)  that the 
                                                     
 
18 See Brazil's 26 February answers, paras. 145-150. 
19 EC's Opening Statement, para. 22.  WT/DS267/RW 
 Page D-279 
 
 
measure at issue was the revised TPC program, even though not all elements of the program had been 
changed.20 
28. Second , having identified the compliance measures at issue, a panel must consider the claims 
made with respect to these measur es.  Brazil recognized in its 26 February reply to question 6 that 
certain panels have ruled that no new claims  can be made with respect to unchanged elements  of the 
original measure;  equally, the same claim  cannot be made with respect to unchanged elements  of the 
measure if that claim was rejected  in the original proceedings.    
 29. These limitations do not apply in these proceedi ngs.  With respect to the marketing loan and 
the counter cyclical programs, which are unchanged,  Brazil makes the same cl aim of adverse effects 
that was upheld in the original proceedings pr ecisely because the WTO-inconsistent programs have 
not been "withdrawn".  As regards ECGs, Brazil clai ms that the revised guarantee fee schedule of the 
amended GSM 102 program involves prohibited export s ubsidies.  This claim can be made because it 
relates to a new element of the amended measure.   
30. The compliance Panel asks whether the app lication of a subsidy program to "different 
agricultural products" relates to the measure or the clai ms at issue.  The questio n of the application of 
a subsidy program to specific products relates to the scope of the measure at issue:  does the measure 
apply to a given product as a matter of munici pal law?  As the Appellate Body noted in EC – Chicken 
Cuts, "it is the measure at issue that gene rally will define the product at issue".
21  In this dispute, the 
amended GSM 102 program applies to a wide range of products, including pig meat and poultry meat.  
 
31. Although a measure may apply to a wide range of products, a complainant may limit the 
claims made regarding that measure to specified produc ts.  For example, in this dispute, Brazil's panel 
request limits the claims made regarding the amended GSM 102 program  relate to specified scheduled 
agricultural products – pig meat, poultry meat a nd rice – and to all unscheduled agricultural 
products.22  
 32. The compliance Panel also asks whether it w ould be "permissible for a compliance panel to 
examine a 'claim' that relates to s ubsidies (granted as part of a measure taken to comply) provided to 
agricultural products to which the 'initial measure' did not apply".  Brazil is not certain which products 
the compliance Panel has in mind that were not elig ible to receive ECGs under the original GSM 102 
program, but that are now eligible under the amended program.  
 33. Brazil has made claims regarding three speci fied scheduled agricultural products, pig meat, 
poultry meat and rice.
23  These three products were all eligib le to receive ECGs under the original 
GSM 102 program, and all remain eligible under the new program.  
 
34. Assuming that a subsidy "measure taken to comply" applies to products that were not eligible 
to receive subsidies under the original measure, a compliance panel is permitted to examine a claim 
relating to the newly eligible products.  In that ev ent, the new product scope of the "measure taken to 
comply" is a changed element  of the original measure.  In Article 21.5 proceedings, there are no limits 
on the claims that a Member can bring regarding changed elements of the compliance measure.  In EC 
– Bed Linen (21.5) , the Appellate Body recognized that "a 'measure taken to comply' may be 
inconsistent with WTO obligations in ways different  from the original measure."24  Accordingly, the 
claims and arguments made in the original proceed ings do not limits the claims and arguments that 
                                                      
20 Appellate Body Report, Canada  – Aircraft  (21.5), paras. 41-42.  
21 Appellate Body Report, EC – Chicken  Cuts, para. 165. 
22 See also Brazil's response to question 50, below. 
23 Brazil's claims also concern GSM 102 ECGs for unscheduled products. 
24 Appellate Body Report, EC – Bed Linen  (21.5), para. 79 (original emphasis). WT/DS267/RW  
Page D-280  
 
can be made regarding the revised measure.
25  This ensures that the compliance measure complies 
with all of a Member's WTO obligations.   
Questions to the United States    
 
47. The United States has raised a preliminary objection regarding Brazil's claims of (threat of) serious prejudice in respect of the marketing loan and counter-cyclical payment programmes.  Is the 
Panel's understanding correct that, apart from this preliminary objection regarding programmes, the 
United States also considers that the issue of whether payments made under the marketing loan and counter-cyclical payment programme after 21 Septem ber 2005 cause serious prejudice to the interests 
of Brazil is not properly within the scope of this proceeding?  
 48. How does the United States address the argument of Brazil that "[i]f the United States were 
to prevail on its view that subsequent mandat ory and price-contingent marketing loan and CCP 
payments are not properly before this Panel, the grant of annual recurring subsidies becomes 
'a moving target that escape from [the WTO subsid y] disciplines'"?  (Closing Statement of Brazil, 
para. 4)   49. Could the United States comment on the argument of the European Communities that the text of Article 21.5 of the DSU does not limit the temporal  scope of that provision in the manner suggested 
by the United States?  (para. 29 of the Oral Statement of the European Communities)   
 
Question to Brazil  
 
50. Does Brazil maintain its claims with respect  to the three unscheduled products (lyocell, 
lysine, wood products) identified  by the United Stat es as falling outside the scope of the Agreement 
on Agriculture? (see paragraph 83 of the United States' Rebuttal)   
35. Brazil maintains its claims unde r Articles 3.1(a) and 3.2 of the SCM Agreement with respect 
to GSM 102 ECGs for lyocell, lysine and wood pr oducts.  To the extent that these products fall 
outside the scope of the Agreement on Agriculture , the compliance Panel need not, before addressing 
Brazil's prohibited subsidy claims under the SCM Agreement , address whether the provision of 
GSM 102 ECGs for these products circumvents U.S.  agricultural export subsidy commitments.  
 B. C
LAIMS OF BRAZIL REGARDING PRESENT SERIOUS PREJUDICE   
 
1. Significant price suppression - Article 6.3(c) of the SCM Agreement    
 
Questions to both parties    
 
51. The parties disagree on whether or not th e marketing loan and counter-cyclical payments 
have more than minimal effects on production of upland cotton.  Could each party explain how its approach to the analysis of the impact of these pay ments on production of upl and cotton is supported 
by the provisions of Articles 5 and 6 of the SCM Agreement and by any other relevant WTO 
provisions?   
 
36. Articles 5-7 of the SCM Agreement , and Article XVI of GATT 1994 are the only legal bases 
governing actionable subsidy claims.  Article 5 of the SCM Agreement states that the focus of the 
analysis is on "any subsidy referre d to in paragraphs 1 and 2 of Article 1."  Articles 6.3(a)-(d) speak to 
the "effect of the subsidy."  Similarly, Article 7.1 provides that consultations with a subsidizing 
                                                     
 
25 Appellate Body Report, EC – Bed Linen  (21.5), para. 79;  Appellate Body Report, Canada  – Aircraft  
(21.5), paras. 40–42.  WT/DS267/RW 
 Page D-281 
 
 
Member can be requested regarding "any subsidy referred to in Article  1, granted or maintained by 
another Member."  Finally, Article XVI :1 also refers to "any subsidy."    
37. The only exception to bringing any actiona ble subsidy challenges under Part III of the 
SCM Agreement  was Article 13 of the Agreement on Agriculture .  Yet, the exceptions in Part III of 
the SCM Agreement referring to Article 13 of the Agreement on Agriculture (i.e., Article 5, 
Article 6.9, and Article 7.1 of the SCM Agreement ) lapsed following the expiration of that provision 
in 2003.  Consequently, any domestic support or export subsi dy supporting or benefiting the 
production of an agricultural good covered by Annex 1 of the Agreement  on Agriculture is properly 
the subject of a claim under Articles 5 and 6 of the SCM Agreement .  In sum, the right to challenge the 
effects of any subsidy, no matter how great or small its effect on production, is now unlimited.   
 
38. The marketing loan and counter-cyclical subsid ies fall within the category of "any subsidies," 
within the meaning of Articles 5 and 7 of the SCM Agreement .  They are also both "the subsidy" 
referred to in Articles 6.3(c) and (d) and Articles 7.8 and 7.9 of the SCM Agreement .  As such, each of 
these subsidies are properly measures which Br azil claims collectively cause significant price 
suppression and an increase in the U.S. world market share of upland cotton.    
 
39. There is no provision in the SCM Agreement or any other WTO Agreement that precludes 
WTO panels from examining the effects of subsidies with no more than minimal effects on production.  The United States has referred in va rious of its arguments to Annex 2 of the Agreement 
on Agriculture .  The chapeau of that Annex states that "[d]omestic support measures for which the 
exemption from reduction commitments is claimed sha ll meet the fundamental requirement that they 
have no, or at most minimal, tr ade distorting effects, or effects on production."  The text of the 
chapeau to Annex 2 sets out a "fundamental requirement" to determine whether particular types of 
domestic support should – or shoul d not – be tabulated as part of measures exempted from domestic 
support reduction commitments set out in Articles 6 and 7 of the Agreement on Agriculture .  This is 
an entirely separate question of whether actionabl e subsidy claims can be asserted against such 
subsidies.  Indeed, the drafters contemplated that  actionable subsidy claims could be asserted against 
subsidies properly covered by Annex 2 since they  found themselves compelled to include a specific 
provision into the "due restraint" peace clause – Article 13(a) of the Agreement on Agriculture .        
 
40. Whether "domestic support" subsidies are – or are not – exempt from the separate reduction commitments relating to the Aggregate Measureme nt of Support ("AMS") for domestic support under 
the Agreement on Agriculture has no bearing on either (i) the type of measure that can be challenged 
or (ii) the claims that can be brought against such measures under the SCM Agreement .  The text of 
Articles 5 and 6 of the SCM Agreement is unrestricted – all measures meeting the definition of a 
subsidy are subject to challenge.  Thus, there is no basis to for a subsidizing Member to claim that a 
subsidy is exempt from an actionable subsidy cha llenge because the challenged subsidies are exempt 
from reduction commitments under the Agreement on Agriculture .    
 
41. From an evidentiary point of view, it is also  irrelevant that domestic support subsidies might 
be exempt from total AMS reduction commitments under Annex 2 of the Agreement on Agriculture .  
Articles 5 and 6 of the SCM Agreement require a panel examining the effects of different forms of 
domestic support subsidies to be color-blind.  It is irrelevant whether the subsidies examined are 
amber, blue, or green.  All subsidies are actionable.  All subsidies have at least the potential to cause 
adverse effects.  Whether any subsidy causes adverse effects or not involves a detailed factual examination of its nature, magnit ude and prevailing conditions of co mpetition – not whether it is the 
type of subsidy that is or is not ex empt from total AMS reduction commitments.  
 
42. To the extent that the compliance Panel' s question also addresses Brazil's approach of 
establishing that the effect of the challenged U.S.  subsidies is "significant price suppression," Brazil 
refers the Compliance Panel to its responses to qu estions 62-74, below.  In response to these 
questions, Brazil explains its count erfactual approach and the evidence supporting the existence of a WT/DS267/RW  
Page D-282  
 
"genuine and substantial relationship of cause and e ffect" between the subsidies and significant price 
suppression.  Brazil establishes that but for these s ubsidies, U.S. acreage would be lower.  Lower 
acreage results in lower U.S. production and supply into the world market – either in the form of 
exports or in the form of increased temporary st ocks of upland cotton building up before they will 
eventually exported.  Basic rules of supply and de mand indicate that supply that is higher than it 
would be but for the subsidies results in lower pri ces.  The assessment of the "effect of the subsidy" 
that is required by Article 6.3 is necessarily a fact -specific, effects-based assessment that must be 
tailored to the product and markets at issue and th at involves assessing the economic impact of these 
subsidies.   52. In its Third Party Submission New Zealand observes:   
 
"Marketing loan payments are amber box measures, the category in which are included the non-prohibited measures with the most trade distorting effect on production and trade."  (para. 5.19)  
 Do the parties consider that the fact that under the Agreement on Agriculture a subsidy is 
included in the "amber box" is relevant to the anal ysis of the subsidy's consistency with Articles 5 
and 6 of the SCM Agreement?   
43. For the reasons set forth in Brazil's response to question 51, Brazil considers that the "amber 
box" nature of a subsidy has no significant relevance to the analysis of its consistency with Articles 5 
and 6 of the SCM Agreement .  Brazil, therefore, agrees with the original panel's assessment that "the 
fact that the United States notifies the marketi ng loan programme as 'amber box' support under the 
Agreement on Agriculture may not necessarily be determinativ e for the purpose of our 'adverse 
effects' analysis under Part III of the SCM Agreement. "
26  Finally, Brazil notes that counter-cyclical 
subsidies, like marketing loan subsidies, are "amber box."    
 
Questions to the United States 
 53. The United States argues that Brazil has not provided evidence of "actual production 
inducing" effects of marketing loan and counter- cyclical payments and that  Brazil "purports to 
demonstrate indirect production effects through its claim that the US planting, production, and 
exports are not responsive to prices" .  (Opening Statement of the United States at the meeting of the 
Panel with the parties, paras. 62 and 69, emphasis in original)  
 
a) Could the United States explain further the distinction between what it terms "actual 
production inducing effects "and "indirect production effects"?  Could the 
United States also elaborate on how this distin ction is legally relevant in the context 
of Articles 5 and 6 of the SCM Agreement?  
 
b)  What is the response of the United States to the argument that the fact that "U .S. 
upland cotton producers know that their overa ll revenue will always be protected by 
marketing loans and counter-cyclical payments ... plays a major role in their planting 
decisions"?  (Rebuttal of Brazil , para . 185;  see also Third Party Submission of 
New Zealand , paras 5 .20-5.21)    
 
 c) In its Opening Statement at the meeting of the Panel with the Parties , Brazil 
observed:   
 
"...we have demonstrated that these subsidies stabilized cotton 
producers' revenue despite wildly fl uctuating market prices, thereby 
                                                     
 
26 Panel Report, U.S. – Upland  Cotton , footnote 1401.    WT/DS267/RW 
 Page D-283 
 
 
insulating and numbing acreage response to market price signals.  These subsidies also cover the huge long-term gaps between market returns and total costs of production.  Both effects are closely interrelated."  (para.55)  
Is the United States only arguing that Braz il has not empirically substantiated that 
these two "effects" have actually occurred or  is it also the position of the United 
States that these effects are in any event le gally irrelevant to an analysis of whether a 
subsidy causes significant price suppre ssion within the meaning of Article 6 .3 (c) of 
the SCM Agreement?   
 
54. Could the United States explain whether, and, if so, why, it is of the view that this Panel 
should not rely on the findings and analysis by the original Panel regarding the effects of marketing loan and counter-cyclical payments on production a nd exports?  Please comment in particular on 
paras. 7.1291, 7.1295, 7.1302, 7.1349, 7.1353 of the Panel Report.   
55. Can the United States confirm that the fi gures "$868 million" and "$838 million" Brazil cited 
in para. 40 of its Opening Statement are correct  figures if one uses the "Brazil's methodology" and the 
"Cotton-to-Cotton methodology"?  (Please note that the Panel is not
 asking whether the US agrees 
with these methodologies.)    56. The United States has cited new empirical research on the production effects of counter-
cyclical payments.  How does the United States ad dress Brazil's criticism that none of this research 
has dealt specifically with the effects of c ountercyclical payments under the FSRI Act of 2002 on 
upland cotton?  (Rebuttal Submission of Brazil, para. 120)     57. The United States has offered the Lin and Dismukes (Exhibit US-34) and Westcott (US-35) 
studies as examples of new empirical research on the production effects of countercyclical payments.    
 
a) Is it not more accurate to characterize th e Lin and Dismukes study as a simulation of 
the possible effect of countercyclical pay ments on production rather than a study on 
the actual impact of the payments since it do es not statistically estimate the effect of 
the actual payments (which began only in 2002) on crop production?  (Please refer to 
pages 9-12 of the paper which describe the data , covering the period 1991-2001 , 
used for the study) .    
 
b) How does the United States deal with Brazil's characterization of the Westcott study 
as offering no new empirical evidence , and instead , being a qualitative discussion , 
much like that presented to the original pane l (see para 128 of Brazil's rebuttal)?    
 58. The Unites States stated that the key consid eration in assessing a farmer's decision to grow 
upland cotton is whether the farmer has been coveri ng his variable costs of production. In this 
connection, it presented upland cotton costs and returns estimates for marketing years 1999-2005 
(Exhibit US-47).  Brazil has disputed the absence of  certain items – land, labour and capital recovery 
costs - in the US calculations of variable costs.   In response, the United States has referred to the 
Commodity Costs and Returns Estimation Handbook (Exh ibit US-88) prepared by a Task Force of the 
American Agricultural Economics Association as the basis for leaving out these items in its 
calculations.  However, the Task Force which authored the Hand book does not use the categories 
"fixed" or "variable" costs and in fact recommends  that the microeconomic concepts of fixed and 
variable costs not be used in preparing and reporting cost and return estimates.  Page 2-67 of the 
Handbook states:   
 
The Task Force therefore recommends that costs should be categorized only as to whether they are associated with expendable  factors or the services of capital assets.  WT/DS267/RW  
Page D-284  
 
The division of costs into categories such as fixed and variable should generally be avoided in preparing CAR estimates. For the purpose of preparing CAR estimates for specific enterprises, the Task Force recommends  that all the costs of all expendables 
be allocated to the generic group OPER ATING COSTS and that all other costs be 
allocated to the group ALLOCATED OVERHEAD.   
 Would the United States clarify whether th e categories "operating costs" and "allocated 
overhead" correspond to the economic concepts of fixed and variable costs?  In particular , are 
"operating costs" variable costs or not?  Would the United States please indicate whether , and if so , 
where , the Handbook makes these clarifications or distinctions .    
 
59. In discussing the impact of long-term costs of  production (and hence long-term profitability) 
of upland cotton production on farmers' decisions to exit cotton farming, the United States argues that 
income from other crops and off-farm income must  be into account.  Why does the United States 
consider these issues relevant given the original Panel's decision that "off farm income" is not a 
legally relevant consideration.  (Panel Report,  para. 7.1354, footnote 1470)  Please respond to 
Brazil's arguments on this matter in paragraphs  249-253 of its Rebuttal Submission.    
 60. In its Rebuttal Submission, the United States argues that Prof. Sumner's description of the 
model that appeared in a recent CATO publication is not "appropriate" for use in a WTO dispute 
involving claims of serious prejudice.  Professo r Sumner has since introduced "more empirical and 
institutional detail" to the model used in th is dispute.  These changes are described in 
paragraphs 111-117 of Br azil's Opening Statement.  Does th e United States view these changes as 
being sufficient to make the model appropriate for u se in a WTO dispute involving claims of serious 
prejudice?  If not, what modifications does the United States think should have been made to the 
model?   
61. With respect to marketing year 2006, the Unite d States has provided some data on upland 
cotton exports (Exhibit US-113), planted and harvest ed area and cotton production (Exhibit US-114), 
as well as a copy of the National Cotton Council's survey of planting intensions (Exhibit US-115).  
The data, all of which have been co llected through the first half of marketing year 2006, are variously 
qualified as "estimates" or "projections" or projected".     
a) Please clarify , as completely as possible , what these various terms mean as they 
apply to US upland cotton exports , acreage and production .    
 
b) Would the United States be able to pr ovide the Panel with some information , based 
on the average of the past six marketing years or so , of how final marketing year data 
on these variables , would differ from preliminary estimates , projections and the like , 
taken at the end of February of the relevant marketing year?    
 
c) Finally , would the United States be able to update that part of Exhibit US-83 dealing 
with futures prices so as to provide the pane l with as complete as possible average 
January to March 2007 New York futu res prices for upland cotton?    
 
Questions to Brazil   
 
62. How does Brazil rebut the argument of the United States that the fact that marketing loan and 
counter-cyclical payment programmes provide income  support when prices are low is not the key 
question before this Panel and that while, like any  other payments to producers, marketing loan and 
counter-cyclical payments could affect production, Br azil has not provided any evidence of actual 
production-inducing effects?  (Rebuttal Submission of the United States, paras. 222, 287-291;  Opening Statement of the United States at the meet ing of the Panel with the parties, paras. 62-75;   WT/DS267/RW 
 Page D-285 
 
 
Comments of the United States on Brazil's 'Oral'  Presentation in the meeting with the Panel, 
paras. 42-57). 
44. The price-contingent nature of market ing loan and counter-cyclical subsidies, i.e., the fact that 
payments are made when prices fall below set trigger prices, is one of the key aspects of the structure, 
design and operation of these subsidies.  It also is one of the fundamental facts supporting Brazil's 
adverse effects claims.  Contrary to the U.S. argu ments, whether the price-contingent marketing loan 
and counter-cyclical subsidies are labell ed as "price support" or "income support"27 is irrelevant for 
purposes of a panel's fact-specific assessment of the effects of these subsidies under Articles 5 and 6 of the SCM Agreement .
28  
 
45. The strong link between these price-con tingent subsidies and upland cotton acreage, 
production and exports as well as suppressed prices h as been recognized by the original panel29, the 
Appellate Body30, U.S. Department of Agriculture ("USDA")31, and all independent economists.32  In 
a review of studies on the world cotton market, th e UN Food and Agricultural Organization observed 
that "all  of the recent studies unambiguously  demonstrate that the removal of domestic subsidies in 
industrialized countries reduces cotton productio n in and exports from these countries."33  Even the 
National Cotton Council ("NCC") acknowledged that  many of its members would go bankrupt 
without these subsidies.34  Bankrupt farmers do not produce upland cotton.  
 46. As price-contingent subsidies, marketing loan and counte r-cyclical subsidies are mandated to 
be made to U.S. upland cotton farmers when prices  fall below levels designed with U.S. producers' 
costs of production in mind.  Every U.S. upland co tton farmer knows that marketing loan subsidies 
will be paid if the adjusted world price ("AWP") falls below 52 cents per pound and that U.S. counter-
cyclical payments will be paid if the average farm  price falls below 65.73 cents per pound.  And every 
U.S. upland cotton farmer knows that the AWP re mained consistently be low 52 cents per pound over 
the past 10 years (with only limited exceptions) and is expected to remain below 52 cents.
35  This is 
shown in Figure 1, below, which updates Figur e 7 in Brazil's First Written Submission:    
 
                                                      
27 See, e.g., Article 1.1(a)(2) of the SCM  Agreement , Article XVI of GATT 1994, Articles 6 and 7 as 
well as Annex 2 of the Agreement  on Agriculture . 
28 See Brazil's response to question 51, above. 
29 Panel Report, U.S. – Upland  Cotton , paras. 7.1291, 7.1294, 7.1295 and 7.1349.  
30 Appellate Body Report, U.S. – Upland  Cotton , paras. 445 and 450. 
31 See Brazil's Rebuttal Submission, Annex I, para. 10 citing Lin, W., P.C. Westcott, R. Skinner, 
S. Sanford and D.G. de la Torre Ugarte, "Supply Response Under the 1996 Farm Act and Implications for the U.S. Field Crops Sector,." Technical Bulletin No. 1888, Sep 2000, United States Department of Agriculture, 
Economic Research Service, available at http://www.ers.usda.gov/publications/tb1888/
 and Adams, Gary. 
"Acreage Response Under the 19 96 FAIR Act?" Speech presented at Economic Research Service, 
U.S. Department of Agriculture seminar series on Supply Response Under the 1996 Farm Act. June 24, 1996. 
32 See, e.g., Exhibit Bra-579 ("Cotton:  Impact of Support Policies on Developing Countries – Why Do 
the Numbers Vary?" FAO Trade Policy Br ief, p. 1, accessed December 2006 at 
ftp://ftp.fao.org/docrep/fao/007/y5533e/y5533e00.pdf );  Brazil's Rebuttal Submission, Annex I, para. 10 citing 
Adams, Gary "Acreage Response Unde r the 1996 FAIR Act?" Speech presen ted at Economic Research Service, 
U.S. Department of Agriculture seminar series on Supply Response Under the 1996 Farm Act. June 24, 1996, 
and Exhibit US-56 ("Documentation of the FAPRI Modelling System," FAPRI-UMC Report No. 12-04, 
December 2004). 
33 Exhibit Bra-579 ("Cotton:  Impact of Support Policies on Developing Countries – Why Do the 
Numbers Vary?" FAO Trade Policy Brie f, p. 1, accessed December 2006 at 
ftp://ftp.fao.org/docrep/fao/007/y5533e/y5533e00.pdf ). 
34 Exhibit Bra-109 (Testimony (Full) of Robert McLendon, Chairman, NCC Executive Committee, 
Before the House Agricultural Committee. National Cotton Council (NCC)). 
35 See Brazil's response to question 89, below. WT/DS267/RW  
Page D-286  
 
Figure 1 – Marketing Loan Subsidy
36 
010203040506070
Aug-99
Jan-00
Jun-00
Nov-00
Apr-01 Sep-01 Feb-02
Jul-02
Dec-02
May-03
Oct-03
Mar-04 Aug-04Jan-05
Jun-05
Nov-05
Apr-06
Sep-06
Feb-07cents per pound
Marketing Loan PaymentsLoan Rate
AWP
  
 
47. Whether futures market prices are high or low at the time of planting is relevant for U.S. 
upland cotton producers' planting intentions.  However, U.S. upland cotton producers know that 
expected prices based off the futu res market price will not necessarily constitute real prices during the 
following marketing year and they plant upland cotton in the knowledge that the support provided by marketing loan and counter-cyclical subsidies will guarantee profitable levels of revenue – regardless 
of the actual farm price.  The Appellate Body full y recognized this in finding that "U.S. farmers were 
aware that if actual prices were ultimately lower, they would be 'insulated' by government support, 
including not only marketing loan program payments  but also counter-cyclical payments, which were 
based on a target upland cotton price of 72.4 cents per pound."
37  Thus, the revenue- and income- 
stabilizing role played by marketing loan and co unter-cyclical payments insulates producers from low 
prices.  This is key evidence fo r the compliance Panel to find acrea ge, production, exports and world 
market price-suppressing effects from the U.S. marketing loan and counter-cyclical subsidies.    
 
48. A fundamental question in this dispute, as be fore the original panel, is what would U.S. 
planted acreage, production, and exports be if there were no marketing loan subsidies and no counter-
cyclical subsidies?  (Brazil notes that in response to question 63, below, it explains that it is irrelevant 
to this counterfactual assessment whether these subsidies " induce " additional  production.)  In 
assessing the significant level of the effects of the s ubsidies, the views of their recipients constitute 
particularly relevant evidence.  In fact, the N CC representing U.S. upland cotton producers repeatedly 
stated that these subsidies are crucial to avoid th e financial failure of many upland cotton farmers.38  
Bankrupt farmers could not produce upland cotton. 
                                                      
36 Exhibit Bra-673 (Upland Cotton Prices, March 2007). 
37 Appellate Body Report, U.S. – Upland  Cotton , para. 445.   
38 Panel Report, U.S. – Upland  Cotton , footnote 1471 referring to Exhibit Bra-109 (Testimony (Full) of 
Robert McLendon, Chairman, NCC Exec utive Committee, Before the Hous e Agricultural Committee. National 
Cotton Council (NCC)).  See also Exhibit Bra-324 (NCC Chairman's Report by Kenneth Hood, 24 July 2002, 
p. 2).  WT/DS267/RW 
 Page D-287 
 
 
49. These admissions by the recipients of upl and cotton marketing loan and counter-cyclical 
subsidies are supported by Figure 8 of Brazil's First Written Submission (reproduced also as Figure 6 in Brazil's Rebuttal Submission).  Based exclusivel y on USDA data, this figure show that marketing 
loan and counter-cyclical subsidies protect upland cotton producers from low market prices, ensuring 
them a high level of revenue per pound of upland cotton produced.  Wh ether this is termed "income 
support,"
39 "price support," or "insulation from low prices," the effects are the same.    
 50. Figures 1-6 in Brazil's Opening Statement and Figures 7 to 12 in Brazil's Comments on the U.S. Oral Statements, based largely on USDA a nd Food and Agricultural Policy Research Institute 
("FAPRI") data, also constitute proof of the crucia l role played by these two subsidies in allowing 
farmers to continue to plant upland cotton.  These figures show the role played by the subsidies in 
covering huge and sustained losses based solely on market revenue.  They also show how upland 
cotton marketing loan and counter-cyclical subsidies keep farmers in the production of upland cotton 
when, absent the subsidies, it would be much mo re profitable to grow soybeans or corn.    
 
51. In assessing the supply effects of U.S. subsidies on world market prices, the compliance 
Panel, like the original panel, must take account  of basic principles of supply and demand.  The 
impact of subsidy-fuelled U.S. upland cotton supply in suppressing U.S. and world market prices of upland cotton is reflected day-in and day-out in upland cotton markets.  Consider the following 
statement from market expert A.O. Cleveland, dated 23 March 2007:    
For now, the sheer volume of U. S. cotton stocks held in the CCC loan program, and 
the 600,000 plus bales of certificated stocks will keep a heavy lid on the market.  …   
USDA will release it March planting intentions report on Friday of next week.  U.S. 
upland acreage could have an 11 in front of it, but will likely be a very low 12 
something.  Look for about 12.2 million acres of upland cotton to be planted.  
Certainly any total acreage number belo w 12.5 million acres will be bullish.  The 
lower the intended plantings  the higher the price rally .
40    
52. Thus, marketing loan and counter-cyclical s ubsidies "insulate" U.S. upland cotton producers 
from market price signals, thereby "numbing" their reac tion to market prices signals.  They results in 
higher U.S. acreage, production, exports or stocks , and lower world market prices than would exist 
otherwise.  As O.A. Cleveland states in the mo st basic supply and demand terms, "the lower the 
intended [U.S.] plantings, the higher the price rally ."  Brazil refers the compliance Panel to its 
response to question 69, below, where Brazil ou tlines the extensive evidence it has submitted to 
demonstrate this point in its written s ubmissions and its oral statements.   
 53. In addition, the original panel made num erous findings with respect to the production-
enhancing effects of unchanged marketing loan and counter-cyclical subsidies.  The original panel 
found that   
[S]everal of the United States subsidies – marketing loan programme payments, the 
user marketing (Step 2) payments … [and] CCP payments – are directly linked to world prices for upland cotton, thereby in sulating United States producers from low 
prices.  We believe the structure, design and operation of these three measures 
constitutes evidence supporting a causal link with the significant price suppression we 
have found to exist.
41 
                                                      
39 Brazil notes that Article 1.1(a)(2) of the SCM  Agreement  specifically identifies "any form of income 
or price support" as a form of financial contribution. 
40 Exhibit Bra-674 (Cotton Marketing Weekly, A.O. Cleveland, 23 March 2007) (emphasis added). 
41 Panel Report, U.S. – Upland  Cotton , para. 7.1349.  WT/DS267/RW  
Page D-288  
 
The further the adjusted world price dr ops, the greater the extent to which 
United States upland cotton producers' re venue is insulated from the decline, 
numbing United States production decisions from world market signals.
42  
We have no doubt that [marketing loan] pa yments stimulate production and exports 
and result in lower world market prices.43    
[T]he structure, design and operation of the marketing loan programme has enhanced 
production and trade-distorting effects.44   
[Marketing Loan payments] accounted for more  than half of the difference between 
the adjusted world price and the marketing lo an rate (and thus of United States upland 
cotton producer revenue).45 
54. On appeal, the United States challenged all of these findings.  The Appellate Body rejected all 
the U.S. appeals in making the following findings:    
We note, based on the evidence provided by the United States, that for four of the 
five upland cotton crops between 1999 and 2003,  the expected harvest price at the 
time of making planting decisions was alwa ys substantially higher than the actual 
price realized at the time of harvest of the crop.  This suggests that although farmers 
had expected higher prices in making their planting decisions, they were also aware 
that if actual prices were ultimately lower, they would be "insul ated" by government 
support, not only marketing loan program  payments, but also counter-cyclical 
payments, which were based on a target upland cotton price of 72.4 cents per 
pound.
46  
With respect to the marketing loan program payments, the Panel found that "[t]he 
further the adjusted world price drops, the greater the extent to which United States 
upland cotton producers' revenue is insulated from the decline."  As a result, during the 1999-2002 marketing years, United States production and exports remained stable 
or increased, even though prices of United States upland cotton decreased.  …  The 
United States contends that the Panel's anal ysis of the price-contingent subsidies was 
"deficient."  However, the Panel found that the price-contingent subsidies stimulated 
United States production and exports of upland cotton and thereby lowered United 
States upland cotton prices.  This seems to us  to support the Panel's conclusion that 
the effect of the price-contingent subsidies is significant price suppression.
47  
55. As the Appellate Body found, U.S. upland cotton producers know that their overall revenue 
will always be protected by marketing loans and counte r-cyclical subsidies.  This plays a major role in 
their planting decisions, which result in continue d and sustained higher levels of production and 
exports than would exist but for these two subsidies.   Indeed, these two subsidies were found to be an 
important factor in "insulating" and "numbing" U.S. cotton producers from low prices.    
 
56. Finally, the U.S. argument that direct payments under the FSRI Act of 2002 also provide 
support to upland cotton producers48 does not support a conclusion that marketing loans and 
                                                      
42 Panel Report, U.S. – Upland  Cotton , para. 7.1294. 
43 Panel Report, U.S. – Upland  Cotton , para. 7.1291. 
44 Panel Report, U.S. – Upland  Cotton , para. 7.1295. 
45 Panel Report, U.S. – Upland  Cotton , para. 7.1294. 
46 Appellate Body Report, U.S. – Upland  Cotton , para. 445 (footnote omitted).   
47 Appellate Body Report, U.S. – Upland  Cotton , para. 450 (footnote omitted).  
48 U.S. Comments on Brazil's Oral Statement, paras. 42 and 49.  WT/DS267/RW 
 Page D-289 
 
 
counter-cyclical payments are not production distor ting.  Under Article 21.5 of the DSU, Brazil is 
precluded from challenging, in these proceedings, the production effects of direct payments.  However, this does not mean that direct payments  do not have any production – or price-suppressing 
– effects.  The Appellate Body recognized that non-price contingent subsidies, such as direct 
payments, can have production effects a nd contribute to significant price suppression.
49  Indeed, 
Figures 1-6 in Brazil's Opening Statement show the key role played by, in particular, direct payments 
in allowing many upland cotton farmers to achieve a healthy "profit" from growing upland cotton.  
Such profits play an important role in maintain ing upland cotton production over the longer term by 
increasing the "wealth" of the producers.50  
 
57. Indeed, USDA recently proposed to increase dire ct payments to beginning farmers "to better 
prepare beginning farmers to face the initial fina ncial burdens associated with entering production 
agriculture."51  Further, a survey of U.S. farmers by Goodw in and Mishra revealed that 68 percent of 
farmers would use direct payments on the farm, 34 percent would use direct payments for farm 
operating costs, 16 percent for farm capital expendi tures, 9 percent to pay down farm debt and 9 
percent to buy farmland.52  This evidence confirms that direct payments play an important role in 
agricultural production.     
63. Could Brazil explain whether or not it considers that whether marketing loan and counter-
cyclical payments increase acreage is not relevant to the inquiry of whet her these payments cause 
significant price suppression within the meaning of Ar ticle 6.3 (c) of the SCM Agreement?  (para. 56 
of the Opening Statement of Brazil)  Could Brazil comment on the points made by the United States in 
footnote 72 of the Comments of the United States on  Brazil's 'Oral' Presentation in the meeting with 
the Panel?   
 
58. Brazil considers that the question whether marketing loan or counter-cyclical payments 
increase  acreage is not the relevant inquiry that the compliance Panel is tasked to undertake.    
 59. Article 6.3 of the SCM Agreement does not compel a complaining Member to produce 
evidence that the challenged subsidies result in a steady increase in production or acreage.  This is 
particularly true where a subsidizing Member ha s supported such production or  acreage with massive 
subsidies for many decades.  Where acreage, pr oduction and conditions of competition within a 
subsidizing Member are distorted – but have  achieved a relatively stable subsidized status quo  – a 
complaining Member does not have the burden to establish yet additional distortions in order to 
succeed in demonstrating that the subsidies cause adve rse effects to the inter ests of the complaining 
Member.     
60. The nature of the enquiry in an Article 6.3( c) claim is necessarily counterfactual, as more 
fully explained in response to question 74, below.  This requires an assessment of the extent to which 
U.S. upland cotton acreage – and the resulting U.S.  upland cotton supply in terms of production, 
exports and stocks – would be lower
 but for  the U.S. marketing loan and counter-cyclical subsidies, 
and whether world market prices for upland cotton would be significantly higher .  
 
61. The counterfactual proposed by Brazil i nvolves examining the acreage and resulting 
production that would have occurred if the United St ates had eliminated marketing loan and counter-
cyclical subsidies for MY 2005.  In such a counterfa ctual, the typical U.S. upland cotton farmer would 
                                                      
49 Appellate Body Report, U.S. – Upland  Cotton , footnote 589. 
50 See Brazil's 16 March Comments on the U.S. Answers to question 32, paras. 64-67. 
51 Exhibit Bra-671 (U.S. Departme nt of Agriculture's 2007 Farm  Bill Proposal, p. 16, accessed 
March 2007 at http://www.usda.gov/documents/07finalfbp.pdf ). 
52 Exhibit US-41 (Goodwin B.K. an d Mishra A. "Another Look at Decoupling:  Additional Evidence 
on the Production Effects of Direct Payments." American  Journal  of Agricultural  Economics  87(5):1200-1210 
(2005), Table 3 at p. 1206). WT/DS267/RW  
Page D-290  
 
have suffered significant losses based on low expect ed upland cotton revenue, as indicated by futures 
prices in early 2005.
53  This is illustrated by Figure 1 to Brazil's Opening Statement set out below:   
 
Figure 2 – Expected Returns and Tota l Costs of Growing Cotton, Corn  
or Soybeans on a Base Acre of Cotton in MY 200554 
 
Corn
Soybeans
CottonNo SubsidiesMLML, Cotton CCP ML, Cotton CCP & DP
-$200-$150-$100-$50$0$50dollars per acre
  
 
62. The "no subsidies" counterfactual shows th e economic irrationality of planting upland cotton 
in the spring of 2005 without marketing loan and co unter-cyclical subsidies.  With many U.S. upland 
cotton farmers not even expecting to cover their variable costs55, there is no basis for the U.S. 
assumption that planted acreage would remain stab le.  Rather, the only r easonable conclusion given 
these facts is that acreage would decline signifi cantly.  Yet, because the United States finds no 
production effects from either marketing loan or counter-cyclical subsidies, it assumes that a non-
subsidized world would look like the status quo and show the same levels of  acreage.  Under this 
flawed logic, the United States also asserts that  only increases in acreage would represent the effects 
of subsidies, with the implication that a finding under Article 6.3(c) would necessarily have to include 
a finding of increasing market share, possibly within the meaning of Article 6.3(d).    
 
63. Brazil has explained how the introduction of market loss assi stance payments in 1998, the 
entry into force of the FSRI Act of 2002 (and its b asket of subsidies) and the market condition in 
MY 1998-2002 resulted in a significant increase in subsidies in the period MY 1998-2002 compared 
to the relatively low levels of subsidies in the MY 1996-1997 period.56  While the original panel's 
causation finding was based, in part, on various temporal correlations, the original panel did not 
                                                      
53 See Brazil's Oral Statement, paras. 63-65 and Br azil's Comments on the U.S. Oral Statement, 
paras. 18-19.  See also Exhibits Bra-634 (Analysis of Planting Decisions Based on Expected Returns) and 
Exhibit Bra-665 (Analysis of Planting Decisions Based on Expected  Returns and Cash  Costs). 
54 Exhibit Bra-634 (Analysis of Planting Decisions Based on Expected Returns). 
55 See Brazil's Comments on the U.S. Oral Statement, para. 19, Figure 7.  
56 Brazil's Rebuttal Submission, paras. 235-236 and 351-352.  WT/DS267/RW 
 Page D-291 
 
 
believe, however, that the 12 percent drop in  planted acreage between MY 2001 and 2002 was 
relevant.57  In spite of the U.S. argument that such a drop in acreage would suggest a "negative" 
correlation between subsidies and acreage effects, th is drop in acreage in MY 2002 did not prevent the 
original panel from finding a strong causal link be tween MY 2002 price-contingent subsidies and 
significant price suppression in MY 2002.58    
 
64. As discussed more fully in response to questi ons 69 and 70, the factual situation before the 
compliance Panel in MY 2002 reflects the status quo  of market conditions distorted by very high 
mandated and price-contingent subsidies under the FSRI Act of 2002.  The average level of U.S. 
support between MY 2003-2006 has not changed signi ficantly from the very high levels of support 
existing in MY 2002, the first year of the FSRI Act of 2002.59  T h e  v e r y  stability of the acreage 
despite large price fluctuations throughout the appli cation of the FSRI Act of 2002 is a key correlation 
factor that highlights the effects of price-contingent  marketing loan and counter-cyclical subsidies.  In 
other words, there is a broad temporal coincide nce or correlation between the receipt of these 
subsidies, continued low market prices, the high cost s of production, and the c ontinued high levels of 
planted acreage.60    
 65. With respect to footnote 72 of the U.S. Co mments on Brazil's Oral Statement referenced in 
the question, Brazil refers the compliance Panel to  its response to questions 51, 52 and 62.  In 
response to these questions, Brazil explains that, inter alia , the notion of "coupled" and "decoupled" 
support in the Agreement on Agriculture , relied on by the United States, is not relevant for the 
assessment of the effects of subs idies under Articles 5 and 6 of the SCM Agreement .  Brazil further 
refers the compliance Panel to its responses to questions 64 and 65 addressing the literature on the 
effect of counter-cyclical subsidies.  This literature  is consistent with Brazil's arguments that upland 
cotton counter-cyclical payments have significant effe cts on U.S. acreage and contribute to significant 
price suppression.  Brazil also recalls that counte r-cyclical subsidies for different crops can have 
different effects on planting decisions, depending on whether they are consistently paid and their 
necessity to cover production costs, among others.    
 66. To the extent that footnote 72 of the U.S. Opening Statemen t addresses the inquiry relevant 
for assessing whether the challenge d subsidies cause significant price suppression, Brazil agrees with 
the U.S. characterization of its claim that these s ubsidies "affect the planting decision, causing U.S. 
producers to plant more than they otherwise woul d and that this ultimately leads to oversupply and 
suppressed world market prices."
61  
 
64. Given that Brazil has criticized the new empi rical research cited by the United States because 
it does not deal specifically with the effects of countercyclical payments on upland cotton production, 
why does Brazil consider that the McIntosh, Shogren & Dohlam study (Rebutta l Submission of Brazil, 
para. 140) is particularly relevant to this case?   Could Brazil comment on the arguments of the 
United States in paragraphs 248-249 of the Rebuttal Submission of the United States?  
 
67. At the outset, Brazil notes that there are no peer-reviewed empirical studies that have examined the specific effect of counter-cyclical s ubsidies (or market loss assistance) on upland cotton 
production.  Thus, like the study cited by the United States on counter-cyclical payments (Lin and 
                                                     
 
57 Exhibit Bra-447 (Upland Cotton Supply and Use, October 2006). 
58 Panel Report, U.S. – Upland  Cotton , paras. 7.596 and 7.1351.  See also the original panel's 
description of the reasons for the introduction of market loss assistance payments in MY 1998-2001 and their institutionalization for MY 2002-2007 as counter-cy clical payments in the FSRI Act of 2002.  Id., paras. 7.216-
7.217, 7.223-7.226 and 7.1301. 
59 See Brazil's First Written Submission, Figure 8. 
60 Brazil's Rebuttal Submission, paras. 180-194, 226-231;  see also Brazil's response to question 69, 
below. 
61 U.S. Comments on Brazil's Or al Statement, footnote 72. WT/DS267/RW  
Page D-292  
 
Dismukes), the study by McIntosh, Shogren and Do hlman does not specifically address the effects of 
upland cotton counter-cyclical payments.  However, there are certain features of this study, which 
make its analytical results more applicable to the assessment that the compliance Panel is tasked with 
than the study by Lin and Dismukes, or other studies that examine direct payments (Goodwin and Mishra 2005) or market loss assistance (Goodwin and Mishra 2006).  
 
68. First , the study by McIntosh, Shogren and D ohlman focuses on key mechanisms through 
which counter-cyclical payments affect production decisions
62 and excludes extraneous factors that 
can distort results.63  The authors explain the advantages of their approach by noting that 
"experimental methods can provide rapid feedback to policy makers about issues that are not easily 
teased out with observed data."64  Indeed, work by Lin and Dismukes and Goodwin and Mishra (2005 
and 2006) confirm that it is difficult to empirically  "tease out" the effect of specific subsidy programs 
from survey data.65  The use of a laboratory experiment mitigates many of these problems.    
 69. Second , the study by McIntosh, Shogren and Dohlman is not confined to examining the 
acreage response to counter-cyclical payments in non-upland cotton producing regions of the 
United States – as is the case with the empirical st udies cited by the United States.  Rather, it assesses 
supply responses based on a laboratory experiment that reflects the economic conditions faced by 
U.S. upland cotton producers.  Studies by Lin and Dismukes and Goodwin and Mishra examine the 
supply response of corn, wheat and soybean acreage in  the mid-West of the United States to direct 
and counter-cyclical payments.  These areas are known for exhibiting small supply responses that are 
certainly smaller than the supply response of upland cotton.
66  This greatly exaggerates the problem of 
applying the results of those studies to upland cotton.     70. In sum, while the study by McIntosh, Shogren  and Dohlman may not be tailored to the exact 
circumstances of this proceeding, it is far more re levant than the empirical literature cited by the 
United States.   
 71. The United States criticizes the study by McIn tosh, Shogren and Dohlma n because it is based 
on a laboratory experiment.
67  As explained by Professor Sumner68, this criticism is without merit.  
                                                      
62 These mechanisms include reducing price variability and the perceived possibility of a base acre 
update. 
63 McIntosh, Shogren and Dohlman note that "farmers have other risk management tools at their 
disposal;  large and less risk-averse farms tend to dominate production of program crops;  and other programs 
such as marketing loan provisions already offer price protection.  These factors underscore the difficulty of separating the effects of CCPs from other influences in observed annual production data, a difficulty reduced 
when using experimental methods."  See Exhibit Bra-565 (McIntosh, Christopher R., Jason F. Shogren and Erik 
Dohlman, "Supply Response to Counter-Cyclical Payments and Base Acre Updating under Uncertainty:  An Experimental Study," Forthcoming paper in the American  Journal  of Agricultural  Economics , November 2006, 
p. 16-17).   
64 Exhibit Bra-565 (McIntosh, Christopher R., Jason F. Shogren and Erik Dohlman, "Supply Response 
to Counter-Cyclical Payments and Base Acre Upda ting under Uncertainty:  An Experimental Study," 
Forthcoming paper in the American  Journal  of Agricultural  Economics , November 2006, p. 17).   
65 Many of the regression coe fficients in these studies are not statistically significant.  See Exhibit 
US-85 (Lin, William and Dismukes, Robert. "Supply Resp onse Under Risk:  Implications for Counter-Cyclical 
Payments' Production Impacts," Review  of Agricultural  Economics-Volume  29, Number  1, 64-86 , p. 78).  See 
also Exhibit US-41 (Goodwin B.K. and Mishra A. "Another Look at Decoupling:  Additional Evidence on the 
Production Effects of Direct Payments," American  Journal  of Agricultural  Economics  87(5):1200-1210 (2005)). 
66 For instance, Goodwin and Mishra find that corn and wheat prices have no impact on corn and wheat 
production.  Exhibit US-41 (Goodwin B.K. and Mishra A. "Another Look at Decoupling:  Additional Evidence 
on the Production Effects of Direct Payments." American  Journal  of Agricultural  Economics,  87(5):1200-1210 
(2005)).  See also Exhibit Bra-659 (Statement of Professor Sumner Concerning Various U.S. Arguments, 
para. 23). 
67 U.S. Rebuttal Submission, paras. 248-249. 
68 Exhibit Bra-659 (Statement of Professor Sumner Concerning Various U.S. Arguments, paras. 36-37).  WT/DS267/RW 
 Page D-293 
 
 
The study applies established tools of behavioral  economics and, as noted above, is made more 
valuable by its experimental nature.  Tools of la boratory experiments have b ecome well established in 
general economics as well as in agri cultural economics over the past 30 years.  Vernon Smith's Nobel 
Prize in 2002 recognized the development of the field.69  Roth's initial survey paper in the 1995 
Handbook of Experimental Economics provides a summary of the tool, which has developed 
substantially in the last decade.70  Indeed, in his USDA-sponsored prestigious Waugh lecture, Shogren 
surveyed the importance of using experiments to measure and test economic parameters in 
agricultural and resource economics.71  Against this background, the U.S. attempt to discredit research 
findings in economics because they derive from controlled experiments lacks any basis.   
72. The United States further quotes a portion of the study where the authors offer caveats to their 
findings.  Specifically, the authors note that the model does not address two features:  (i) the fact that counter-cyclical payments are made with respect to only 85 percent of base acres, and (ii) the exclusion from the model of the marketing loan program.  However, these abstractions to ease 
modelling may only temper the magnitude of the effect s found by the study.  They do not change their 
underlying conclusion, which the authors summarize as follows:   
 
[o]ur results support some of the critic isms of CCPs and base acre updating.  We find 
that with CCPs , laboratory decision makers increase d their investment in the base 
crop relative to the baseline case .  Adding updating and policy uncertainty, they 
continued to rely relatively more on the base crop than under a more policy-neutral 
environment.  The implications of increased  base acre plantings are several:  lower 
potential income to producers who choose to reduce their revenue risk;  decreased 
efficiency of crop markets due to distorte d allocation decisions;  depressed base crop 
prices , which further reduces income;  and an increased likelihood of subsidy 
payments .
72    
73. In sum, the McIntosh, Shogren and Dohlman study provides valuable insights into the 
significant effects of counter-cyclical payments on production of U.S. upland cotton.  While it is based on a controlled laboratory experiment, it anal yzes more closely the effects of counter-cyclical 
payments on the production decisions of U.S. upland cotton farmers than results of empirical studies 
that analyzed the somewhat different economics imp licated by corn, wheat or soybean production in 
the mid-West of the United States.  
 
65. The United States has cited new empirical research on the production effects of counter-
cyclical payments.  Could Brazil explain why the fa ct that these studies do not deal specifically with 
upland cotton should preclude the Panel from consid ering the studies as being highly probative?   
 74. The United States has cited one empirical study on the production effect of counter-cyclical 
payments, Lin and Dismukes (2007)
73, to support its arguments that counter-cyclical subsidies do not 
                                                      
69 See Exhibit Bra-659 (Statement of Professor Sumner Concerning Various U.S. Arguments, 
paras. 36-37). 
70 See Exhibit Bra-659 (Statement of Professor Sumner Concerning Various U.S. Arguments, 
paras. 36-37). 
71 See Exhibit Bra-659 (Statement of Professor Sumner Concerning Various U.S. Arguments, 
paras. 36-37). 
72 Exhibit Bra-565 (McIntosh, Christopher R., Jason F. Shogren and Erik Dohlman, "Supply Response 
to Counter-Cyclical Payments and Base Acre Upda ting under Uncertainty:  An Experimental Study," 
Forthcoming paper in the American Journal of Agricultural Economics, November 2006, p. 2-3) (emphasis added). 
73 The United States cited a draft of this stud y in its First Written Submission, para. 210.  
The United States cites the published version in its Rebuttal Submission, paras. 229-234. WT/DS267/RW  
Page D-294  
 
significantly impact upland cotton production.  The other empirical study cited by the United States, 
Goodwin and Mishra (2005)
74, examines direct payments, not counter-cyclical payments.    
 75. At the outset, Brazil notes that these studies do not even support the U.S. position.  Viewed in their proper context, both studies confirm that co unter-cyclical subsidies can significantly impact 
production.
75  Nevertheless, the studies are not highly pr obative to these proceedings for a number of 
reasons.76  This is in part due to their failure to address the specific effect of upland cotton counter-
cyclical subsidies on upland cotton production.     76. Of the counter-cyclical subsidies provided for major U.S. program crops
77, those for upland 
cotton are likely to have some of the largest effects on production because of (i) the size of the 
subsidy, (ii) the frequency with which it is paid, (iii) the regions where upland cotton is grown, 
and (iv) the assertions of upland cotton producer associ ations such as the NCC that such subsidies are 
essential to avoid bankruptcy for its members.   Each reason is discussed below.   
 
77. First , the maximum per-acre counter-cyclical payment for upland cotton is among the largest 
of the nine major "program crops" in the FSRI Act of 2002.  In absolute terms, the maximum counter-
cyclical payment for upland cotton results in an  average per-acre payment of approximately $75.78  
The maximum counter-cyclical subsidy for the crops  examined by Lin and Dismukes results in much 
smaller per-acre payments, approximately $10 for soybeans, $39 corn and $20 for wheat.79  T h e  
maximum upland cotton counter-cyclical payments is  also one of the largest in relative terms, 
accounting for 19 percent of the upland cotton target price80, or the institutional price set by 
U.S. Congress.     78. The evidence before the compliance Panel dem onstrates that the vast majority of upland 
cotton producers grow upland cotton on farms with upland cotton base acres.
81  This planting pattern 
reflects the high cost of production for upland cotton compared to other crops.  The high average 
$75 per-acre payment for upland cotton is essential for upland cotton producers to meet their costs of 
production.82    
 
                                                      
74 U.S. First Written Submission, para. 213.  See also U.S. Rebuttal Submission paras. 235-236. 
75 The 2005 version of the Lin and Dismukes study finds that soybean counter-cyclical subsidies would 
increase soybean acreage if the average soybean farm pri ce was below the loan rate.  The study also finds that 
the "effect of CCPs may go beyond their short-run effect s on farmers' acreage decisions;  in the longer term 
there may be structural implications to the extent that these payments keep farmers in business.  In addition to 
commodity loan programs, CCPs are another safety net measure that protects farmers from adverse effects of 
weak market prices.  To farmers who are financially distressed, CCPs could provide help necessary for them to 
remain in farming." ( see Exhibit US-34 (Lin, William and Robert Dismukes, "Supply Response Under Risk:  
Implications for Counter-Cyclical Payments' Productio n Impact," Selected Pape r, American Agricultural 
Economics Association, July 2005, p. 24-25)).  Goodwin and Mishra (2005) contains the results of a survey of U.S. farmers, showing that counter-cyclical payments are important to U.S. farmers an d that direct payments are 
largely used for on-farm expenditures.   
76 For a critique of Lin and Dismukes (2006/2007), see Brazil's Rebuttal Submission, paras. 124-127 
and Exhibit Bra-659 (Statement of Professor Sumner Concerning Various U.S. Arguments, paras. 18-21).  For a 
critique of Goodwin and Mishra (2006), see Brazil's Rebuttal Submission, paras. 135-137 and Exhibit Bra-659 
(Statement of Professor Sumner Concerning Various U.S. Arguments, paras. 22-27). 
77 These include wheat, corn, soyb eans, rice, upland cotton, oats, barley, sorghum and peanuts. 
78 Exhibit Bra-675 (Updated Program Crop Comparison, March 2007). 
79 Exhibit Bra-675 (Updated Program Crop Comparison, March 2007). 
80 Exhibit Bra-675 (Updated Program Crop Comparison, March 2007). 
81 See Brazil's Rebuttal Submission, paras. 153-165;  Brazil's Oral Statement, para. 40 and Brazil's 
Comments on U.S. Answer to Question 29, paras. 46-51. 
82 Brazil's First Written Submission, paras. 156-164;  Brazil's Rebuttal Submission, paras. 245-283 and 
Brazil's Oral Statement, paras. 54-91.   WT/DS267/RW 
 Page D-295 
 
 
79. Second , counter-cyclical subsidies are paid more frequently for upland cotton than for other 
program crops.  For two of the three crops exam ined by Lin and Dismukes (wheat and soybeans), 
counter-cyclical subsidies have never been paid.  The following chart, which was presented in Brazil's 
First Written Submission83, shows the actual amount of counter-c yclical payments provided to crops 
relative to the theoretically possible maximum amount.  The "fill rate" for upland cotton was 
82 percent.   
 
Figure 3 – Actual Counter-Cyclical Payments as a Percent of Theoretical Maximum84 
 
0%10%20%30%40%50%60%70%80%90%
Peanuts
Upland Cotton
SorghumRice Corn
BarleyOatsWheat
Soybeans
    
 
80. Third , the two empirical studies cited by the Unite d States examine the effect of direct and 
counter-cyclical payments on corn, soybeans and wheat acreage in the mid-West of the United States.  
As Brazil has explained previously, one would exp ect low supply elasticities in these regions for these 
crops.85  Farmers in the corn belt and north central region grow almost entirely soybeans and corn, 
and sometimes wheat.  By contrast, upland cotton is grown in regions where a number of other 
substitute crops, including soybeans, rice, corn, sorghu m, peanuts, fruits and vegetables, are grown.   
 81. Fourth , the two empirical studies cited by the United States are contrary to the numerous 
statements in the record reflecting the view of the NCC and its upland cotton producing members that 
counter-cyclical subsidies are essen tial to cover their costs of pr oduction and to avoid bankruptcy.  
Representatives of the NCC testified to the U.S. Co ngress that "during the past three years, many 
cotton farmers have avoided bankruptcy only becau se Congress has authorized emergency relief to 
supplement the FAIR Act's in adequate fixed payments."
86  This statement refers to market loss 
                                                      
83 Brazil's First Written Submission, para. 276. 
84 Exhibit Bra-493 (Counter-Cyclical Payments Analysis).  
85 Exhibit Bra-659 (Statement of Professor Sumner Concerning Various U.S. Arguments, para. 20). 
86 Panel Report, U.S. – Upland  Cotton , footnote 1471 referring to Exhibit Bra-109 (Testimony (Full) of 
Robert McLendon, Chairman, NCC Exec utive Committee, Before the Hous e Agricultural Committee, National 
Cotton Council (NCC)). WT/DS267/RW  
Page D-296  
 
assistance payments, which are the predecessor to counter-cyclical subsidies under the FSRI Act 
of 2002.  Representatives of the NCC have also tes tified that they need U.S. subsidies generally to 
"avoid bankruptcy,"
87 "to make ends meet"88 and basically to "exist."89  Leaders of the upland cotton 
industry confirm that counter-cyclical subsidies are the next most important government program for 
upland cotton farmers besides the marketing loan program.90  None of the studies cited by the United 
States focus on the loss-making situation that would confront many upland cotton farmers if counter-
cyclical payments were eliminated.     82. In sum, the new literature cited by the Unite d States, consisting of one  empirical study on the 
effect of counter-cyclical subsidies and one empirica l study on the effect of direct payments, is not 
highly probative in this proceeding.  In any even t, for reasons discussed in prior written submissions
91, 
the literature largely supports Brazil's arguments th at counter-cyclical subsidies significantly impact 
production.  It also supports the conclusion that direct payments affect production.  
 
66. Can Brazil explain the differences between the figures for the amount of counter-cyclical 
payments allocated to upland cotton provided by Br azil at the meeting of the Panel with the parties 
(Opening Statement of Brazil, para.  40 and Exhibit Bra 625) and the figures in Table 5 of Brazil's 
Rebuttal Submission?    
 
83. The figures in Table 5 of Brazil's Rebutta l Submission constitute upland cotton counter-
cyclical subsidies allocated acco rding to the "Cotton-to-Cotton" methodology.  The Cotton-to-Cotton 
methodology matches each planted acre of uplan d cotton with one upland cotton base acre, if 
available on the same farm.  Thus, if a farm has more upland cotton base acres than upland cotton planted acres, or no upland cotton planted acres at all, these excess upland cotton base acres are excluded from the calculation.  Similarly, if a fa rm plants more upland cotton than it holds upland 
cotton base, no payments are allocated for each acre  in excess of the upland cotton base available on 
the farm.  
 84. By contrast, the figure in paragraph 40 of  Brazil's Opening Statement is based on an 
allocation of counter-cyclical payments in MY 2005 to upland cotton under "Brazil's Methodology."
92  
This methodology allocates certain non-upland cotton counter-cyclical payments to planted acres of 
upland cotton for which no upland cotton base acre is available on the farm.  Since the United States 
provided the data necessary for this calculation so lely for MY 2005, Brazil's figures are similarly 
limited to MY 2005.   85. Brazil recalls that the original panel f ound Brazil's "allocation of support delivered under 
these programmes to one covered commodity appropriat e, because it combines elements of the way in 
which the payments are calculated with the volum e of upland cotton which recipients plant."
93   
 
                                                      
87 Exhibit Bra-109 ("Testimony (full) of Robert E. McLendon, Chairman, NCC Executive Committee, 
Before the House Ag Committee", February 15, 2001, p. 2).   
88 Exhibit Bra-324 (NCC Chairman's Report by Kenneth Hood, 24 July 2002, p. 2). 
89 Exhibit Bra-3 (Roger Thurow / Scott Kilman, "U.S. Subsidies Creat e Cotton Glut That Hurts Foreign 
Cotton Farms," The Wall Street Journal, 26 June 2002, p. A1).  
90 See Brazil's Oral Statement, para. 35 quoting Southwest Farm Press, 17 January 2007, accessed 
February 2007 at http://southwestfarmpress.com/news/011707-farm-bill/index.html , in Exhibit Bra-624 
(Updated Market News and Market Reports About Cotton) ("Status quo for 2007 farm bill good for cotton 
growers").  
91 For a critique of Lin and Dismukes (2006/2007), see Brazil's Rebuttal Submission, paras. 124-127 
and Exhibit Bra-659 (Statement of Professor Sumner Concerning Various U.S. Arguments, paras. 18-21).  For a 
critique of Goodwin and Mishra (2006), see Brazil's Rebuttal Submission, paras. 135-137 and Exhibit Bra-659 
(Statement of Professor Sumner Concerning Various U.S. Arguments, paras. 22-27). 
92 Panel Report, U.S. – Upland  Cotton , Table A-6 at para. 7.642. 
93 Panel Report, U.S. – Upland  Cotton , para. 7.646.  WT/DS267/RW 
 Page D-297 
 
 
67. Please confirm whether or not th e Panel's understanding is correct:   
 
• "Table 6" in Brazil's First Written Submi ssion was produced using the so-called 
"Brazil's method" using USDA data .   
 
86. Brazil can confirm that the compliance Pane l's understanding is correct.  Brazil notes, 
however, that the United States had not provided USDA data for MY 2003-2005 at the time of Brazil's First Written Submission.  Absent that data , Brazil applied the ratio of total upland cotton 
counter-cyclical payments to counter-cyclical paym ents allocated to upland cotton under "Brazil's 
Methodology" for MY 2002, based on data that the Un ited States provided to the original panel and 
including in the report of the original panel.
94  Brazil applied this ratio to the actual amount of total 
upland cotton counter-cyclical pa yments made in MY 2003-2005.95  In its Opening Statement, Brazil 
updated the figures for MY 2005 based on USDA data that the United States provided only for MY 2005.
96  
 
• "Table 5" in Brazil's Rebuttal Submission wa s produced using the so-called "cotton-
to-cotton" methodology using USDA data.  
 
87. Brazil can confirm that the compliance Panel' s understanding is correct.  Brazil also notes that 
the figures in Table 5 of Brazil's Rebuttal Submission were calculated using the data in the table in 
paragraph 224 of the U.S. First Written Submissi on and average national payment rates and yields.97   
 
• The figures cited in para. 40 of Brazil' s opening statement (i.e. "$868 million and 
$838 million) are produced with the "Brazil' s method" as well as the "cotton-to-
cotton" methodology, using the data provided by the United States in exhibit US-64.   
 88. Brazil can confirm that the compliance Pane l's understanding is correct.  Brazil notes that 
Exhibit Bra-625 contains the detailed calcula tions from which these figures were derived.  
 
68. Please comment on the following statement by the US:   
 
"The United States understands that Braz il intends the counter-cyclical payment 
figures shown in 'Table 5' of Brazil's re buttal submission to supersede the counter-
cyclical payment figures shown in 'Table 6' of its first written submission."  (US response to question 4 at para. 15)    
89. The United States is incorrect in its unders tanding.  Brazil refers the Panel to Brazil's 
comment on the U.S. answer to question 4.
98  The figures in Table 6 of Brazil's First Written 
Submission are based on the ratio of counter-c yclical subsidies under "Brazil's allocation 
methodology" to total counter-cyclical subsidies in MY 2002.99  By contrast, the figures in Table 5 of 
Brazil's Rebuttal Submission are based on the "Cotton-to-Cotton Methodology."100  Brazil does not 
intend that the figures in Table 6 of its First Wr itten submission be superseded by the figures in 
Table 5 of its Rebuttal Submission.    
 
69. How does Brazil address the argument of the Unite d States that "the only evidence that Brazil 
has submitted purporting to examine the price effects of marketing loan and counter-cyclical 
                                                      
94 Panel Report, U.S. – Upland  Cotton , Table A6 at para. 7.642 and Table 2 at para. 7.596.  
95 Brazil's First Written Submission, paras. 116-118.  
96 See Brazil's response to question 66, above. 
97 Brazil's Rebuttal Submission, para. 174. 
98 Brazil's 16 March Comments on U.S. Answers to Question 4, para. 15.  
99 Brazil's First Written Submission, para. 116-118. 
100 Panel Report, U.S. – Upland  Cotton , para. 7.642. WT/DS267/RW  
Page D-298  
 
payments specifically are the results of the mode lling exercise that it has conducted for purposes of 
this proceeding"?  (Openi ng Statement of the United States, para. 76)    
 
90. The United States' argument incorrectly  ignores the hundreds of exhibits and the 
circumstantial evidence presented by Brazil in th e original proceeding and in this compliance 
proceeding.  Below, Brazil provides a concise resume of that evidence.
 101  Professor Sumner's 
modelling analysis that specifically quantifies the price-suppressing effects of the U.S. marketing loan and counter-cyclical subsidies simply confirms extensive other evidence of significant price 
suppression in view of the effects of these subsid ies on U.S. acreage, production, and export, as well 
as the dominant role played by the United States in  the discovery of world market prices for upland 
cotton.  Professor Sumner's model is the "ici ng" on the cake, not the cake itself.    
 91. Brazil – and the compliance Panel – live in the real world characterized by decades of heavily 
subsidized U.S. upland cotton production and export s.  Brazil cannot unilaterally remove the U.S. 
subsidies to present direct evidence of what w ould actually happen to U.S. acreage, production, 
exports, and world prices without those subsidies.  Only the United States can do so.  It has chosen 
not to despite the recommendations and rulings of th e DSB.  To the extent that the United States 
believes that the only credible "empiric al evidence" is that showing what actually  happens without 
marketing loan and counter-cyclical subsidies, then the United States is exclusiv ely in control of that 
evidence.     
92. To assist the compliance Panel in appreciating th e baseless nature of the U.S. allegations that 
Brazil presented "no evidence" of significant pr ice suppression except the analysis of Professor 
Sumner
102, Brazil summarizes below the many hundreds of pages of arguments in its submissions and 
hundreds of exhibits.  However, this summary canno t substitute for a full review of Brazil's evidence 
in its Written Submissions, Oral Statements and Re sponses to Questions.  Some of that evidence is 
referenced in the footnotes attached to the summaries of the evidence, below.   
 93. The most basic facts concerning the U.S. subs idies at issue and the conditions of competition 
in the world market for upland cotton suffice to establish a causal link between the subsidies and 
significant price suppression in the world market.  It is undisputed that there is a world market for upland cotton.  Heavily subsidized U.S. upland cott on competes directly in that world market with 
upland cotton from Brazilian and other third country producers.
103  It is undisputed that U.S. upland 
cotton is "like" Brazilian upland cotton as well as like upland cotton produced by many other 
countries.104  The price of U.S. upland cotton, like that of other upland cotton producers, is reflected in 
a world market price, the A-Index.105  It is also undisputed that there is a closely integrated world 
market for upland cotton in which U.S. supply account s for a very large world market share and in 
which it exercises a substantial proportionate influe nce on the discovery of the world market price.106  
All of these facts were established by the original pa nel and affirmed by the Appellate Body.  In view 
of the updated evidence provided by Brazil, they remain valid today.     94. In particular, Brazil has established the following facts:    
• The legislative and regulatory provisions of the marketing loan program and the 
counter-cyclical payment programs have not been altered since the original 
                                                      
101 U.S. Opening Statement, para. 76. 
102 U.S. Opening Statement, para. 76. 
103 Brazil's First Written Submission, Section 7.4. 
104 Brazil's First Written Submission, Section 7.4. 
105 Brazil's First Written Submission, Section 7.4;  Br azil's Oral Statement, para. 148 and Declaration 
by Andrew Macdonald, Brazil's First Written Submission, Annex II, para. 18. 
106 Panel Report, U.S. – Upland Cotton , paras. 7.1285, 7.1311.  WT/DS267/RW 
 Page D-299 
 
 
proceeding and, like the payments made  thereunder, continue to constitute 
subsidies107; 
 
• U.S. upland cotton, therefore, continues to be heavily subsidized by marketing loan 
and counter-cyclical subsidies108; 
 
• Subsidized U.S. upland cotton competes with and is "like" other upland cotton 
produced in various parts of the world109; 
 
• The United States maintains a 40 percent world export market share and accounts for 
20 percent of total world production resulting in a substantial proportionate influence 
on the world market price of upland cotton110; 
 
• The world market for upland cotton identified by the original panel still functions on 
the same basis as found by the original panel111; 
 
• Market participants perceive the A-I ndex as the world price of upland cotton112 and 
ICAC113 and USDA114 refer to the A-Index as the world price of upland cotton; 
 
• Upland cotton prices from spot markets in the United States and Brazil are among the 
constituent price quotes of the A-Index115, and U.S., Brazilian, A-Index and futures 
prices continue to move broadly in parallel.116  
 95. These undisputed facts, combined with the undis puted fact that massive price-contingent U.S. 
marketing loan and counter-cyclical  subsidies represent a 40 percent ad valorem subsidization rate 
over the lifetime of the FSRI Act of 2002, alone  are sufficient for the compliance Panel to find that 
these subsidies cause significant price suppression in the world market for upland cotton.     96. Billions of dollars of "specific" marketi ng loan and counter-cyclical subsidies received by 
thousands of U.S. upland cotton farmers are not spent in clinical isolation within the United States.  
Instead, the vast majority of U.S. upland cotton pr oduction that would not exist but for these billions 
in U.S. subsidies is exported to almost every third country market in the world.
117  The most basic 
laws of supply and demand compel a finding that  huge subsidies benefiting the production of a 
                                                      
107 Brazil's First Written Submission, Section 7.3. 
108 For details, see Brazil's First Written Submission, Sections 7.8-7.9;  Brazil's Rebuttal Submission, 
Section 2.3.2;  and Brazil's Oral Statement, Sections 2.2-2.3. 
109 Brazil's First Written Submission, Section 7.4. 
110 Exhibit Bra-559 ("Potential Challenges to U.S. Fa rm Subsidies in the WTO:  A Brief Overview," 
Congressional Research Service Report for Congress, 25 October 2006, p. 5). 
111 Brazil's First Written Submission, Section 7.4. 
112 Brazil's Oral Statement, para. 148 and Declara tion by Andrew Macdonald, Brazil's First Written 
Submission, Annex II, para. 18. 
113 Exhibit Bra-445 (Cotton This Month, ICAC, 1 June, 2006, pp. 1-2). 
114 The USDA's Economic Research Service refers to  the A-Index as the "world price."  Exhibit 
Bra-436 (Cotton and Wool Outlo ok, USDA, 13 March 2006, p. 4, accessed October 2006 at 
http://usda.mannlib.cornell.edu/usda/ers /CWS//2000s/2006/CWS-03-13-2006.pdf ). 
115 Brazil's First Written Submission, Section 7.4. 
116 Brazil's First Written Submission, Section 7.6. 
117 Exhibit Bra-676 (USDA Cotton an d Wool Outlook, 12 March 2007,  p. 17, accessed March 2007 at 
http://usda.mannlib.cornell.edu/usda/current/CWS/CWS-03-12-2007.pdf ).  Brazil notes that market reports 
show a declining U.S. domestic mill use and an increas e in imports.  If production stays high, the resulting 
excess supply will increase exports and stocks ev en more, thereby negatively impacting prices.  See, e.g., 
Exhibit Bra-676 (USDA Cotton and Wool Outlook, 12 March 2007, p. 4, accessed March 2007 at 
http://usda.mannlib.cornell.edu/usda/current/CWS/CWS-03-12-2007.pdf ).   WT/DS267/RW  
Page D-300  
 
fungible commodity product result in higher producti on and exports, and prevent upland cotton prices 
from being as high as they otherwise would be in an integrated world market.  In other words, this 
evidence is sufficient to establish significant pri ce suppression amounting the serious prejudice to the 
interests of Brazil, within the meaning of Articles 5(c) and  6.3(c) of the SCM Agreement .      
 
97. Yet, as detailed below, Brazil has presente d much more evidence demonstrating that the 
effects of these two price-contingent subsidies is significant price suppression in the world market.  
Brazil presented evidence of actual market conditions th at are distorted by the e ffects of the subsidies, 
as well as evidence allowing the compliance Panel to determine the general magnitude of what U.S. 
acreage, production, exports, and world market prices would be but for  U.S. marketing loan and 
counter-cyclical subsidies.  Brazil also presented information regarding the large gap between U.S. 
upland cotton producers costs of production and market revenues.   98. Brazil's evidence covers the MY 2005 referenc e period is supplemented by evidence covering 
the period MY 2003-2006, as well as the reference pe riod 1999-2002 assessed by the original panel.  
The evidence demonstrates that U.S. planted acreage was generally stable despite low and fluctuating 
market prices and huge losses based only on market revenue.
118  These facts strongly support the 
conclusion that U.S. acreage and supply would be lower but for the effects of U.S. subsidies.  The 
evidence also shows that production and exports of upland cotton actually increased significantly 
from MY 2004 to 2005.  The evid ence also suggests that but for the U.S. subsidies, such increases 
would not have taken place.119    
 
99. Ultimately, the totality of the data and ev idence provided by Brazil allows the compliance 
Panel to assess the various key elements120 highlighted by the original panel as relevant in 
determining the effects of the subsidies and the existence of significant price suppression caused by 
the subsidies.  Brazil has established the following:   
 
• The nature  of the marketing loan and counter-cyclical subsidies remains price-
contingent and production- and trade-distorting, as they have not been modified to comply with the recommendations and rulings of the DSB
121:    
 
¾ Above all, mandated price tr iggers for payments are significantly above prices 
throughout the lifetime of the FSRI Act of 2002 and thus guarantee constant payments
122; 
 
¾ The original panel affirmed it had "no doubt that the [marketing loan] 
payments stimulate production and exports and result in lower world market prices."
123  For counter-cyclical subsidies, the panel found that "due to their 
market-price contingency, CCPs may influence production decisions 
indirectly"124;   
 
¾ The original panel considered it "axioma tic that the nature of a given subsidy 
may play an important role in determining its effects."125  The Appellate Body 
                                                      
118 Brazil's First Written Submission, Section 7. 9;  Brazil's Rebuttal Submission, para. 211. 
119 Brazil's Rebuttal Submission, para. 348. 
120 These elements were assessed by the original panel.  See, e.g., Panel Report, U.S. – Upland  Cotton , 
paras. 7.1347-7.1355. 
121 Brazil's Rebuttal Submission, Sections 2.3.1.2-2.3.1.3 and Brazil's Oral Statement, Sections 2.2-2.3. 
122 Brazil's First Written Submission, Section 8.4. 
123 Panel Report, U.S. – Upland  Cotton , para. 7.1291. The panel examin ed effects of marketing loan 
subsidies at paragraphs 7.1290-7.1297. 
124 Panel Report, U.S. – Upland  Cotton , para. 7.1302. 
125 Panel Report, U.S. – Upland  Cotton , para. 7.1191.  WT/DS267/RW 
 Page D-301 
 
 
confirmed the importance of this factor  when it held that "a large subsidy 
closely linked to prices of the relevant product is likely to have greater impact on prices than a small subsidy that is less closely linked to prices"
126;  and  
 
¾ Studies on subsidy effects127 and Professor Sumner's analysis128 confirm the 
production-enhancing effects of marketing loan and counter-cyclical 
payments.  
 
• The magnitude  of the subsidies continues to be significant:   
 
¾ Marketing loan subsidies were $1,269 million in 2005129, an increase of 
41 percent compared to MY 2002130;   
 
¾ Counter-cyclical subsidies for MY 2005 were almost identical to the MY 2002 
payments, amounting to a total of $868 million.131    
 
¾ Recent marketing loan and counter-cyclical subsidies are, thus, higher than in 
MY 2002 for which the original panel found significant price suppression132;    
 
¾ Marketing loan and counter-cyclical subsidies for upland cotton exceeded 
subsidies to other crops133;  and  
 
¾ The Appellate Body held that "a large subsidy closely linked to prices of the 
relevant product is likely to have great er impact on prices than a small subsidy 
that is less closely linked to prices."134  
 
• Marketing loan and counter-cyclical pa yments cover the gap between producer 
revenue and production costs .135  In other words, th ey stabilize upland cotton 
producers' revenue in the face of fluctuating market prices:    
 
¾ USDA data on actual production costs and market returns shows a significant 
gap between production costs and market returns, which is filled by U.S. 
                                                      
126 Appellate Body Report, U.S. – Upland  Cotton , para. 461. 
127 With respect to counter-cyclical payments , Brazil presented studies in Section 2.3.2.3.1 of Brazil's 
Rebuttal Submission and further discussed them in Exhibit Bra-659 (Statement of Professor Sumner Concerning 
Various U.S. Arguments).  With respect to marketing loan payments , see USDA's studies in Exhibit Bra-79 
("U.S. Farm Program benefits:  Links to Planting Decision and Agricultural Markets") and in Exhibit Bra-222 ("Analysis of the U.S. Commodity Loan Program with marketing Loan Provisions"). 
128 See Analysis of Effects of U.S. Upland Cotton Su bsidies on Upland Cotton Prices and Quantities by 
Dan Sumner, Brazil's First Written Submission, Annex I;  Statement by Professor Daniel Sumner in 
Section 2.5.2 of Brazil's Oral Statement. 
129 Brazil's 16 March Comments on U.S.  Answer to Question 4, para. 14. 
130 Marketing loan subsidies were $898 million in MY 2002, see Brazil's First Written Submission, 
Table 6 at para. 111.  In its Oral Statement, Brazil erroneously referred to "29 percent."  See Brazil's Oral 
Statement, paras. 29 and 31.  
131 Based on Brazil's methodology.  See Brazil's Oral Statement, para. 40. 
132 Brazil's First Written Submission, Sections 7.8-7.9;   Brazil's Rebuttal Submission, Section 2.3.2 and 
Brazil's Oral Statement, Sections 2.2-2.3. 
133 Brazil's First Written Submission, Sections 7.7 and 8.4. 
134 Appellate Body Report, U.S. – Upland  Cotton , para. 461. 
135 When considering a divergence between revenue and costs, the original panel found significant 
Brazil's evidence that "the ef fect of the subsidies was to allow the United States producers to sell upland cotton 
at a price lower than would otherwise have been n ecessary to cover their total costs."  Panel Report, U.S. – 
Upland  Cotton , para. 7.1353. WT/DS267/RW  
Page D-302  
 
subsidies.
136  In particular, USDA data indicates that upland cotton farmers 
lost on average $837 per planted acre over the past seven years (MY 1999-2005).
137  Projections of production costs and market returns indicate that this 
gap between market revenue and cost of production will continue to exist.138  
Brazil asks the compliance Panel why U.S. producers decide to plant upland 
cotton in the fact of collective losses of $12.4 billion over the past 7 years?139  
The obvious answer is that, no matter what happens to market prices, U.S. price-contingent marketing loan and counter-cyclical subsidies bail out U.S. upland cotton producers.  
 
¾ The prospect of receiving subsidies affects producers' planting decisions, as 
the Appellate Body recognized.140  Data on expected returns from growing 
competing crops shows that it is no t economically rational to continue 
growing upland cotton and that, but for these subsidies, growers would switch 
to other crops.141  Yet, due to the challenged subsidies, U.S. upland cotton 
producers are insulated from and do not respond to market price signals.  Instead, they continue to plant in  anticipation of subsidy payments.
142  Bot h 
the graphs provided with Brazil's Oral Statement based on total cost of production
143, as well as the graphs provided by Brazil in its Comments on the 
U.S. Opening Statement based on variable costs144 demonstrate this reality;  
and  
 
¾ The original panel found that "United States upland cotton producers rely on 
… subsidies to cover their cost of production."145  
 
• There continues to be a temporal coincidence  between price suppression and U.S. 
price-contingent marketing loan  and counter-cyclical subsidies.146  F o r  e x a m p l e ,  
contrary to the planting decisions of non- U.S. producers who must meet their costs 
based solely on market revenue, U.S. upland cotton acreage does not react to expected futures prices fluctuations.
147  Consequently, U.S. planted acreage remained 
relatively stable while increased yields on subsidized acreage resulted in increased 
production and exports over the lifetime of the FSRI Act of 2002, despite market 
prices that were low by historical standards.148    
 
                                                      
136 See Brazil's First Written Submission, Figure 13 in Section 7.11. 
137 Brazil's Oral Statement, para. 57. 
138 Brazil's First Written Submission, Figure 28 in Section 8.6. 
139 Brazil's Oral Statement, para. 58. 
140 The Appellate Body found that U.S. upland cotton producers were "aware that if actual prices were 
ultimately lower, they would be 'insulated' by government support, including not only marketing loan program 
payments but also counter-cyclical payments, which were  based on a target upland cotton price."  Appellate 
Body Report, U.S. – Upland  Cotton , para. 445. 
141 Brazil's Rebuttal Submission, Sections 2.2.2 and 2.3.6 and Brazil's Oral Statement, Section 2.4.  
142 Brazil's First Written Submission, Section 7.11;  Brazil's Rebuttal Submission, Sections 2.2.2 
and 2.3.6;  Brazil's Oral  Statement, Section 2.4. 
143 Brazil's Oral Statement, Figures 1 to 6. 
144 Brazil's Comment on the U.S. Opening Statement, Section 4. 
145 Panel Report, U.S. – Upland  Cotton , footnote 1471. 
146 For more details on this discussion, see Brazil's response to question 70, below. 
147 See Brazil's Rebuttal Submission, Figure 9. 
148 Brazil's First Written Submission, Section 7.5 and Brazil's Rebuttal Submissi on, Section 2.3.3.2.  
The United States recognized this fact.  See U.S. First Written Submission, para. 285.  WT/DS267/RW 
 Page D-303 
 
 
100. In addition to actual data, Brazil provided  analysis from institutions such as the World 
Bank149, the Food and Agricultural Organization150, and the Overseas Development Institute151 to 
demonstrate the supply-enhancing and price-suppr essing effects of marketing loan and counter-
cyclical subsidies.     
101. The abundant and diverse evidence provided by  Brazil shows the significant effect that U.S. 
marketing loan and counter-cyclical subsidies ha ve on U.S. upland cotton plantings.  The resulting 
extra supply, whether in the form of exports or te mporary stocks, in turn affects the world market 
price for upland cotton, which is determined by th e equilibrium between supply and demand.  Prices 
fall when the amount of supply exceeds demand and rise when demand exceeds current levels of 
supply.  As changes in both supply and demand affect price levels, a supply-enhancing subsidy 
evidently impacts prices negatively.
152  Recent market reports confirm this.  O.A. Cleveland stated 
that prices "struggle under the pressure of excessive carryover stocks into 2008.  …  For now the 
potential for a nine million bale carryov er will keep a lid on the market"153 and that "with prospects of 
ending stocks rising to 8.2 to 8.5 million bales come  July 31, 2007, both old crop and new crop prices 
have little possibility of moving higher."154 
 102. Moreover, the factors cited by the original panel in assessing significance
155 continue to exist 
for MY 2003-2005.156  As the original panel explained, significance can be assessed in light of the 
market and product at issue.157  The size of the fungible U.S. upland cotton supply results in a 
substantial proportionate influence on world market pr ices.  In the world market for upland cotton, 
even price effects much smaller th an those established by Brazil would be "significant" in light of the 
large volume of upland cotton traded and the ge nerally small profit margins of upland cotton 
producers.158  Professor Sumner159, Andrew Macdonald160 and other market analysts confirm that the 
subsidies still have a significant price-suppressing e ffect.  Professor Sumner's 2006 model, consistent 
with USDA studies relied upon by the original panel, found for MY 2005 that marketing loan and 
counter-cyclical subsidies sustained about 2.5 million acres of upland cotton resulting in over 
4 million bales of surplus production and exports a nd caused world market prices to be 6 cents per 
                                                      
149 Brazil's First Written Submission, Section 7.12.2 and Brazil's Rebuttal Submission, Section 2.3.7 
referring to Exhibit Bra-481 (Anderson, Kym and Valenz uela, Ernesto "WTO's Doha Cotton Initiative:  A tale 
of Two Issues," Development Research Group, World Bank, February 2006). 
150 Brazil's Rebuttal Submission, Section 2.3.7 referring to Exhibit Bra-55 (Poonyth, Daneswar, 
Alexander Sarris, Ramesh Sharma, and Shanguan Shui, "The impact of Domestic and Trade Policies on the World Market," FAO Commodity and Trade Policy Research Working Paper No. 8). 
151 Brazil's Rebuttal Submission, Section 2.3.7 referring to Exhibit Bra-578 (Gilson, Ian et al ., 
"Understanding the Impact of Cotton Subsidies on Developing Countries," ODI). 
152 For details on the functioning of the world market for upland cotton, see statements of Andrew 
Macdonald Statements in Brazil's Further Submission befo re the original panel, Annex II;  Brazil's First Written 
Submission, Annex II;  Brazil's Oral Statement, Section 2.8. 
153 Exhibit Bra-677 (Cotton Ma rketing Weekly, 9 March 2007, accessed March 2007 at 
http://www.cottonexperts.com/solutions/cottonmktweekly.html ). 
154 Exhibit Bra-678 (Cotton Mark eting Weekly, 16 February 2007, accessed March 2007 at 
http://www.cottonexperts.com/solutions/cottonmktweekly.html ). 
155 Panel Report, U.S. – Upland  Cotton , paras. 7.1316-7.1333. 
156 Brazil's First Written Submission, Section 7.13;   Brazil's Oral Statement, Section 2.6. 
157 Panel Report, U.S. – Upland  Cotton , para. 7.1329. 
158 Brazil's Closing Statement, Section 7. 
159 Analysis of Effects of U.S. Upland Cotton S ubsidies on Upland Cotton Prices and Quantities by 
Dan Sumner, Brazil's First Written Submission, Annex I and Section 7.12.1. 
160 Statement by Andrew Macdonald in Brazil's Oral Statement, para. 150. WT/DS267/RW  
Page D-304  
 
pound lower.
161  Thus, the challenged U.S. subsidies (1) increase acreage and the resulting production, 
stocks and exports, and (2) significantly suppress prices. 
103. In sum, Brazil's evidence estab lishes that marketing loan and counter-cyclical subsidies, in 
view of their nature and magnit ude and in light of the prevaili ng conditions of competition in the 
world market for upland cotton significantly suppr ess the world market prices for upland cotton.  
While the failure of the United States to implemen t fully the recommendations and rulings of the DSB 
prevents Brazil and the compliance Panel from di rectly observing how much prices are suppressed, 
such price suppression can be measured through a counterfactual but for  analysis such as the one 
conducted by the original panel.  As the United Stat es has not taken any measures to amend or change 
marketing loan and counter-cyclical payment program s, this compliance Panel should adopt the same 
conclusions as the original panel and Appellate Body.   
 104. Indeed, the original panel did not have any "smoking gun" empirical evidence in which the 
United States admitted that its subsidies cause si gnificant price suppression in the world market for 
upland cotton.  Instead, in Sections VII:G.3(j)  ("Is there price suppression in the same world 
market?") and VII:G.3(k) ("The effect of the subsi dy" and "Is there a causal link") of its report, the 
original panel examined a wide variety of circumst antial evidence.  Brazil's evidence and argument in 
these proceedings similarly demonstrate significant price suppression through a wide variety of updated evidence that continues to support many of the findings by the original panel.  They, therefore, can and should be adopted by the compli ance Panel.  Indeed, there is no legal or factual 
basis for this compliance Panel to accept the various U.S. attempts to have it effectively reverse the 
original panel's findings that were affirmed by the Appellate Body and adopted by the DSB.
162  
Brazil's significant price suppression argumentation a nd evidence adopt the approach taken by the 
original panel, although it has done so by establishing causation in a "unitary" format.163   
 105. Finally, Brazil notes that it has presented cons iderable evidence that Step 2 subsidies, and 
their removal, did not have the effect of di minishing, or cancelling out, the significant price 
suppression"
164 caused by marketing loan and counter-cyclical subsidies.165  Brazil established that the 
removal of the Step 2 subsidies will actually increase counter-cyclical subsidies and only very 
minimally reduce marketing loan subsidies.166  Brazil also established th at the repeal of Step 2 
subsidies has not eliminated or reduced the pressure on world prices from excess U.S. production, 
                                                      
161 See Brazil's Oral Statement, para 37.  See also Analysis of Effects of U.S. Upland Cotton Subsidies 
on Upland Cotton Prices and Quantities by Dan Sumn er, Brazil's First Written Submission, Annex I and 
Section 7.12.1. 
162 Many of the panel's findings appealed by the Un ited States were rejected by the Appellate Body.  
See Appellate Body report, U.S. – Upland  Cotton , paras. 419-484.  As underlined by the Appellate Body in 
U.S. – Softwood  Lumber  VI (21.5), "Article 21.5 panels can be expected to refer to their original panel reports, 
in particular, when matters before them are closely relate d to the matters before the original panel. […] doubts 
could arise about the objective nature of an Article 21.5 panel's assessment if, on a specific issue, that panel 
were to deviate from the reasoning in the original panel report in the absence of any change in the underlying 
evidence in the record and explanation"  (paras. 103-105).  Or, in the United States' words, in para. 180 of the 
United States' First Written Submission, "[T] the findings in the original proceeding formed the basis for the 
compliance by the United States with the DSB recommendatio ns and rulings.  […] those findings are taken as a 
given purpose of this Article 21.5 proceeding.  Brazil cannot declare those findings of the original panel to be 
wrong or of no effect." 
163 Brazil's First Written Submission, paras. 55-63.   
164 Panel Report, U.S. – Upland  Cotton , para. 7.1350.  See Brazil's response to question 74, below.   
165 Brazil First Written Submission, paras. 191-209;  Br azil Rebuttal Submission, paras. 48-90;  Brazil's 
Oral Statement, paras. 135-144 and 156-162;  Brazil's Closing Statement, paras. 9-14 and Brazil's Comments on 
the U.S. Oral Statement, paras. 5-9.   
166 Brazil's First Written Submission, paras. 197-198,  Brazil's Rebuttal Submission, paras. 57-65 and 
Brazil's Oral Statement,  paras. 136-140.   WT/DS267/RW 
 Page D-305 
 
 
stocks, and exports generate d by marketing loan and counter-cyclical subsidies.167  Nor does the 
removal of Step 2 result in any significant or lo ng-term reduction of U.S. exports.  Indeed, the 
Vice-President of the NCC recently predicted that  U.S. exports would increase significantly in 
MY 2007 over MY 2006 exports.168  Brazil demonstrated that 2005 exports exhibit distorted data as a 
result of an unusually high surge of exports just prior to the termination of the Step 2 program.169  
Thus, the United States'. claims that exports in MY  2006 fall because of the repeal of Step 2 subsidies 
are unfounded.   106. In sum, Brazil's arguments and evidence dem onstrate "without doubt" that the U.S. marketing 
loan and counter-cyclical subsidies cause significan t price suppression in the world market for upland 
cotton.  
 
70. How does Brazil respond to the United States' re buttal that Brazil has not even established a 
temporal correlation between payment of subsidi es and significantly suppressed prices during the life 
of the FSRI, that is from marketing year 2002  to 2005?  More specifically, please address the 
United States' claim of the stability of US plantings, US share of world production, US share of world 
exports and the world price of cotton during this period.  
 
107. A temporal "coincidence" between the paymen t of subsidies, increased U.S. exports, and a 
drop in world prices during the period MY 1999-MY 2002 was one of many factors and evidence that the original panel examined and found relevant for its causation findings.
170  In updating evidence that 
the original panel relied on, Brazil demonstrated th at, as in MY 1999-2002, there was also a temporal 
coincidence in the period MY 2002-2005 between th e payment of massive marketing loan and 
counter-cyclical subsidies and contin ued high levels of planted acreage.171  Brazil further 
demonstrated a temporal coincidence between conti nued high levels of U.S. subsidized acreage in 
MY 2002-2005 (generating record high yields) and abso lute levels of U.S. production that increased 
by 41 percent and exports that surged by 55 percent.172  Brazil also demonstrated the temporal 
coincidence between the payment of massive mark eting loan and counter-cyclical subsidies and 
stubbornly low world market prices during MY 2002-M Y 2005 that remained 20 percent below their 
1980-1998 average.173  
 108. Thus, as a factual matter, the U.S. asserti on that there were not "coincidences" between 
(a) increased U.S. production and exports and (b) large U.S. marketing loan and counter-cyclical 
subsidies is wrong.  It is fact that, over the lif etime of the FSRI Act of 2002, U.S. exports increased 
55 percent and U.S. production incr eased 41 percent.  And it is fact that at the same time, U.S. 
marketing loan and counter-cyclical subsidies increased by 21 percent in MY 2005 compared to 
                                                     
 
167 Brazil's Oral Statement, para s. 157-162, Brazil's Closing Statement, paras. 9-14 and Brazil's 
Comments on the U.S. Oral St atement, paras. 10-12.   
168 Exhibit Bra-679 ("US Cotton Indu stry To Face Challenges In Gl obal Market," 2006 AgWeb.com, 
accessed March 2007 at http://www.cattlene twork.com/content. asp?contentid=103318 ) quoting Garry Adams, 
Vice President of the National Cotton Council, ("Looking to the 2007-08 marketing year, however, Adams said 
the NCC sees U.S. exports recovering to 16.22 million bales as foreign mill use increases.").  
169 Brazil's Rebuttal Submission, paras 77-79;  Brazil's Oral Statement, para. 143 and Brazil's Closing 
Statement, paras. 11-14.   
170 See, e.g., Panel Report, U.S. – Upland  Cotton , paras. 7.1260-7.1303, 7.1380-7.1333 
and 7.1339-7.1363.  
171 See Brazil's response to question 63, above.   
172 Exhibit Bra-447 (Upland Cotton Supply and Use, October 2006). 
173 The average A-Index price during MY 1980-1998 was 73.36 cents per pound.  The average A-Index 
price during MY 2002-2005 was 58.92 cents per pound.  See Exhibit Bra-673 (Upland Cotton Prices, 
March 2007).   WT/DS267/RW  
Page D-306  
 
MY 2002, and by 54 percent between MY 2002 and MY 2004.
174  Brazil further demonstrated that 
while there were higher yields during MY 2002-2005,  these yields took place on planted acreage that 
benefited from massive subsidies, and that but for these subsidies, U.S. production and acreage would 
have been lower .175  
 
109. These temporal "coincidences," in isolation,  suggest a relationship between the massive 
marketing loan and counter-cyclical subsidies and suppressed U.S. and suppressed world market 
prices.     110. Such coincidences, in and of themselves, ar e of course not sufficient to establish causation.  
Nor did the original panel base its analysis even pr imarily on such coincidences.  Rather, it saw the 
coincidences – two facts occurring at the same ti me – as another piece of evidence suggesting that 
subsidies significantly suppress world market prices.
176   
 111. Brazil now turns to the United States' assertion that the U.S. share of world upland cotton 
production, and share of world exports did not increase and that this would be evidence of a lack of 
causation.  This argument is without merit.  One key flaw in the U.S. argument is that it ignores the 
fact that absolute levels of U.S. upland cotton production and absolute levels of U.S. upland cotton 
exports increased substantially despite low market pr ices and despite the fact that U.S. upland cotton 
producers have among the highest production costs in the world.
177  It was only in light of these 
considerable increases in production and exports that the United States was able to maintain its market 
shares at times when worldwide demand for and pr oduction of upland cotton increased considerably.  
These continued high market shares occurred at the sa me time that U.S. price-contingent subsidies 
increased covering massive losses of U.S. upland co tton producers.  So, contrary to the U.S. 
argument, the stable share of U.S. production and exports does not demonstrate the absence of a 
temporal coincidence.  Rather, the large absolute increases in production and exports establish the 
existence of a very strong coincidence. 
 112. Further, the United States claim that the stab ility of U.S. acreage demons trates the lack of any 
"temporal coincidence" (and hence causation) is al so without merit.  Brazil refers the compliance 
Panel to its response to question 63, above, where th e issue of stable acreage is addressed in more 
detail.  Brazil also notes that the original panel did not find that U.S. acreage increased during the 
reference period of MY 1999-2002.  In fact, U.S. acreage declined by 6 percent between 
MY 1999-2002.
178  And the original panel also found that U.S. "production may have been driven 
upward by high yields" during that time.  Yet, these  two "negative" coincidences did not prevent the 
original panel from finding a "strong temporal coin cidence between the Unite d States subsidies and 
the drop in United States prices, the drop in – an d suppression of – world market prices, the increase 
in United States exports."179    
 113. Moreover, contrary to the situ ation before the original panel, planted acreage did not decline 
between MY 2002-2005.  Instead, it increased by 2 percent.
180  This is an even stronger "coincidence" 
(or relationship) between planted acreage and subsid ies than existed before the original panel.  
Further, the original panel placed considerable we ight on the fact that A-Index prices were 29.5 
                                                      
174 Brazil's First Written Submission, Table 6 at para. 111, as amended by updated marketing loan 
subsidy amounts ( see Brazil's 16 March Comments on U.S. Answer to Question 4, para. 14) and an updated 
counter-cyclical subsidy amount in MY 2005 ( see Brazil's Oral Statement, para. 40). 
175 Brazil's First Written Submission, para. 175;  Brazil's Rebuttal Submission, paras. 226-231. 
176 Panel Report, U.S. – Upland  Cotton , paras 7.1351-7.1352.   
177 Brazil's First Written Submission, para. 162.  See also  Exhibit Bra-480 (Survey of the Cost of 
Production of Raw Cotton, ICAC, November 2004). 
178 Exhibit Bra-447 (Upland Cotton Supply and Use, October 2006). 
179 Panel Report, U.S. – Upland  Cotton , para. 7.1352.   
180 Exhibit Bra-447 (Upland Cotton Supply and Use, October 2006).  WT/DS267/RW 
 Page D-307 
 
 
percent lower in MY 1999-2002 on average than during the period between MY 1980-1998.  This 
same "coincidence" existed during the period MY 2002-2005, with A-Index prices 20 percent lower 
than during the period MY 1980-1998.181    
 114. An examination of changes in U.S. acreage relative to changes in planting period futures 
prices further supports the existence of a temporal  coincidence between U.S. marketing loan and 
counter-cyclical subsidies and suppressed worl d market prices.  As shown by Brazil
182, in five out of 
the last eight years, changes in U.S. acreage ha ve moved in different directions from changes in 
futures prices, although one would expect – everyt hing else being equal – that market-based producers 
adjust planting in line with cha nges in expected prices.  Noticeab ly, changes in non-U.S. acreage and 
futures prices have moved in the same direction in seven out of eight years.183    
 115. Finally, while the United States claims that farm ers' price expectations at the time of planting 
are the key factor in establishing causation, it ignores one of the most important "temporal 
coincidences" in the record.  In the spring of 2005, New York futures prices predicted the second 
lowest harvest time prices in 10 years.  U.S. producers responded by increasing planted acreage by 
4.2 percent.
184  These same producers had received more than $2.5 billion in marketing loan and 
counter-cyclical subsidies just the year befo re and received more than $2 billion in MY 2005.185  By 
contrast, the Brazilian producers responded to pr edicted lower upland cotton prices in 2005 by 
planting 27 percent fewer acres. 186  Similarly, non-U.S. acreage de clined by 5 percent in MY 2005 as 
compared to MY 2004.187  These temporal coincidences are important pieces of evidence suggesting 
the strong effects of the U.S. subsidies in suppressi ng world market prices.  The effect of the price-
contingent subsidies in "insulating" U.S. produ cers from and in "numbing" their reaction to market 
price signals in MY 2005 was a record amount of U.S.  production.  This results were predictable in 
light of the supply and demand dynamics in an integrated world cotton market for a fungible, commodity product – low world market prices.
188   
 
116. In sum, the United States' repeated assertion that Brazil has not provided evidence of relevant 
temporal coincidences is simply wrong.  Brazil refers the compliance Panel to its response to 
question 69, above, and also notes that it provided data covering these various coincidences during 
MY 2002-2005 in its Written Submis sions and Opening Statement – evidence which remains largely 
undisputed.189 
 
71. In the original case, the Panel concluded t hat the analysis covering "the six-year period from 
1997-2002 ... lends itself to an assessment of the medium- to longer-term examination of developments in the United States upland cotton indu stry" (see para. 7.1354 of the original panel 
report).  Thus, total costs of production were the costs considered appropriate by the Panel.  Would 
total costs of production continue to be relevant  should the compliance Panel decide to use only 
                                                     
 
181 The average A-Index price during MY 1980-1998 was 73.36 cents per pound.  The average A-Index 
price during MY 2002-2005 was 58.92 cents per pound.  See Exhibit Bra-673 (Upland Cotton Prices, 
March 2007). 
182 Brazil's Rebuttal Submission, Table 9 at para. 224. 
183 Brazil's Rebuttal Submission, Table 9 at para. 224. 
184 Brazil's Oral Statement, paras. 62-67;  Exhibit Bra-447 (Upland Cotton Supply and Use);  Exhibit 
Bra-621 (Upland Cotton Expected Marketing Loan Payments Based on Futures Prices).  
185 Brazil's First Written Submission, Table 6 at para. 111, as amended by updated marketing loan 
subsidy amounts ( see Brazil's 16 March Comments on U.S. Answers to Question 4, para. 14) and an updated 
counter-cyclical subsidy amount in MY 2005 ( see Brazil's Oral Statement, para. 40). 
186 Exhibit Bra-629 (Brazilian Harvested Acreage, Producer, Supply & Distribution Database, FAS, 
USDA). 
187 Exhibit Bra-570 (Producer, Supply & Distribution Database, FAS, USDA).   
188 For details, see Brazil's Oral Statement, para. 62. 
189 Brazil's First Written Submission, Sections 7.4- 7.6 and 7.9-7.10;  Braz il's Rebuttal Submission, 
Section 2.3.5 and Brazil's Oral Statement, Sections 2.2-2.4 and 2.6-2.7. WT/DS267/RW  
Page D-308  
 
marketing year 2005 as the reference period for analysis?  Or would variable costs of upland cotton 
farming in marketing year 2005 now be the relevant information to consider?  
 
117. Brazil considers that total costs continue to  be highly relevant.  Brazil urges the compliance 
Panel to adopt one of the primary findings of the orig inal panel's causation analysis relating to "total 
cost of production."  The original panel found as follows:    
 
[The] divergence between the United States producers' total costs of production and 
revenue from sales of upland cotton si nce 1997 … supports the proposition that 
United States upland cotton producers would not have been economically capable of 
remaining in the production of upland cotton had it not been for the United States 
subsidies at issues and that the effect of  the subsidies was to allow United States 
producers to sell at a price lower than would otherwise have been necessary to cover their total costs.  …  We believe that th e existence of this gap between upland cotton 
producers' total production costs and market revenue, on the one hand, and the effect 
of the subsidies, on the other hand, was to sustain a higher level of output than would 
have occurred in the absence of th e United States subsidies at issue.
190  
118. There have been no fundamental changes in  the conditions of competition or any other 
relevant factor that would compel this complianc e Panel to reject these findings and conclusions.  
Long-term total costs were, and continue today, to  be highly relevant for assessing the present effects 
of subsidies.    
 
119. Further, as the original panel found, "[c]ons ideration of developmen ts over a period longer 
than one year, while not necessarily required (at least in Articles 5(c) and 6.3(c)) provides a more robust basis for a serious prejudice evaluation than merely paying attention to developments in a 
single recent year."
191  The original panel further noted that "having found that the subsidies exist and 
have been provided over a longer period of time than  one year, it would be inappropriate to look at 
trends only in the last year to arrive at an y conclusion on serious prejudice [because]  …  the market 
may well already be distorted in a given year due to subsidies ."192    
 120. Thus, even if the compliance Panel uses onl y MY 2005 as a reference period, both variable 
and longer-term total costs would be relevant information to consider.  In examining the effects of 
marketing loan and counter-cyclical subsidies in  the MY 2005 reference year, the compliance Panel 
cannot conduct its counterfactual analysis in a vacuum.  Over the long term, i.e., over several years, 
the "typical" upland cotton farmer must meet his or her total costs of production or go out of business.  
When deciding what to plant in MY 2005, the typical farmer must make planting decisions to generate sufficient revenue to meet  full variable costs, as well as to make sufficient payments to 
creditors demanding ongoing payment of long-term costs.  Assuming no marketing loan and counter-
cyclical subsidies had been rece ived between MY 2000-2005, the typi cal U.S. upland cotton farmer in 
production since MY 2000 had a $663 per acre deficit.
193 
 121. Thus, in the counterfactual, a farmer has two di fferent, but related cost concerns at the time of 
planting in MY 2005:  first, to meet the full variable costs of  producing the crop such as seed, land, 
fertilizer, labor, and energy costs;  and second , ensuring that sufficient funds were available to service 
fixed costs such as mortgage and equipment.  W ithout generating sufficient revenues to meet this 
second set of costs, there would be no facilities or equipment to grow upland cotton in the first place.  Thus, the U.S. assertion that farmers' only concer n in MY 2005 was to cover variable costs ignores 
the reality of an ongoing long-term cost deficit th at, at a minimum, would have be financed each and 
                                                     
 
190 Panel Report, U.S. – Upland  Cotton , para. 7.1354.  
191 Panel Report, U.S. – Upland  Cotton , para. 7.1199.   
192 Panel Report, U.S. – Upland  Cotton , para. 7.1199 (emphasis added). 
193 Brazil's First Written Submission, para. 158.  WT/DS267/RW 
 Page D-309 
 
 
every year.  Of course, with marketing loan and counter-cyclical subsidies, upland cotton farmers not 
only covered their costs, they also achieved a healthy profit.194    
 122. Whichever cost measurement is used, a comparison of expected market returns and 
production costs in MY 2005 suggest that much less cotton would have been produced but for  
marketing loan and counter-cyclical subsidies.  In  its Rebuttal Submission, Brazil showed that the 
average acre planted to upland cotton in MY 2005 was able to cover its variable cost of production by 1 cent per pound.
195  Considering the wide range of cost structures for various types of upland cotton 
producers, this means that a large minority of upland cotton producers were unable to cover their 
variable costs of production in MY 2005.  Moreover , considering that futures prices were predicting 
even lower prices than those achieved in MY 2005, ev en more producers did not expect to be able to 
cover their variable costs of production.196    
 123. Even for farms that are able to cover their variable costs, the elimination of upland cotton 
marketing loan and counter-cyclical subsidies would result in significantly less production, even if the 
compliance Panel's reference period was confined to  MY 2005.  As explained by Professor Sumner in 
Brazil's Oral Statement, "the supply equations [Professor Sumner's]  model, FAPRI's acreage allocation equations, USDA's supply models and statistical analysis of crop supply are all consistent 
with the principle that acreage of a crop declines when expected revenue falls relative to costs."
197    
 
72. Brazil has argued that the adjustment in cotton stocks should not be included in the 
simulation of a large and permanent reduction in subsidies to cotton. Please respond to the following 
argument:   
 
If the simulation were a comparative static analysis in which a baseline is compared 
to a counterfactual outcome in some l ong-run state, modelling such adjustments 
would be unnecessary. But such adjustments should be taken into account given that 
the model is used to simula te the average impact on the world price of cotton (among 
other variables) on specific periods of ti me (MY 2002-05 or MY 2006-08) and not in 
the long run.   
124. For the specific time periods mentioned in the question, the demand-side question of 
Professor Sumner's simulation analysis is the fo llowing:  how would the quantity of upland cotton 
demanded have responded to a fully anticipated a nd permanent removal of the upland cotton subsidy 
programs at issue.  To properly assess this question, the modeller must specify the appropriate elasticity of demand for upland cotton that is applicab le to this specific counterfactual situation.    
 125. Upland cotton market prices and stocks fluctu ate for many reasons.  For the purposes of the 
assessment relevant to this dispute, the demand el asticity includes those reductions in stocks that 
would have occurred in response to the permanent and expected price increase caused by the removal 
of the subsidy programs at issue.  Under this questio n, even for a particular time period, upland cotton 
                                                     
 
194 Brazil's Oral Statement, paras. 54-91.  
195 Brazil's Rebuttal Submission, para. 269.  Measurement of variable costs includes operating, land 
and labour costs because a fa rmer can choose to incur them on an a nnual basis, while capital recovery costs, 
which are variable to some  degree, are not included. 
196 Brazil's Rebuttal Submission, para. 274.  Braz il notes that in its Comments on Brazil's Oral 
Statement, the United States asserts th at upland cotton producers expected to  be able to cover their variable 
costs of production every year during MY 2002-2007.  To reach this conclusion, the United States excluded variable costs associated with land an d labor, used yields that were far higher than what farmers could have 
possibly expected (for instance, in MY 2002, the United States asserts that farmers expected to achieve an 
average yield of 723 pound per planted acre, approximately five percent higher than the all-time record high yield at the time) and used futures pr ices adjusted for a 5 cent cash basis th at is not supported by the data ( See 
Exhibit US-139). 
197 Brazil's Oral Statement, para. 95. WT/DS267/RW  
Page D-310  
 
exporters and mill users would not reduce their stock to  the extent that they would if a price increase 
was not fully anticipated and thought to be tempor ary.  Significant short-run adjustments in stocks 
occur when price shocks are part of the normal fluc tuations in the market and may occur if the policy 
change were expected to be temporary.  It is this sort of response in stocks to changes in prices that 
are measured by econometric analysis of hist orical data.  These responses concern the natural 
tendency to reduce stock during temporarily high pr ices and to build stocks during temporarily low 
prices.     126. Thus, even though the simulation is being applie d to a counterfactual analysis of a particular 
time period, measured responses of stocks to temporary price swings do not represent changes in 
quantity demanded that should be added to demand response to a permanent  and anticipated  
reduction in subsidies.   127. By contrast, if subsidies were expected be removed for a few years and then reinstated, the 
price increase would be expected to be temporar y and stockholders would have great incentive to 
reduce stocks while prices were high and build back stocks after prices fell again.   
 
73. How does Brazil respond to the argument made by the United States in paragraph 79 of its 
Opening Statement that:   
 
"to the extent a counterfactual assessment is undertaken, it is only to assess what the 
price equilibrium would be at present if marketing loan and counter-cyclical 
payments had been lower, different or did no t exist.  Article 6.3(c) does not ask what 
prices will look like in the short-run adjustment period if the marketing loan and counter-cyclical payments are suddenly e liminated... Brazil's argument that it is 
necessary to look at the short-run effects of total elimination of the programs cannot 
be accurate as a textual matter."   
 More specifically:   
 
a) Why did Brazil not consider it appropriate to include simulations that involve 
reductions rather than elimination of the subsidy programmes?   
 
128. Brazil does not consider that an assessment of  reductions of the marketing loan rate or a 
reduced target price for counter-cyclical subs idies would be appropriate in these compliance 
proceedings to resolve Brazil's claims of inco nsistency pursuant to Articles 5 and 6.3 of the 
SCM Agreement .  When the United States finally amended the basket of price-contingent measures on 
1 August 2006, it did not partially reduce marketing loan payments or counter-cyclical payments.  
Had it done so, the compliance Panel would properly examine whether such reduced marketing loan 
rates or reduced target price for counter-cyclical payments  were sufficient to eliminate fully the 
serious prejudice claimed by Brazil.  It is not Brazil's role – or that of the compliance Panel – to theorize or investigate what levels of reductions of ta rget price, loan rates, or other eligibility criteria 
for receiving such subsidies the United States should or  should not make to eliminate fully the serious 
prejudice caused to Brazil.  Rather, in this compliance proceeding, the compliance Panel must 
examine the serious prejudice caused by the non -reduced marketing loan and counter-cyclical 
subsidies.  These subsidies are the measures before  the compliance Panel – not some modified or 
reduced form of these subsidies.     129. Article 6.3 requires a counterfactual examination of effects but for "the subsidy."  This does 
not involve assessing effects of a "lower" or  "changed" subsidy, but "effects" of " the subsidy," i.e., the 
measure at issue.   An assessment of a reduced subsidy woul d not enable the compliance Panel to 
determine whether the full "effect of the subsidy"  amounts to serious prejudice or adverse effects to 
the interests of the complaining Member.  It woul d simply reveal fewer effects than are actually 
caused by the subsidy at issue.  WT/DS267/RW 
 Page D-311 
 
 
130. An assessment of the full effects of the subsidy is consistent with the findings of the original 
panel and the Appellate Body, which assessed the eff ects of the full amount of all price-contingent 
subsidies.  It is also consistent with the count erfactual "but for" approach adopted by the panel Korea 
– Commercial Vessels .  Specifically, that panel held as follows:   
 
[T]he text of Article 6.3(c) implies a "but  for" approach to causation in respect of 
price suppression/depression.  Price suppression is the situation where prices have been restrained by something, and price depression is the situation where prices have 
been pushed down by something.  So the question to be answered is whether the 
"something" is subsidization.  Looki ng at a counterfactual situation, i.e., trying to 
determine what prices would have been in th e absence of the subsidy, seems to us the 
most logical and straightforward way to answer this question.
198  
131.  Further, the counterfactual assessment must  determine what the effect of removing the 
subsidy would be today – not years from today.  Article 6.3 of the SCM Agreement requires the 
assessment of whether "the effect of the subsidy," "is " "significant price suppression."199  F r o m  a  
textual point of view, this requires assessing how the challenged subsidy causes present  "significant 
price suppression" under market conditions during the reference period.  The analysis does not 
involve examining the serious prejudice that may exist years later over a sufficiently long time for any shock to result in a new equilibrium.  This assessm ent necessarily is of a short-term, not long-term 
nature.     
132. These general principles are even more appli cable in Article 21.5/Article 7.8 proceedings.  
Any Member that retains or amends the challenged subsidy measure (or "basket of measures") still maintains "the subsidy."  Articles 7.8 and 7.9 of the SCM Agreement require the full removal of all 
adverse effects (assuming no withdrawal of the subs idy) within only six months.  This short time 
period exists to protect the complaining Member that  has already endured years of market distortions 
through adverse effects.  As a textual matter, it is , thus, entirely appropriate for this compliance Panel 
to examine the adverse effects of "the subsidy" through a counterfactual analysis that assesses the present effects of eliminating the entire subsidy.     133. With these principles in mind, Brazil emphasi zes that Professor Sumner's model is fully 
appropriate for the question at issue before the compliance Panel.  
 
b) If simulations of such  scenarios are performed , would the current values of the 
elasticities chosen (particularly the supply el asticities) to simulate the elimination of 
marketing loan and counter-cyclical programmes continue to be appropriate?   
Please kindly provide an explanation for the chosen answer .  
 
134. The parameters in Professor Sumner's m odel were specified for cases of permanent and 
anticipated elimination of subsidies.  The full remova l of subsidies is the most appropriate use of the 
model in this dispute.  Yet, the model can also be used to assess less than full removal.  
 135. Generally, Professor Sumner's model was devel oped to apply the same elasticity parameters 
to subsidy reductions rather than subsidy elimination.  There is no  strong evidence that responses are 
not proportional to the amount of price change or change in revenue caused by permanent and 
expected changes in policy incentiv es.  Naturally the model would show that price increases from 
partial removal of subsidies will be smaller than the price increase from full subsidy removal.  
However, the model's assumption that responses are proportional to the price increase would still be 
valid.  Quantity demanded and foreign quantity supplied both respond to  endogenous increases in 
market price.  Constant elasticity m odels are traditional in this context. 
                                                     
 
198 Panel Report, Korea  – Commercial  Vessels , para. 7.612. 
199 See Brazil's Closing Statement, paras 17-20.   WT/DS267/RW  
Page D-312  
 
136. That said, the U.S. supply elasticity may be  even larger for partial subsidy removal for 
two reasons.    137. First , farmers may interpret a partial removal of  subsidies as an indicator that further 
reductions are more likely in the near future.  In that case growers would face more policy uncertainty 
and begin the process of full adjustments by disinv estments in machinery, shifting additional land to 
alternative crops and otherwise anticip ating more changes to come.    
 138. Second , in some regions of the United States ther e are quantitative limits to the amount of 
land and other resources that are likely to shift out of  upland cotton.  A partial elimination of subsidies 
may be enough to encourage all upland cotton land in a region that has feasible alternatives to make 
the shift to other uses.  In that case, full subsid y elimination would not cause any more land to shift 
out of upland cotton.  These two reasons suggest that  it would be useful to explore using a larger 
supply elasticity under simulations of partial subsidy removal.  
 74. Brazil's view is that the data that the P anel must consider for its claim of present serious 
prejudice should be that covering the latest mar keting year for which complete information is 
available, MY 2005, and where credible, evidence after 31 July 2006.  Since in MY 2005, payments 
under Step 2 continued to be made by the United States (payments which the original Panel found to 
have contributed to adverse effects) how shall th e Panel ascertain that any adverse effects observed in 
marketing year 2005 are due solely to the two subsid y measures which are the subject of the present 
serious prejudice claim – marketing loan and counter-cyclical payments?  
139. Consistent with the approach  taken by all prior panels exam ining the effects of subsidies 
under Articles 5 and 6 of the SCM Agreement , the compliance Panel should examine whether 
marketing loan and counter-cyclical subsidies cause significant price suppression by means of a 
counterfactual analysis.  As in the original proceed ing, this counterfactual analysis involves assessing 
whether any factors (other than the challenged subs idies) "would have the effect of attenuating this 
causal link, or of rendering not 'significant' the effect of the subsidy."
200  In these implementation 
proceedings, Step 2 subsidies in MY 2005 constitute such a non-attribution factor.201  With respect to 
the Step 2 subsidy, the question is whether it had "the effect of diminishing, or cancelling out, the significant price suppression"
202 caused by marketing loan and counter-cyclical subsidies.    
 
140. In other words, the compliance Panel must assess whether other factors, including the Step 2 
subsidy, operate to diminish, cancel out or render in significant the effects of U.S. marketing loan and 
counter-cyclical subsidies.  This is very similar to the analysis that the original panel performed with 
respect to direct payments and crop insurance subsidies.203  Indeed, the fact that  both price-contingent 
subsidies and non-price contingent subsidies were provided in the same  marketing year (MY 2002) 
did not prevent the original panel from focusing its significant price suppression analysis only on the 
effects of the price-contingent subsidies.    141. Brazil asks this compliance Panel to adopt the same analytical approach that the original 
panel adopted with respect to MY 2002.  This involves focusing on only the effects of marketing loan 
and counter-cyclical subsidies in MY 2005, and assessing whether the effects of other subsidies, 
including Step 2, attenuate the causal link.     142. Brazil has suggested that the compliance Pane l conduct this analysis by using many of the 
same factors examined by the original panel in  finding significant price suppression and causation by 
                                                     
 
200 Panel Report, U.S. – Upland  Cotton , para. 7.1356. 
201 Brazil's Oral Statement, para. 135. 
202 Panel Report, U.S. – Upland  Cotton , para. 7.1350. 
203 Panel Report, U.S. – Upland  Cotton , para. 7.1350.  WT/DS267/RW 
 Page D-313 
 
 
means of a "unitary" analysis.204  The original panel found that "it is important for the establishment 
of 'current' serious prejudice that such prejudice w ould be established to exist up to, and including, a 
recent point in time."205  Brazil emphasizes that the appropria te reference period to conduct the 
counterfactual is MY 2005.  This is the marketing y ear for which complete data is available.  The 
original panel considered that complete data w as required for its assessment when it stated that:  
"MY 2002 is a relevant year for our serious prejudi ce inquiry.  It represents a recent period for which 
essentially complete data exists."206 
 143. Brazil recognizes that because of the repeal of  Step 2 on 1 August 2006, it is also appropriate 
to set forth relevant evidence con cerning the effects of marketing loan and counter-cyclical subsidies 
after that date.  However, given the importance of comparing full year data, the compliance Panel 
should place primary emphasis on complete MY 2005 data .  In isolating the effects of marketing loan 
and counter-cyclical subsidies, it should assess if other subsidies such as the effects of Step 2, direct 
payments, crop insurance, and export credit guarantee subsidies, among other factors such as China's 
demand and India's exports break the causal li nk between the subsidies and significant price 
suppression.    
 144. Indeed, Brazil has focused a considerable portio ns of its evidence on isolating the effects of 
marketing loan and counter-cyclical subsidies.
207  This evidence, which is primarily focused on 
MY 2005, but also includes data from MY 2006, is more than sufficient to allow the compliance 
Panel to have a firm evidentiary basis for concludi ng that the collective effect of marketing loans and 
counter-cyclical subsidies is significant price suppression and an increase in the U.S. world market 
share.     145. Brazil has also demonstrated that the effects of Step 2 subsidies in MY 2005 were modest 
compared to
 the effects of the two challenged subsid ies – marketing loan and counter-cyclical 
payments.208  Brazil provided considerable data for the pe riod after the repeal of Step 2 that shows 
that marketing loan and counter-cyclical subsidi es continue to significantly suppress world market 
prices for upland cotton.209  Brazil has also demonstrated that the fundamental conditions of 
competition in the world market for upland cotton have  not significantly change d since the repeal of 
the Step 2 subsidy – upland cotton continues to be a fungible commodity and the United States 
continues to exercise a substantial proportionate  influence on the world market price for upland 
cotton.210  Before the original panel as well as befo re this compliance Panel, Brazil also presented 
evidence simulating the effects of subsid ies on the world market for upland cotton.211      
 146. Further, the compliance Panel has the benefit of  the original panel's "non-attribution" analysis 
in which it addressed the various factors other than th e price-contingent subsidies.  The original panel 
made the following conclusion:    
 
[A]lthough some of these factors may have contributed to lower, and even suppressed, world upland cotton prices during MY 1999-2002, they do not attenuate 
                                                     
 
204 Brazil's First Written Submission, Section 7.2. 
205 Panel Report, U.S. - Upland  Cotton , para. 7.1198. 
206 Panel Report, U.S. - Upland  Cotton , para. 7.1198. 
207 Brazil's First Written Submission, Sections 7.4-7.13;   Brazil's Rebuttal Submission, Sections 2.2.2-
2.3.8;  Brazil's Oral Statement, Sections 2.2-2.8;  Brazil's Closing Statement, Sections 4-7 and Brazil's 
Comments on the U.S. Oral Stat ement, Sections 2-5.     
208 Brazil's First Written Submission, Section 7.14;  Brazil's Rebuttal Submission;  Section 2.2 and 
Brazil's Oral Statement, Section 2.7. 
209 Brazil's Rebuttal Submission, Sections 2.2.1, 2.2.4 and 2.3;  Brazil's Oral Statement, Sections 2.4 
and 2.6. 
210 Brazil's Oral Statement, Sections 2.7-2.8;  Brazil's Closing Statement, Section 4 and Brazil's 
Comments on the U.S. Oral Statement, Section 2.   
211 Brazil's First Written Submission, Section 7.12. WT/DS267/RW  
Page D-314  
 
the genuine and substantial causal link that  we have found between the United States 
mandatory price-contingent subsidies at i ssue and the significant price suppression.  
Nor do they reduce the effect of the mandato ry price-contingent subsidies to a level 
which cannot be considered "significant".
212    
147. Brazil has demonstrated that factors such as Step 2, direct payments, Chinese demand and 
supply, and Indian exports have not attenuated th e genuine and substantial relationship of cause and 
effect between marketing loan and counter-cyclical  subsidies and significant price suppression in the 
world market for upland cotton.213  Variations in Chinese demand, Indian exports, or the repeal of 
Step 2 may well be responsible for certain price mo vements in the world market for upland cotton.  
But fluctuations in the world market price of upland cotton are irrelevant to Brazil's claim of 
significant price suppression.  The focus of the analysis is on determining whether world market 
prices would be higher without the two challenged subsidies, regardless of whether those world 
market prices rise or fall.     148. Finally, Brazil references the summary of its evidence and arguments set out in its response to 
question 69, above, and in its prior submissions.  
 
2. Increase in world market share - Article 6.3(d) of the SCM Agreement    
 
Questions to the United States  
 
75. Could the United States explain further the textual basis of its argument that "Article 6.3(d) is not concerned with absolute market share and wheth er or not in any given year a member's market 
share would have been lower if subsidies were remo ved"?  (Rebuttal Submission of the United States, 
para. 401)   
 
Questions to Brazil  
 
76. What is the view of Brazil on the argument of the United States that an inquiry under 
Article 6.3(d) of the SCM Agreement requires two di stinct elements:  first, a demonstration of an 
increase in the world market share of a Member as  compared to the average share it had during the 
previous period of three years, and, second, a demons tration that this increase in world market share 
compared to the average share the Member had during the previous period of three years is part of a 
consistent trend over a period when subsidies ha ve been granted?  (Rebuttal Submission of the 
United States, para. 399)  
 
149. Brazil disagrees with this new interpretation of  "consistent trend" in Article 6.3(d) of the 
SCM Agreement , as recently advanced by the United States.  There is no textual basis for the U.S. 
argument that "the data must show that a Member 's market share is consistently increasing over the 
previous three-year average."
214  Article 6.3(d) provides as follows:   
 
(d)  the effect of the subsidy is an increase in the world market share of the 
subsidizing Member in a particular s ubsidized primary product or commodity as 
compared to the average share it had during the previous period of three years and 
this increase follows  a consistent trend over a period when subsidies have been 
granted.215 
                                                      
212 Panel Report, U.S. – Upland  Cotton , para. 7.1363. 
213 Brazil's First Written Submission, Section 7.15;  Brazil's Rebuttal Submission, Sections 2.2.4 
and 2.3.8. 
214 U.S. Rebuttal Submission, para. 403.   
215 Emphasis added.  WT/DS267/RW 
 Page D-315 
 
 
150. Contrary to its previous arguments in both the original proceeding216 and in its First Written 
Submission217, the United States now claims that the final element of a "consistent trend" in 
Article 6.3(d) requires proof that there have been increases in every year since the subsidies have been 
granted.  Such increases are to be measured, acco rding to the United States, on a three-year rolling 
average.218  This new claim has no legitimate textual basi s.  Indeed, the United States attempts to read 
the separate element of a three-year  average into the element of a "consistent trend."  However, the 
separate element of a three-year average solely serv es to determine the data against which to compare 
the market share of the year for which the assessment is made.   
 
151. The proper assessment of a claim under Article 6. 3(d) begins, first, with the determination of 
whether there has been an increase in the world market share.  Su ch a determination necessarily must 
be conducted with reference to a particular year.  The requirement for an "increase" (or reference) 
year follows from the requirement to  compare market share with the average share a Member had 
over the "previous period of three years."  With resp ect to the first element, the analysis ends here.  
Article 6.3(d) does not contemplate a series of "i ncrease," or reference, years for which multiple 
increases have to be demonstrated.  It requires only an  increase for the year at issue.  In this case, 
MY 2005 is the "increase," or reference, year and marketing years 2002-2004 are the previous period 
of three years used to assess whether there is an increase in the U.S. market share in MY 2005.    
 
152. The key elements in the text of Article 6.3(d)  relevant to the U.S. argument is the term "an 
increase" in the first line, and the phrase "this increase"  in the next to last line.  The "increase" 
referred to in both instances in the text is the same, i.e., an increase in world ma rket share in the most 
recent year (the reference period of MY 2005, in th is dispute).  Other than determining whether there 
is an increase, the text of Article 6.3(d) does not require quantification of the increase.    
 
153. The final step of the Article 6.3(d) assessment  includes a consistent trend.  Contrary to the 
U.S. argument, this step involves determining whet her the increase in the worl d market share follows 
a "consistent trend" over a period in which th e subsidies have been granted.  This is different  from  a 
consistent increase.  Brazil notes that the phr ase "this increase follows" immediately precedes the 
phrase "a consistent trend."  The requirement  that an "increase" follow a "consistent trend " is by no 
means identical to the requirement  the increase be an uninterrupted "consistent increase" every single 
year that subsidies have been granted, as argued by the United States.  A "trend" implies that there 
will be periods in which market share may increase or decrease.  What is important is the overall 
direction of the trend, i.e., that it increases.      
 154. The ordinary meaning of the text of Article 6.3(d) does not require an annual increase in the 
three-year rolling average for a finding of a "consis tent trend."  Indeed, the United States offers no 
reason why the drafters would explicitly state that there should be "an increase … compared to the 
average share it had during the  previous period of three years" and then implicitly impose the 
requirement for an additional increase based on a rolling three-year average for every year.  Under the 
U.S. theory, it is not enough to show an increase in  the most recent year compared to the previous 
three-year average.  Instead, under the U.S. interp retation, there must be an increase for every year 
since the initiation of the subsidies.  The U.S. in terpretation makes the actual textual requirement of 
                                                     
 
216 None of the earlier U.S. arguments relating to Artic le 6.3(d) in this or the original proceeding 
asserted that the concept of a "consis tent trend" required proof of an increase measured by a three-year rolling 
average.  Rather, the U.S. argued that there was a requ irement for an annual incr ease compared to the prior 
year's actual  world market share.  See, e.g., U.S. Further Submission, September 30, 2003, para. 101 ("In two of 
five years, the U.S. share of world ex port trade has decreased rather than increased;  in a third year, the share 
was stable.  Thus, Brazil has failed to make a prima  facie  case of inconsistency w ith Article 6.3(d)").   
217 U.S. First Written Submission, paras. 337-343 (w hich do not indicate the U.S. view that the 
"consistent trend" requires assessment of a rolling three year average).   
218 U.S. Rebuttal Submission, para. 403 ("In other words, to make a claim under Article 6.3(d), the data 
must show that a Member's market share is consistently  increasing over the previous  three-year average.").   WT/DS267/RW  
Page D-316  
 
showing an increase in the most recent year a nullity .  This is because the incr ease would have to exist 
for every year since the subsidy was granted.  It wo uld have been easy for the drafters to impose this 
requirement directly, for example by using the following language:    
the effect of the subsidy is an increase in  the world market share of the subsidizing 
Member in a particular subsidized primary product or commodity for every year in 
which the subsidies have been granted as measured by a moving three-year average 
market share. 
 Of course, no such text exists in Article 6.3(d). 155. Contrary to the new U.S. arguments, the "consis tent trend" referred to in Article 6.3(d) does 
not require proof that a Member's market share is consistently increasing over the previous three-year 
average.  The three-year average in th e text of Article 6.3(d) is relevant only to determine whether 
there is an increase in the market share in a reference year ( i.e., MY 2005 in this case).  There is no 
basis in the text to transform this  single three-year average into a rolling three-year average back to 
the time of the initial provision of subsidies.  Indeed , there is no basis to read  this language into the 
notion of a "consistent trend" in the first place.  As noted above, negotiators could easily have drafted 
such text.  But they did not.  Only a single three-year average is provided for in the text.    
 156. The invalidity of the U.S. argument is furt her supported by the fact that Article 6.3(d) 
addresses only the limited category of "primary prod ucts or commodities."  Commodities or primary 
products are particularly susceptible to fluctuati ons in production, based on weather-related factors, 
which will significantly impact the world market shar e of a subsidizing Member.  The use of the word 
"consistent trend," as opposed to U.S.-imposed s ubstitute phrase "consistent increase," reflects the 
drafters appreciation of this reality.  The United States interpretation, on the other hand, would make 
Article 6.3(d) non-operational even where massive price-contingent subsidies are provided so long as 
subsidizing Member's market share falls for one year during a much longer period over which 
subsidies have been granted.  This is contrary to  the object and purpose of Article 6.3(d), which is to 
ensure that adverse effects are not caused by subsidies for primary products or commodities.  
 157. Finally, Brazil notes that it demonstrated why 1998 is a proper year to begin the analysis of whether the trend has been "consistent,"
219 and why the overall increase of the trend since 1998 meets 
the "consistent trend" test.  Such proof is prope r evidence of a "consistent trend," as required by 
Article 6.3(d).  
 
77. In this connection, could Brazil respond to the argument of the United States that Brazil has 
not shown that either of these elements are me t with respect to the marketing loan and counter-
cyclical payment programs"?  (Rebuttal Submission of the United States, paras. 399-403)  
 
158. Brazil disagrees with the United States for the reasons set forth in its answer to question 76 
above, as well as for the reasons set forth in para graphs 346-358 of Brazil's Rebuttal Submission and 
paragraphs 214-236 of Brazil' s First Written Submission.  
 C. C
LAIM OF BRAZIL REGARDING THREAT OF SERIOUS PREJUDICE  
 
Questions to both parties   
 
78. Could both parties comment on the statements of Canada that "(a)t issue is whether these 
programmes....threaten to cause serious prejudice si mply by virtue of their existence" and that 
"(c)ertain subsidy programs, by their very nature, gi ve rise to a constant likelihood of support that 
results in a permanent threat of serious prejudice"?  (Third Party Submission of Canada, paras. 9-10) 
                                                      
219 Brazil's First Written Submission, paras. 227-229.    WT/DS267/RW 
 Page D-317 
 
 
159. In Brazil's view, it may be possible that, as a theoretical matter, certain types of subsidy programs simply due to their nature and existence ca use a "permanent threat of serious prejudice."  As 
Articles 5 and 6 of the SCM Agreement  focus on effects of subsidies and not on the existence  (as 
would be the case for, e.g., prohibited subsidies), however, as a practical matter, additional proof of 
threat of serious prejudice would be required.  This evidence must show a significant likelihood that 
the subsidy causes serious prejudice in the future.  For example, in addition to the nature and 
existence of a statutory and regulatory instruments,  such evidence could include facts regarding the 
subsidizing Member's producers established history of  significant production and/or exports of the 
subsidized product, or that  without the subsidies, producers would not be able to c over their long-term 
costs of production.
220  
 
160. In this dispute, Brazil has challenged th e marketing loan and counter-cyclical payment 
programs under the FSRI Act of 2002 and the mandat ory and price-contingent payments thereunder 
as causing a threat of serious prejudice.221  In its First Written Submission, Brazil argued, inter alia , 
that:    
 
The FSRI Act of 2002 contains no limits on the amount of upland cotton that can be 
produced by upland cotton farmers receivi ng marketing loan and counter-cyclical 
payments.  The mandatory nature of these large trade-distorting subsidies, coupled 
with the commanding U.S. share of world production and exports, creates a permanent and structural threat of serious prejudice to the interests of other Members, 
including Brazil.  This threat will continue until the expiry or substantial alternation 
of the FSRI Act of 2002, as it applies to upland cotton.
222    
161. In this dispute, Brazil does not claim that the mere "existence" of the marketing loan and 
counter-cyclical payment programs under the FSRI Act of 2002 causes a threat of serious prejudice.  For example, Brazil argued that th e "structure, design and operation, i.e., the very nature, of the U.S. 
marketing loan and counter-cyclical programs provide evidence
 that these subsidies cause a 
significant threat of serious prejudice …."223  In paragraph 260 of its First Written Submission, Brazil 
set out the criteria that it believes are relevant to a ssess claims of a threat of serious prejudice.  It 
applies these criteria by providing evidence in its First Written Submission.  This evidence includes 
the provisions of the FSRI Act of 2002 providing for mandatory and price-contingency marketing loan and counter-cyclical payments,  along with ev idence of projected payments, costs of production, 
price effects, and the commanding U.S. share of world production and exports.  The evidence 
collectively supports a finding that the subsidies cause a threat of serious prejudice.
224   
 162. Finally, Brazil would note its agreemen t with the United States' observation in EC – Selected 
Customs Matters that certain claims under the covered agreem ents are "not readily classifiable in the 
categories of 'as such' and 'as applied.'"
225  Brazil's threat of serious prejudice claim in this dispute is 
not labeled either as a "per se" or "as applied" clai m.  Rather, Brazil  challenges subsidies that have 
not been changed during the implementation period  and that cause, and will continue to cause, 
adverse effects to the interests of Brazil.   
79. Could the parties state their views on th e analysis of the ordinary meaning of the term 
"threat" in paras. 15-28 of the Third Party Submission of Canada?  
                                                     
 
220 See Panel Report, U.S. – Upland  Cotton , paras. 1495-1497.  
221 Brazil's First Written Submission, paras. 237-314.  
222 Brazil's First Written Submission, para. 242.   
223 Brazil's First Written Submission, para. 262 (emphasis supplied).   
224 Brazil's First Written Submission, paras. 237-314.   
225 Appellate Body Report, EC – Selected  Customs  Matters , para. 165.   WT/DS267/RW  
Page D-318  
 
163. Brazil agrees with the well-reasoned analysis  of Canada concerning the appropriate legal 
considerations for assessing a threat in the context of a serious prejudice claim, as set forth in 
paragraphs 15-28 of its Third Party Submission.  Th is analysis complements Brazil's analysis of the 
appropriate legal standard for threat of serious pr ejudice claims, as set forth in paragraphs 246-261 of 
the First Written Submission of Brazil.  
 
Questions to the United States  
 
80. How does the United States address the argument of Japan that in view of the different 
purposes of Parts III and V of the SCM Agreement th e standard for determining threat of material 
injury in Article 15.7 of the SCM Agreement is  an inappropriate standard for determining the 
existence of a threat of serious prejudice under Pa rt III of the SCM Agreement?  (Third Party 
Submission of Japan, paras. 8-12.) '   81. How does the United States respond to the argument of Australia that "it is beside the point 
for the United States to argue that the progr ammes under consideration are due to expire in 
late 2007"?  (Third Participant Oral Statement of Australia, para. 13)   82. Could the United States comment on the proj ections of marketing loan and counter-cyclical 
payments in Table 26 of Brazil's First Writte n Submission and on the projections of prices and 
subsidy payments in Table 27 of Brazil's First Wr itten Submission?  Could the United States explain 
how the data in these Tables support its argument that producers are likely to expect low or no 
marketing loan payments in MY 2007?  (Rebuttal Submission of the United States, para. 418)   
 
Questions to Brazil  
 
83. How does Brazil address the argument of th e United States that footnote 13 of the 
SCM Agreement "does not indicate that where a pane l finds that a Member is causing present serious 
prejudice through the use of a subsidy, the panel automatically also finds that the Member is threatening to cause serious prejudice in the future th rough the use of the same subsidy"?  (Rebuttal 
Submission of the United States, footnote 624)  
 164. Brazil notes that the United States has not properly understood Brazil's arguments concerning 
the relationship between "present" serious prejudice and "threat" of serious prejudice occurring in the 
future.  Brazil does not argue that, by virtue of footnote 13 of the SCM Agreement , a finding of 
"present" serious prejudice necessarily "includes" a finding of a threat of serious prejudice in the future.  Indeed, Brazil's First Written Submission quot ed the original panel's analysis in which it 
stated that "[w]e believe that 'threat' of serious prejudice refers to something distinct from serious 
prejudice."
226  It also quoted the original panel's statement that "present serious prejudice would more 
often be preceded in time by a prejudice that threatens to become serious, and serious prejudice would 
be the realization of a threat of serious prejudice."227  With respect to the future , as opposed to past 
threat, Brazil's position is that a finding of "present" serious prejudice (as distinguished from "threat" of serious prejudice) caused by marketing loan and counter-cyclical subsidies for upland cotton is 
compelling evidence that a serious prejudice will conti nue to be caused by the same subsidies in the 
future.     165. Brazil does wish to take this opportunity to clarify a statement made in paragraph 241 of its 
First Written Submission which appears to have generated some confusion.
228  To the extent that 
                                                      
226 Brazil's First Written Submission, para. 238 quoting  Panel Report, U.S. – Upland  Cotton , 
para. 7.1495.   
227 Panel Report, U.S. – Upland  Cotton , para. 7.1497.   
228 The sentence is as follows:  Brazil notes that it  withdraws this contingency in case the compliance 
Panel were to not agree with the original panel that its present serious prejudice findings includes a finding of  WT/DS267/RW 
 Page D-319 
 
 
Brazil suggested in the first part of the second senten ce of paragraph 241 that the original panel found 
that its present serious prejudice finding includes a finding of threat of serious prejudice in the future , 
that is not correct.  Accordingly, Brazil withdraw s the following statement in paragraph 241 of its 
First Written Submission:  "… the compliance Panel were  to not agree with the original panel that its 
present serious prejudice finding includes a finding of threat of serious prejudice in the future …."  In 
this regard, Brazil refers the Panel to  its response to question 84, below.  
 
84. Could Brazil confirm that its claim of threat of serious prejudice is s ubmitted on a contingent 
basis i.e., that it does not request the Panel to make a finding on this claim if the Panel make a finding of present serious prejudice?  How is the contingent  character of this "threat of serious prejudice" 
claim reflected in Brazil's request for the establishment of a panel?  
166. Brazil's intention in raising a "contingent" threat of serious prejudice claim was to signal that the Panel could exercise judicial economy on this claim if it made a finding of "present" serious prejudice.  However, this compliance Panel is empowe red to make determinations with respect to any 
and all claims asserted by Brazil that the Panel belie ves are necessary to secure  a positive solution to a 
dispute pursuant to Article 3.7 of the DSU.  I ndeed, Brazil's request for establishment of a panel 
includes a threat of serious prejudice claim without an y limitations or contingencies.  Thus, the stated 
contingency as set out in paragraph 241 of Braz il's First Written Submission does not limit the 
compliance Panel's terms of reference.  Moreover,  Brazil has requested that the compliance Panel 
make all necessary findings of fact regarding Brazil's threat of serious prejudice claim in the event of 
an appeal.  In view of these factors and notwithsta nding the previously articulated contingency, Brazil 
requests that the compliance Panel make a determina tion with respect to Brazil's threat of serious 
prejudice claims if it considers that resolution of such claims will contribute to a positive solution to this dispute.   85. Could Brazil explain its request that the Panel "make factual findings with respect to its 'threat of serious prejudice' claim to allow the Ap pellate Body to complete the analysis, in case it 
were to disagree with the compliance panel's int erpretation"?  (First Written Submission of Brazil, 
para. 241) What are the precise "factual findings" which Brazil requ ests the Panel to make in this 
regard? 
 167. Brazil refers the compliance Panel to its answer to question 84 above.  It notes, first, that, to 
the extent that the compliance Panel were to make a determination with respect to Brazil's threat of 
serious prejudice claims, Brazil's request in pa ragraph 241 of Brazil's Fi rst Written Submission 
regarding factual findings would not be necessary.    
 
168. Second, to the extent that the compliance Pa nel were to exercise judicial economy regarding 
Brazil's threat of serious prejudice findings, Braz il requests that the compliance Panel nevertheless 
make factual findings that would allow the Appell ate Body to make a threat of serious prejudice 
finding.  These factual findings would be necessary in  the event that the Ap pellate Body were to 
determine that the compliance Panel has erred (for whatever reason) in making a finding that the 
marketing loan and counter-cyclical subsidies cause  "present" (as opposed to "threat of") serious 
prejudice.   
 
169. Brazil requests the compliance Panel to make the factual findings summarized in 
paragraph 244 of Brazil's First Written Submission, as amplified a nd supported by the evidence 
referenced in Sections 8.3-8.9 (as well as S ection 7) of Brazil's First Written Submission, 
Sections 2.2-2.3.8 of the Rebuttal Submission of Brazil, Sections 2.2-2.8 of the Brazil's Opening 
Statement, Sections 3-7 of the Brazil's Closing Statement, Sections 2-5 of Brazil's Comments on U.S. Oral Statements, and in Brazil's Answers to the questions 89, 69 and 70. 
                                                                                                                                                                    
 
threat of serious prejudice in the future or that its present serious prejudice findings do not require changes to the 
statutory provisions setting up these subsidy programs.).   WT/DS267/RW  
Page D-320  
 
86. How does Brazil address the argument of the Unite d States that the definition of "threat" of 
injurious effects in Article 15.7 of the SCM Ag reement and Article 4.1(b) of the Agreement on 
Safeguards "in terms of their close proximity in time and their high probability of occurring" reflects 
the ordinary meaning of the word "threat" and that, as such, Article 15.7 of the SCM Agreement and 
Article 4.1(b) of the Agreement on Safeguards provide "useful contextual guidance" for the 
interpretation of "threat" of serious prejudice?  
170. In Brazil's view, it is not appropriate to import into Part III of the SCM Agreement the "clearly 
foreseen and imminent" standard of Articles 15.7 of the SCM Agreement and Article 4.1(b) of the 
Agreement on Safeguards .  Brazil's First Written Submission set forth in detail its concern with 
importing the threat standard from Article 15.7 of the SCM Agreement into Part III of the 
SCM Agreement .    
 
171. Article 4.1(b) and 2 of the Agreement on Safeguards as well as Article 15.7 of the 
SCM Agreement deal primarily with the threat posed by a potential surge of imports.  For example, a 
key focus for investigating authoriti es in investigating a threat of injury pursuant to the provisions of 
Article 15.7(ii) is whether there is a "significan t rate of increase of subsidized imports", and 
Article 15.7(iii) requires examination of increased capacity "indicating the lik elihood of substantially 
increased subsidized exports to the importing Member's market …."   
 
172. By contrast, Articles 5(c) and 6.3 as well as footnote 13 of the SCM Agreement deal with the 
likelihood of adverse effects – not subsidized im ports – occurring sometime in the future.  The 
original panel found that "[t]he text of Articles 5 and 6 of the SCM Agreement support the conclusion 
that it is the effects of United States subsidies – not th e effects of the 'subsidized product' – that are at 
issue in a claim of price suppression under Article 6. 3(c)" and that the "references in Articles 5(c) 
and 6.3(c) to the 'effect of the subsidy' contr ast with the language used in countervailing duty 
provisions in Part V of the Agreement."
229    
 
173. Unlike a situation involved in an Article 15.7 of the SCM Agreement or Article 4.1 of the 
Agreement on Safeguards investigation, where goods may be sitting in a warehouse ready to be 
shipped across borders, the effects of subsidies in causing "adverse effects" may take much longer to 
materialize.  For example, a subsidy provided today to build a factory that would triple the world's 
supply of a particular good may not yet generate quan tities of output or exports that are sufficient to 
cause displacement or impedance until three years late r.  The adverse effects of such a subsidy, 
however, may be able to be "foreseen."  Yet, as they  may not occur until three years later, they would 
fail the "clearly foreseen and imminent" standard in a countervailing duty ("CVD") investigation.  
Similarly, subsidies mandated to be granted for fu ture deliveries of large capital goods with a long 
production lead-time may result in a threat that is "clearly foreseen," but would not be "imminent" 
because the subsidies would not be paid until deliv ery of the good two or three years later.    
 
174. Another important reason explaining that the "threat" standard in Part III of the 
SCM Agreement should be different from the "threat" standard in Article 15.7 of the SCM Agreement 
and Articles 4.1(b) and 2 of the Agreement on Safeguards is the distinct nature of the remedies 
involved.  Articles 15.7(ii) of the SCM Agreement and Articles 4.1(b) and 2 of the Agreement on 
Safeguards provide rules governing the unilateral impos ition of remedies following domestic national 
proceedings – not challenges to subsidies in multilateral WTO dispute settlement.  Countervailing 
duty and safeguard rules also discipline investig ating authorities' imposition of provisional limited 
actions to stem the imminent surges of imports.230  These provisional remedies provided for in the 
rules allow domestic authorities expeditiously to stop  goods at the border.  Correspondingly, the rules 
require that future surges of imports be "clearly foreseen and imminent."  This makes perfectly sense 
                                                      
229 Panel Report, U.S. – Upland  Cotton , para. 7.1227.   
230 Article 6 of the Agreement  on Safeguards  and Articles 17.1(b) and 15.7 in connection with 
footnote 45 of the SCM  Agreement .  WT/DS267/RW 
 Page D-321 
 
 
in light of the rapid nature of the remedy that  may be unilaterally imposed.  If CVD or safeguard 
investigations by domestic authorities were governed by anything less than an "imminent" standard, 
the rapid and unilateral nature of the remedy could significantly restrict the flow and import of goods.    
 
175. By contrast, multilateral dispute settlement ac tions challenging subsidies under Part III of the 
SCM Agreement offer no immediate remedy to resolve the a dverse effects caused or threatened by 
subsidies.  Complaining Members, such as Brazil in  this dispute, are forced to wait years before 
subsidizing Members causing adverse are required to  make changes to their subsidy measures under 
Article 7.8 of the SCM Agreement .    
 
176. Correspondingly, the threat standard under Part III of the SCM Agreement should not prevent 
a non-subsidized Member from seeking protection until a competing subsidized good from another 
Member is just about to be prod uced, exported, or imported.  The threat standard for CVD measures 
of "clearly foreseen and imminent" in Article 15.7 and the associated CVD remedy provide precisely the type of unilateral immediate relief that does not exist in Part III of the SCM Agreement .  In view of 
the length of a multilateral proceeding, imposition of a "clearly foreseen and imminent" standard will 
effectively guarantee that Members will be forced to  suffer serious prejudice before they are able to 
obtain any relief.    
 
177. The original panel recognized this problem in noting that "[i]f a Member were unable to bring 
[a threat] action against subsidies until they were actually paid, this would undermine the object of 
preventing adverse effects to its interests."
231  This rationale suggests that a threat claim should be 
able to be brought even before a subsidy is paid – let alone before a subsidized good is produced and 
about to be exported.  But that right of self-pro tection in a multilateral proceeding under Part III of the 
SCM Agreement would become empty if a "clearly foreseen and imminent" standard were adopted for 
threat of serious prejudice claims.    
 
178. The length of time it takes to pursue WTO dis pute settlement requires a more flexible threat 
standard such as a "significant likelihood" of threat – not an " imminent likelihood" of threat.  Such a 
standard would be consistent with both the slower  pace of WTO dispute settlement procedures and of 
the associated remedies, as well as with the time it ta kes for effects of certain types of subsidies to 
materialize.    
 
179. Further, as Brazil has explained in detail in its First Written Submission, there is yet another 
reason that the "clearly foreseen and imminent" standard from Article 15.7 should not be imported 
into Part III of the SCM Agreement .  This is because it would be inappropriate to require a 
complaining Member to demonstrate a "change in circumstances" that was "clearly foreseen and 
imminent."232  Many subsidy programs, such as the mark eting loan and counter-cyclical subsidies, 
continue without any "changes" year after year.  Nor do the fundamental aspects of conditions of 
competition in many commodity markets change over the short to medium term.  Yet, such subsidies, when coupled with appropriate cond itions of competition in the relevant market, may cause a threat of 
serious prejudice without there necessarily being a "change in circumstances."   
 
180. Thus, the concept of "threat" must be exam ined within the particular context of each 
WTO Agreement in which it is found.  It is not a ppropriate to simply import into Part III of the 
SCM Agreement , which provides remedies for the effects  of subsidies,  an elaborated meaning of threat 
that is applicable to imminent surges of imports  in the context of the Agreement on Safeguards or 
Part V of the SCM Agreement .  Threat of adverse effects need not necessarily be "imminent" or 
"clearly foreseen" in the same very short term, as  suggested by the United States.  The threat of 
adverse effects caused by subsidies may well be of a distinctly more qualitative nature than the threat 
of injury posed by goods literally waiting to be shipped across a border.  Instead, the ordinary 
                                                     
 
231 Panel Report, U.S. – Upland  Cotton , para. 7.191.   
232 Brazil's First Written Submission, paras. 254-258.   WT/DS267/RW  
Page D-322  
 
meaning of the term "threat" could similarly enco mpass the concept of a signi ficant "likelihood" that 
adverse effects will occur in the future as Brazil has argued.
233    
 
181. Brazil emphasizes that it is not asking the comp liance Panel to adopt a standard that would 
require panels to base threat findings  on allegation, conjecture or remo te possibility.  In paragraph 260 
of its First Written Submission, Brazil proposed criteri a that ensure that any finding of threat with 
respect to the type of annual agricultural subsidi es at issue in this dispute will be based a firm 
evidentiary basis.  However, the effects of subsid ies demonstrated by this evidence necessarily have a 
longer time-frame than the effects from a shipment  of subsidized goods at issue in a unilateral 
Article 15.7 proceeding.  Thus, for the reasons set forth above and those already articulated by Brazil (and Canada in its Third Party Submission), Brazil does not believe that the standards of either 
Article 15.7 of the SCM Agreement or Article 4.1(b) of the Agreement on Safeguards should be 
imported into an assessment of threat of  serious prejudice in Part III of the SCM Agreement .  
 
87. Could Brazil comment on the argument of the United States that the standard of "significant 
likelihood" is without support in the text of the SCM Agreement or in the GATT/WTO dispute 
settlement reports cited by Brazil?  (Rebuttal Submission of the Un ited States, paras. 406, 410,413)   
 
182. Brazil acknowledges that the term "si gnificant likelihood" is not found in the SCM Agreement 
or any other WTO Agreement.  However, this does not prevent the compliance Panel from adopting 
the interpretation advanced by Brazil.  Indeed, there are many terms and descriptions for legal 
standards and concepts developed by  panels and the Appellate Body that are not found explicitly in 
the text of the WTO Agreements but are inherent to th e interpretive task under Article 3.2 of the DSU.    
 
183. One relevant example is the "genuine and substantive relationship of cause and effect" 
causation standard.234  Moreover, with respect to actionable subsidy claims under Article 6.3 of the 
SCM Agreement , panels have described many standards that  are not found in the text of Part III, 
including the concept of a "reference period,"235 a "but for" or "counterfactual" causation analysis236, 
"nature" and "magnitude" of th e actionable subsidies standard237, and "non-attribution."238    
 
184. Examples from other WTO Agreements include the "rational basis" standard239 for 
interpreting the term "base on" in 3.1 of the SPS Agreement , the words "shall use as a basis"240 in 
Article 2.4 of the TBT Agreement , the "total average cost of production" test241 in Article  9.1(c) of the 
Agreement on Agriculture , the "sudden, sharp, and recent" standard242 for assessing imports under 
Article 2.1 of the Agreement on Safeguards , the use of a market benchmark for benefit243 under 
Article 1 of the SCM Agreement , the like product criteria of physi cal characteristics, consumer 
perceptions, end use244,  the "design structure and architecture" standard245 in Article III:2 of 
GATT 1994, and the "necessity"246 and "least trade restrictive measure"247 standards of 
Articles XX(b) and XX(d) of GATT 1994, among others. 
                                                      
233 Brazil's First Written Submission, paras. 246-261. 
234 Appellate Body Report, U.S. – Softwood Lumber VI (21.5) , para. 132.   
235 Panel Report, U.S. – Upland  Cotton , para. 7.1195.  
236 Panel Report, Korea  – Commercial  Vessels , paras 7.613-7.616.   
237 Appellate Body Report, U.S. – Upland  Cotton , para.467.  
238 Panel Report, Korea  – Commercial  Vessels , para. 7.617.   
239 Appellate Body Report, EC – Hormones , paras. 160-166.  
240 Appellate Body Report, EC – Sardines , para. 245.  
241 Appellate Body Report, Canada  – Dairy (21.5 I) , para. 88. 
242 Appellate Body Report, Argentina  – Footwear , para. 131. 
243 Appellate Body Report, Canada  – Aircraft , para. 157. 
244 Appellate Body Report, EC – Asbestos , paras. 101-102. 
245 Appellate Body Report, Japan  – Alcohol II , section H.2(c). 
246 Appellate Body Report, Korea  – Various  Measures  on Beef, paras. 161-162. 
247 Appellate Body Report, Dominican  Republic  – Import  and Sale of Cigarettes , para. 54.  WT/DS267/RW 
 Page D-323 
 
 
185. As discussed in Brazil's response to questi on 86 above, the U.S. arguments do not address the 
sui generis nature of "effects"-based claims under Part III of the SCM Agreement .  Indeed, the 
United States entirely ignores the "effects"-based nature of these claims by simply importing an 
"imminent" "changes in circumstances" threat standa rd designed to discipline actions by investigating 
authorities regarding restrictions on imports of goods.  Brazil believes that the appropriate concept of 
threat in an Article 6.3 claim is captured in the phrase "significant likelihood" that serious prejudice 
will occur in the future.  This phrase – or some ot her similar term – is better suited to capture the 
threat caused by the longer-term and slowly materializing effects of many subsidies.  Brazil invites the compliance Panel to use or articulate another phrase or description of the applicable standard if it 
captures the special nature of the effect s-based enquiry of Article 6.3 of the SCM Agreement .  
 
88. Does Brazil agree or disagree with the propos ition advanced by the United States that "[a] 
panel may consider the ordinary meaning of a term as reflected in a particular provision to interpret 
the same term in another provision (especially of the same agreement) without  the need for an express 
cross-reference."  (Rebuttal Submission of th e United States, para. 411, footnote 635)  
 
186. In the particular context of Part III of the SCM Agreement , Brazil disagrees with the U.S. 
argument that the absence of a cro ss-reference to Article 15.7 of the SCM Agreement in Footnote 13 is 
irrelevant.  The U.S. argument assumes that the natu re, object and remedy of the assessment of threat 
in Article 15.7 are identical or substantially sim ilar to the nature, object and remedy of threat in 
Article 6.3 of the SCM Agreement .  Brazil has demonstrated in its responses to questions 86-87, 
above, and in its First Written Submission, that this  is not the case.  Therefore, the absence of a cross-
reference is important to reveal the intent of negotiators  to treat a multilateral claim of threat of 
serious prejudice differently from a unilateral countervailing duty remedy.   187. The United States incorrectly  compares the absence of a cross-reference in footnote 13 to 
Article 15.7 with the absence of a cr oss-reference to the term "export s ubsidy" in Article 3.1(a) of the 
SCM Agreement to Article 1(e) of the Agreement on Agriculture .
248  While there was no explicit cross 
reference between these two provisions, the Appellate Body's decision in U.S. – FSC focused on the 
identical phrase "contingent upon export pe rformance" in Article 1(e) of the Agreement on 
Agriculture and Article 3.1(a) of the SCM Agreement .249  The Appellate Body found that "[a]lthough 
there are differences between the export subsid y disciplines established under the two Agreements, 
those differences do not, in our view, affect the common substantive requirement relating to export 
contingency.  Therefore, we think it appropriate to  apply the interpretation of  export contingency that 
we have adopted under the SCM Agreement to the interpretation of export contingency under the 
Agreement on Agriculture ."250   
 
188. By contrast, there are substantive differen ces between Article 6.3 and Article 15.7 of the 
SCM Agreement that do affect the common substantive requirement relating to "threat."  Brazil has 
explained those differences in its answers to questions 86-87, above.   In addition, the original panel 
emphasized that there were many aspects  of the disciplines in Part V of the SCM Agreement that were 
not able to be imposed into Part III of the SCM Agreement .251  These differences are many, but among 
the most important identified by the original panel were the different remedy provisions and the fact 
that the focus of an Article 6.3 claim was on the ef fects of subsidies – not the effects of subsidized 
imports.252  
 
                                                      
248 U.S. Rebuttal Submission, para 411, footnote 653.  
249 Appellate Body Report, U.S. – FSC, para 141.   
250 Appellate Body Report, U.S. – FSC, para. 141.  
251 Panel Report, U.S. – Upland  Cotton , paras. 7.1167-7.1177, 7.1179-7.1181 and 7.1189.   
252 Panel Report, U.S. – Upland  Cotton , paras. 7.1170 (differences in remedies) and 7.1227 (effects v. 
subsidized imports). WT/DS267/RW  
Page D-324  
 
89. Brazil argues that marketing loan and c ounter-cyclical payments for upland cotton are 
designed "in such a manner that payments would be made in consistently large amounts".  
(First Written Submission of Brazil, para. 270)    
 
a) Could Brazil in this regard discuss the data in Table 27 of Brazil's First Written 
Submission that show an increase in the projected farm price and AWP over the 
period MY 2006 - 2010 and a decline in projected marketing loan payments?    
 
189. The data in Figure 27 of Brazil's First Written Submission reflect deterministic projections of 
outlays (also known as point estimates).  As explaine d by USDA, "deterministic projections, by their 
nature, tend to underestimate outlays."
253  A comparison of the most up to date (February 2007) 
USDA deterministic and stochastic  projections of upland cotton budget outlays shows that this 
underestimation is very significant.  For instance,  while the point projection of marketing loan 
subsidies falls to zero in MY 2009 , the stochastic estimate remain s at $468 million.  The respective 
U.S. government data is shown in Table 2 below:    
 
Table 4 – USDA Projections of Upland Cotton Marketing Loan  
and Counter-Cyclical Subsidies254 
 
  2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 
   million dollars 
Point $757 $238 $21 $0 $1 $24 $72 $166 $169 $266ML Stochastic $757 $798 $515 $468 $477 $542 $592 $729 $732 $875
Point $1,376 $1,075 $875 $774 $774 $875 $975 $1,075 $1,075 $1,175CCP Stochastic $1,376 $1,028 $860 $769 $769 $860 $947 $1,028 $1,075 $1,175
Point $2,132 $1,313 $895 $774 $775 $898 $1,047 $1,241 $1,244 $1,441Total Stochastic $2,132 $1,826 $1,376 $1,237 $1,246 $1,403 $1,540 $1,756 $1,807 $2,050
 
 190. In addition to showing that deterministic projections underest imate subsidy outlays, the above 
table is important in at least two other respects.  First, it shows that even the point estimates of 
marketing loan subsidies are expected to incr ease after 2009, through the end of the baseline in 
MY 2015.  This suggests that USDA expects the AWP to be below the loan rate of 52 cents per pound 
after 2009.  Second, and most important, USDA projects marketing loan and counter-cyclical 
subsidies to be well in excess of $1 billion indefi nitely.  This confirms Brazil's assertion that 
marketing loan and counter-cyclical subsidies are d esigned "in such a manner that payments would be 
made in consistently large amounts."
255    
 191. Brazil notes that no other program crop is projected to receive significant amounts of marketing loan or counter-cyclical payments in future years.  A recent USDA statement by USDA 
fully supports this conclusion:    
While program crop prices are generally expected to remain firm or increase over the 
next few years, upland cotton is an exception
.  The combination of increases in 
upland cotton yields per acre and declini ng U.S. upland cotton textile production is 
                                                      
253 Exhibit Bra-460 (Explanatory Notes for Stochastic Budget Outlay Estimates, Farm Service Agency, 
accessed October 2006 at http://www.fsa.usd a.gov/Internet/FSA_File/msrexplain.doc ). 
254 Exhibit Bra-639 (Commodity Estimates Book for FY 2008 President's Budget, pp. 52, 71, 74-75, 
79-80, 82, 84, 87 and 92, accessed February 2007 at 
https://www.ccc2.ne t/ccc2app/2008PresBu d/PresBud2008.htm ).  Brazil notes that projected CCP subsidies are 
not allocated. 
255 Brazil's First Written Submission, para. 270.  WT/DS267/RW 
 Page D-325 
 
 
expected to limit price gains and result in substantial cotton program expenditures, 
compared to other commodities.256  
192. Brazil agrees with USDA's most recent assessment.  This ev idence supports the conclusion 
that year after year, upland cotton subsidies ar e essential to supplement significantly the average 
farmer's market revenue.  Indeed, the NCC recently  urged Congress to provide for disaster assistance 
to U.S. upland cotton producers arguing that  "'[a] large number of U.S. cotton producers have dealt 
with crop disasters in either or both of the 2005 and 2006 crop years.'  …  'With production costs expected to remain high, many U.S. cotton producer s will need assistance in order to maintain their 
operations.'"
257  The evidence suggests that what has been true in the past will remain so in the future.    
 
193. Finally, it is important to recognize that the magnitude of the marketing loan subsidies, which 
reflects total payments over the particular marketing year, are but one of the key aspects of the nature 
of these subsidies.  Of course, total marketing lo an payments are important evidence because they 
demonstrate how year after year, the marketing loan subsidies play a crucial role in maintaining the 
revenue and financial well-being of  high-cost U.S. upland cotton producers.  But even if overall 
marketing loan payments are relatively low in a partic ular year, this does not mean that such subsidies 
have not had an important influence on U.S. upland cotton producers' planting decisions.  
 194. This is because there is a separate and equally  important aspect of marketing loan subsidies 
that contributes to significant U.S. upland co tton acreage, production and exports.  This aspect 
involves the expectations of future marketing loan (and counter-c yclical payments) that farmers have 
at the time of planting.  Brazil has demonstrated ho w the expectations of low upland cotton prices at 
the time of harvest (based on February prices of the December futures contract price) in many marketing years, such as MY 2005 and 2006, have not led to cutbacks in acreage.
258  The reason is 
that explained by the Appellate Body – upland co tton producers know that even if expected prices 
stay low, their revenue will be protected fully by  the marketing loan and counter-cyclical payments.259  
 
b) How does Brazil respond to the argument of the United States that "by MY 2008 , the 
projection is of no marketing loan payment at all"?  (Rebuttal Submission of the 
United States , para . 419) .   
 
195. It is remarkable that the Un ited States claims that there will be  "no marketing loan payment at 
all" when projections by the U.S. government itself ( see Table 4 above) show marketing loan 
subsidies of $758 million in MY 2007 and $515 million in MY 2008.260  The United States assertion 
that "by MY 2008, the projection is of no market ing payments at all," is based on deterministic 
estimates of world prices in future years.  As e xplained above, "deterministic projections, by their 
                                                      
256 Exhibit Bra-671 (U.S. Departme nt of Agriculture's 2007 Farm  Bill Proposal, p. 14, accessed 
March 2007 at http://www.usda.gov/documents/07finalfbp.pdf ).  
257 Exhibit Bra-680 ("NCC urges disaster assistan ce for cotton producers," High Plains / Midwest 
AG Journal, 15 March 2007, accessed March 2007 at http://www.hpj.com/archives/2007/mar07/mar19/NCCu rgesdisasterassistancef.cfm?title=NCC%20urges%20dis
aster%20assistance%20for%20cotton%20producers ).  
258 Brazil's First Written Submission, paras.137-143;  Brazil's Rebuttal Submission, paras. 214-225;  
Brazil's Oral Statement, paras 60-81 and Brazil's Comments on the U.S. Oral  Statement, paras.18-27. 
259 Appellate Body Report, U.S. – Upland  Cotton , para. 445.  See also, Brazil's response to question 62, 
above. 
260 Exhibit Bra-639 (Commodity Estimates Book for FY 2008 President's Budget, pp. 52, 71, 74-75, 
79-80, 82, 84, 87 and 92, accessed February 2007 at 
https://www.ccc2.ne t/ccc2app/2008PresBu d/PresBud2008.htm ). WT/DS267/RW  
Page D-326  
 
nature, tend to underestimate outlays."
261  It is for this reason that USDA, FAPRI and the U.S. 
Congressional Budget Office all use stochastic  projections to estimate budget outlays.262    
 196. Indeed, USDA's MY 2006 estimate of $757 million in marketing loan payments appears to be low based on the current adjusted world price AWP.   The current AWP for upland cotton is 43.5 cents 
per pound
263 and the average AWP for the first seven months of MY 2006 is 43.7 cents per pound.264  
This implies an average marketing loan subsidy of  8.3 cents per pound in the first seven months of 
MY 2006, or $836 million in total.265  Marketing loan payments of  $836 million are roughly similar to 
the $898 million in marketing loan payments made in MY 2002266 that were considered by the 
original panel.    
 
197. However, based on past experience and US DA data, $836 million is even conservative.  
Under the marketing loan program, farmers are able to choose when to exercise their marketing loan 
payment.267  Because of this flexibility and the obvi ous incentive of farmers to maximize their 
marketing loan payments, marketing loan subsidi es on a per-pound basis are usually larger than the 
per-pound difference between the loan rate and the average annual AWP.  USDA explains that "the 
loan program may overcompensate when  production is marketed at prices above the level used to lock 
in the loan benefit."268  In fact, since MY 1999, actual upland cotton marketing loan payments have 
been, on average, 3.8 cents larger that the di fference between the average AWP and loan rate.269  
Therefore, marketing loan subsidies in MY 2006 are likely to be significantly larger than 
$836 million. 
 
D. EXPORT CREDIT GUARANTEES  
 
1. Outstanding export credit guarantees  
 
Questions to the United States  
 
90. The United States states, in para. 50 of its Opening Statement, that:   
 
 ... nothing in the SCM Agreement  provides that "withdrawing" a "subsidy" allegedly 
"taking the form of a program" "includes an obligation to abstain from performing on 
commitments outstanding under that program as of the deadline for implementation."  
That argument improperly equates "perfo rming on commitments under the program" 
with the "subsidy" itself.  Such an equation was appropriate in Brazil – Aircraft 
(21.5), where Brazil continued to issue new WTO-inconsistent bonds even after the 
period of implementation on the basis that it had pre-existing contractual obligations 
                                                      
261 Exhibit Bra-460 (Explanatory Notes for Stochastic Budget Outlay Estimates, Farm Service Agency, 
accessed October 2006 at http://www.fsa.usd a.gov/Internet/FSA_File/msrexplain.doc ). 
262 Exhibit Bra-460 (Explanatory Notes for Stochastic Budget Outlay Estimates, Farm Service Agency, 
accessed October 2006 at http://www.fsa.usd a.gov/Internet/FSA_File/msrexplain.doc ). 
263 For the week of 23 March 2007, see http://www.fsa.usda.gov/Intern et/FSA_File/cotton_rates.htm .  
264 Exhibit Bra-673 (Upland Cotton Prices, March 2007). 
265 USDA's estimate of U.S. production in MY 2007 has been revised upward to 20.973 million bales, 
the third largest amount in history.  20.973 million bales * 480 pounds per bale * 0.08 dollars per pound = 
$836 million. 
266 Brazil's First Written Submissi on, Table 6 at para. 111. 
267 See Brazil's First Written Submission, paras. 65-67.  See also Exhibit Bra-681 (Upland Cotton 
Direct and counter-cyclical Payment Program and Marketing Assistance Lo ans, Farm Service Agency Fact 
Sheet, March 2006, acce ssed March 2007 at 
http://www.fsa.usda.gov/FSA/printapp?fileName=pf_2006 0301_insup_en_cottdcp06.html&newsType=prfactsheet ).  
268 Exhibit Bra-682 (Risk Manageme nt, 2007 Farm Bill Theme Pape r, May 2006, p. 2, accessed  
March 2007 at http://www.usda.gov/do cuments/Farmbill07riskmgmtsum1.doc ). 
269 Exhibit Bra-683 (Marketing Loan Subsidies and Average AWP).  WT/DS267/RW 
 Page D-327 
 
 
to do so.  However, it is not accurate here, where the guarantees are not themselves 
prohibited subsidies.   
 Would the United States please clarify what it meant in the underlined sentence?   
 91. In paragraph 342 of its First Written Submissi on, Brazil indicates that the total amount of 
guarantees under the GSM 102, GSM 103 and SCGP programs outstanding on 1 July 2005 amounted 
to $8.5 billion.   (a) Does the United States agree with the figure provided by Brazil?  
 
(b) Please indicate what proportion of that  amount concerns exports of unscheduled 
products? (please distinguish between principal and interests)  
 
(c) Please indicate what proportion of t hat amount concerns exports of scheduled 
products, and in particular rice (please dis tinguish, in each case, between principal 
and interest). 
 
Questions to Brazil 
 
92. Is it of any relevance to the Panel's assessme nt of Brazil's claims concerning "outstanding" 
export credit guarantees that what was at issue in Brazil – Aircraft (21.5) was the issuance, after the 
implementation date, of new
 bonds, and that bonds which had been  issued prior to the implementation 
date could be redeemed for a number of years therea fter (see para. 46 of the US' Opening Statement 
at the panel meeting).   
 
198. In Brazil – Aircraft (21.5) , Canada did not claim that Brazil was precluded from making 
future payments with respect to PROEX bonds issu ed prior to the implementation date.  Rather, 
Canada claimed that the obligation in Article 4.7 of the SCM Agreement  prevented Brazil from 
issuing new PROEX bonds after the end of the im plementation period purs uant to letters of 
commitment concluded prior to that date.  Both the panel and the Appellate Body ruled that Brazil 
could not issue new bonds after the implementation da te because this amounted to the continued grant 
of prohibited subsidies, contrary to Articles 3.1(a), 3.2 and 4.7 of the Agreement .  The parallel in this 
dispute, with respect to ECGs outstanding on 1 July 2005, is at a more abstract level – the obligation 
to abstain from performing on commitments outstanding under a program as of the deadline for implementation.     199. This obligation flows from the text of the SCM Agreement .  Under Article 3.2 of the 
SCM Agreement , "[a] Member shall neither grant nor main tain" prohibited subsidies.  The obligation 
in Article 4.7 of the Agreement to withdraw a subsidy, therefore, extends to both the "grant" of new 
subsidies and the "maintenance" of existing s ubsidies.  As the Appellate Body held in U.S. – FSC 
(21.5 II) , the obligation to "fully" withdraw a prohib ited subsidy is not achieved if the Member 
"leaves  the entirety or part of the original prohibited subsidy in place ".
270    
 
200. In this dispute, the United States has "le[ft ] the entirety" of the outstanding prohibited ECGs 
"in place" after the implementation date.  On the Un ited States' view, it is entitled to "maintain" the 
prohibited ECGs throughout the life of the loan that is guaranteed.  Thus, following the end of the 
implementation period, and at any time during the remaining life of the loan, the United States could make payments pursuant to a prohi bited subsidy.  By continuing to  perform on its commitments under 
the prohibited subsidies, the United States "maint ains" them unchanged.  The United States has, 
therefore, failed to comply fully with its obliga tion under Article 4.7 to withdraw these subsidies. 
                                                     
 
270 Appellate Body Report, U.S. – FSC (21.5 II), para. 84. WT/DS267/RW  
Page D-328  
 
201. Brazil reiterates that its claim is entirely pr ospective in nature.  In essence, Article 4.7 
prevents the United States from taking any prospective action , after  the implementation date, to 
perform on its commitments under prohibited subsidies that it maintains unchanged.  
 
93. The Panel notes that Exhibit Bra-516 indicat es outstanding amounts for GSM 5 as of 30 June 
2006
 rather than as of 30 June 2005  as indicated in footnote 523 of Brazil's First Written Submission.  
Please explain.   
 
202. Instead of Exhibit Bra-516, the correct e xhibit, which includes data as of 30 June 200 5, is 
Exhibit Bra-586.  Brazil apologizes for this inadve rtent error, which has no material impact on 
Brazil's claim.  As corrected, footnote 523 of Brazil's First Written Submission should read as 
follows:    
523 The exact amount, including interest  arrears of USD 50.7 million, is 
USD 8,543,477,674.  See Exhibit Bra-515 (Total Exposure under P.L. 480 Title 1 & 
GSM Programs as of June 30, 2005).  Brazil notes, however, that this figure includes 
USD 41.58 65 million of ECGs under a program titled "GSM 5".  Brazil notes that if 
outstanding GSM 5 ECGs (including interest arrears) are excluded, the exact amount of GSM 102, GSM 103 and SCGP ECGs  outstanding on 30 June 2005 was 
USD 8,501,899,803
28,537 .  See Exhibit Bra-586 516 (Commodity Credit Corporation 
Guarantee Loan Program Summary for FAS as of June 30, 2005).  
2. Legal Bases for Brazil's export subsidies claims  
 
Question to the United States 
 
94. The United States has noted that the orig inal Panel's findings (that the export credit 
guarantees at issue constituted prohibited export subsidi es) were based on item (j).  The United States 
has also asserted that it has based itself on item (j) in implementing the DSB recommendations with 
respect to export credit guarantees.  Please clarify  whether the Panel should understand the United 
States' argument in this respect as an argument concerning the scope of the present proceeding.  
 
3. "Benefit" under Articles 1.1 and 3.1(a) of the SCM  Agreement  
 
Questions to both parties   
 
95. Brazil has taken the position that "different parties to a transaction involving a GSM 102 
ECG derive different benefits from the GSM 102 ECG,  each of which is potentially subject to 
assessment under Article 1.1(b) of the SCM Agreemen t"  and has indicated that it is, in this 
proceeding, "primarily concerned" with the benefit received by the US exporter in the form of below-
market fees (para. 404, Brazil's Rebuttal).  The United States has challenge d Brazil's approach of 
focusing on fees to the exclusion of other elements of the total cost of the loan.  Please explain, 
referring to the provisions of the SCM Agreement and WTO jurisprudence (if any applicable), your 
position as to whether:  (1) export credit guarantees and other types of subsidies may involve more 
than one type of benefit and/or recipient;  (2) whet her it is up to the complaining Member to decide 
which benefit it chooses to challenge.   
 
203. In this question, the compliance Panel asks whether (i) ECGs and other types of subsidies 
may involve more than one type of benefit and/or r ecipient;  and, (ii) if so, whether the complainant 
can choose which benefit/recipient to challenge.  Th e background to this question appears to be the 
United States' argument that it is not sufficient for Brazil to prove that a benefit is conferred on the 
U.S. exporter through the provision of a loan guar antee on better-than-market terms.  Instead, it  WT/DS267/RW 
 Page D-329 
 
 
argues that Brazil must prove that this guarantee also resulted in a benefit to a foreign bank by 
lowering the "total costs of funds" involved in the transaction.271   
 204. Under Article 1.1, a "subsidy" exists when a "f inancial contribution" confers "a benefit".  The 
word "a" indicates that it is sufficien t that any form of benefit is conferred.  Further, in terms of the 
wording of the "benefit" requirement in Article 1. 1(b), it suffices that "a benefit" is conferred on any 
entity in connection with goods produced by the granting Member.
272  Thus, a subsidy is proved to 
exist if a government provides goods or services to  a producer or exporter on better-than-market 
terms.  It is not necessary for the complainant to pr ove that a government's financial contribution also 
confers "a benefit" on other entiti es, including foreign entities.  No r is it necessary to prove that the 
cumulative impact of the financial contribution is to confer a benefit on all entities affected by the 
contribution.  205. Although it suffices to prove that "a benefit" is conferred on one entity, Article 1.1 does not 
require that "a benefit" be conferred exclusively  on one entity.  Instead, the language of sub-
paragraph (b) is sufficiently open-ended to accommoda te the possibility that a financial contribution 
confers a benefit on several entities.   206. There are many situations in which a financ ial contribution confers a benefit on more than 
one entity.  A financial contribution may reduce a company's costs of producing and selling goods, for 
example, costs of research, inputs, production, marketing, or transport.   The benefit conferred by such 
financial contributions may be passed through, in  whole or in part, to downstream producers and 
consumers through lowered prices.  This is specifi cally recognized in the rules governing the price 
effects of subsidies in Article 6 of the SCM Agreement .  
 207. There are several examples in the case-law of  a single financial contribution that benefits 
more than one recipient.  In Brazil – Aircraft (21.5 II) , Brazil was found to provide subsidies to 
purchasers  of Brazilian civil aircraft in the form of in terest rate buy-downs that lowered the financing 
costs on the export of Brazilian products.  The purch aser was found to benefit from reduced interest 
charges.  Additionally, the financial contribution benefited the Brazilian producer  of civil aircraft, 
which was able to export its produc ts with improved financing.  Fu rther, a benefit accrued to the 
lenders  that provided the financing in question.
273    
 
208. In that dispute, the compliance panel consid ered that the crucial enquiry was whether the 
Brazilian producer  of the goods benefited from the financial contribution.274  The evidence showed 
that the lender  received the payments under the bonds.  Lenders might, as a result, offer improved 
financing terms to purchasers which, in turn, mi ght benefit the Brazilian producer.  However, there 
was no evidence that lenders, in fact, offered improved credit terms to purchasers and, thus, no 
evidence that the bonds resulted in overall reduced finance costs for purchaser s.  Instead, the panel 
assumed  that it was " very unlikely  that lenders will not pass on at least part" of the financial 
contribution to purchasers through better credit terms.275  Otherwise, it said, "borrowers could simply 
                                                      
271 U.S. First Written Submission, para. 138. 
272 Appellate Body Report, Canada  – Aircraft , para. 154 ("Logically, a 'benefit' can be said to arise 
only if a person, natural or legal, or  a group of persons,  has in fact received someth ing.") and Appellate Body 
Report, U.S. – CVDs  on Certain  EC Products , para. 108 (Characterizing paragraph 154 of its report in Canada  – 
Aircraft , the Appellate Body stated that "when referring to 'a recipient' in Canada  – Aircraft , we did not exclude 
the possibility that 'a recipient' could include both a firm  and its owner.  A 'group of persons' could include a 
group of 'natural persons', or a group of 'natural and legal persons', or a group exclusively of 'legal persons'."). 
273 See generally  Panel Report, Brazil  – Aircraft  (21.5 II), paras. 5.27-5.29. 
274 Panel Report, Brazil  – Aircraft  (21.5 II), para. 5.27. 
275 Panel Report, Brazil  – Aircraft  (21.5 II), footnote 44. WT/DS267/RW  
Page D-330  
 
choose other lenders".
276  The panel also assumed  that there was a prima facie  case that producers  
benefited from the payments if purchasers of the aircraft benefited.277  
 209. In U.S. – Softwood Lumber IV , Canada provided standing timber to timber harvesters .  In a 
countervailing duty investigation, the United States found that all of this subsidy was provided to 
processed lumber products, even though some of the lumber processors  were not harvesters of 
standing lumber.  Both the panel and the Appe llate Body held that the United States acted 
inconsistently with the SCM Agreement  by failing to establish whether, in fact, the lumber processors 
benefited from the financial cont ribution given to the harvesters.
278  Further, the entire premise of the 
U.S. investigation was that the benefit could pass-th rough to yet another recipient, the U.S. consumer 
of Canadian lumber products, through lower lumber prices.  
 210. In U.S. – CVDs on Certain EC Products , the panel and Appellate Body held that, in a 
privatization transaction, the benefit under Article  1.1(b) from a subsidy provided to a state-owned 
company may pass through to the priv atized company, if the price paid  for the company is below fair 
market value or the transaction is not at arm's length.
279  In that event, a benefit would also be 
bestowed on the shareholders of the privatized co mpany, which paid less for the company's equity 
than its fair market value.   211. In each of these situations, the SCM Agreement  contemplates that a single financial 
contribution could provide different types of "benefit"  to multiple recipients.  However, in order to 
demonstrate the existence of a subsidy, it suffi ces to show that the initial recipient received a 
"benefit".  Moreover, where that party receives a "b enefit", it is not necessary to examine whether the 
"benefit" is subsequently passed through or extinguished as a result of other transactions.   Nor is it 
necessary to assess the cumula tive impact of the financial contributi on on all entities affected by it.  
 
212. Indeed, even if the entire "b enefit" passes through from an initial recipient to other recipients, 
a subsidy is still granted to the initial recipient.  For example, in U.S. – Softwood Lumber IV , even if 
the entire benefit had passed from the harvesters to  the lumber producers, a complainant can still 
prove that "a benefit" was conferred on harvesters under Article 1.1(b) of the SCM Agreement .  If the 
initial grant of that subsidy had been continge nt upon export performance, the subsidy would be 
prohibited, regardless of whether the benefit sub sequently passed through to other recipients.  
 
213. In this dispute, the situation is similar.  As the CCC has itself recognized, the provision of 
cheap ECGs through the GSM 102 program provides bene fits to several different commercial parties.  
USDA's Foreign Agricultural Servi ce ("FAS") notes that "[p]rogram benefits are shared between U.S. 
exporters and bankers and fo reign importers and bankers.  To work effectively, all parties must derive 
some benefit or they will not use the program."
280  Moreover, in a publication regarding GSM ECGs, 
under the title "Benefits to Participants," FAS notes that "[u]nder the GSM credit guarantee programs all participants can benefit.  …  The GSM export credit guarantee programs are designed for everyone 
to benefit."
281    
 
                                                      
276 Panel Report, Brazil  – Aircraft  (21.5 II), footnote 44. 
277 Panel Report, Brazil  – Aircraft  (21.5 II), footnote 42. 
278 Appellate Body Report, U.S. – Softwood  Lumber  IV, paras. 146-147 and Panel Report, U.S. – 
Softwood  Lumber  IV, paras. 7.91 and 7.93-7.99. 
279 See generally  Appellate Body Report, U.S. – CVDs  on Certain  EC Products and Panel Report, U.S. 
– CVDs  on Certain  EC Products . 
280 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov, 
Section 1.5, accessed January 2007 at http://www.whitehouse.gov/OMB/expect more/detail.10002020.2005.html
). 
281 Exhibit Bra-589 (FAS Online, Keys  to Successful  Trade , section regarding "Benefits to 
Participants," accessed January 2007 at h ttp://www.fas.usda.gov/ex credits/videotxt.html ).  WT/DS267/RW 
 Page D-331 
 
 
214. Most importantly, as the United States h as acknowledged in these proceedings, the CCC 
provides a service to the U.S. producer/exporter th rough the provision of an ECG in a situation where 
no commercial operator is willing to provide the same service.282  This shows the existence of a per se  
"benefit" in that transaction between the U.S. gove rnment and the producer/exporter.  Further, the 
price of the ECG is below the price charged by the United States' own Export-Import Bank for 
comparable products.283  This confirms the existence of a benef it in the initial transaction.  As a result, 
by providing a financial contribution to U.S. pr oducers/exporters on better-t han-market terms, the 
United States grants a subsidy to these producers/e xporters.  That subsidy is prohibited because it is 
contingent upon export performance.   
215. As noted above, in Brazil – Aircraft (21.5 II) , the compliance panel considered that the crucial 
issue was whether the Brazilian producer  received a benefit.  The existence of a benefit to other 
parties was considered unimportant.  In this disput e, Brazil has proved that the U.S. producer/exporter 
receives a benefit from the provision of a financial service on better-than-market terms.  That suffices to demonstrate the existence of a subsidy.  
 
216. In addition to the U.S. producer/exporter rece iving a benefit, the U.S. government explains 
that, in the usual course of events, the grant of a GSM 102 ECG to the exporter bestows benefits on 
other parties that are engaged in separate tr ansactions involving the exported U.S. goods:   
 
• FAS states that the U.S. bank is able to pr ovide a loan to a foreign bank on profitable 
terms with virtually no risk because the lo an is backed by the U.S. Government.284    
 
• FAS also notes that the foreign bank secures f unds from the U.S. bank on, at the very 
least, better credit terms than would otherwise be available because the loan is backed 
by the U.S. Government.285  Finally, FAS states that the importer obtains credit286, on 
terms better than could otherwise be secured287;  the largest participant in the GSM 
program characterizes the "benefit" to an importer as "better financing terms!!!"288  
                                                      
282 U.S. 9 March Comments on Brazil's Oral Statement, para. 29 ("[E]xport credit guarantees and other 
similar loan guarantees are now and have always been instruments provided predominantly – if not exclusively 
– by governments and international financial institutions, as opposed to purely private banking institutions."). 
283 Brazil's First Written Submission, paras. 381-406.  See also Id., Annexes III (Statement of Professor 
Rangarajan Sundaram) and IV (Methodology for Comparison of GSM 102 Fees with Fees for ExIm Bank 
Products), and Exhibits Bra-536 and Bra-537. 
284 Exhibit Bra-589 (FAS Online, Keys  to Successful  Trade , section regarding "Benefits to 
Participants," accessed January 2007 at http ://www.fas.usda. gov/excredits/videotxt.html ).  ("The U.S. bank's 
risk of loss is reduced, and the banks profit fr om letter of credit and loan servicing fees."). 
285 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov, 
Section 1.1, accessed January 2007 at 
http://www.whitehouse.gov/OMB/expect more/detail.10002020.2005.html ).  (GSM ECGs "make commercial 
credit available at a reduced  cost to higher risk markets.") (emphasis added).  See also Exhibit Bra-589 (FAS 
Online, Keys  to Successful  Trade , section regarding "Benefits to Part icipants," accessed January 2007 at 
http://www.fas.usda.gov/excredits/videotxt.html ) ("The importer's bank benefits from the competitive cost of 
capital on its dollar borrowing, by being able to provide a service to its customers, and from earning fees on 
letters of credit and other services.").  In fact, the GS M 102 regulations provide that the benefit is even more 
dramatic, since the program "operate[s] in cases where cred it is necessary to increase or maintain U.S. exports to 
a foreign market and where U.S. financial institutions  would be unwilling to provide financing without CCC's 
guarantee."  Exhibit Bra-519 (7 C.F. R. § 1493.10(a)(2), GPO Access Onlin e, January 2006, accessed July 2006 
at http://www.g poaccess.gov/cfr/index.html). 
286 Exhibit Bra-589 (FAS Online, Keys  to Successful  Trade , section regarding "Benefits to 
Participants," accessed January 2007 at http ://www.fas.usda.gov/ex credits/videotxt.html ) ("The importer 
benefits by obtaining U.S. agricultural products, most likely with deferred  payment .") (emphasis added). 
287 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov, 
Section 1.1, accessed January 2007 at WT/DS267/RW  
Page D-332  
 
217. In Brazil – Aircraft (21.5 II) , the panel found that it was "very unlikely" that payments to the 
lender did not also benefit the purchaser because, otherwise, the purchaser would simply go to a different lender.  In this dispute also, the fo reign obligors have a choice of CCC-approved U.S. 
banks
289, and can, therefore, ensure that the guarantee results in lower finance costs that would be 
available commercially.  Indeed, USDA's FAS states  that the ECG programs "make commercial credit 
available at a reduced cost  to higher risk markets290, clarifying the U.S. government's view that the 
U.S. bank passes along to the foreign obligor at least a portion of the reduced cost of borrowing enabled by the GSM 102 ECG.  FAS separately confirms that benefits of a CCC ECG are indeed passed along from the U.S. bank to the foreign bank, as well as from the foreign bank to the importer.
291  
 
218. From the perspective of the U.S. government , the specific terms and conditions attaching to 
the other transactions are of no importance at all, pr ovided only that they occur.  In other words, the 
U.S. government neither verifies nor controls the fi nancing costs of the loan transactions that it 
guarantees.  In Brazil – Aircraft (21.5 II) , the panel attached importance to the fact that the granting 
Member, Brazil, did not place any "limitation" on the terms of the underlying financing between the 
lender and purchaser to prevent the PROEX payments from conferring a benefit.292  Similarly, far 
from limiting the financing terms of the other transactions, the United States is wholly ignorant of the details surrounding them.  Its exclusive interest is to provide the U.S. producer/exporter with a service 
that facilitates the exportation of U.S. agricultural products, and it provides that service on terms that 
are highly preferential, if not unique.  
 
219. From the perspective of the U.S. producer/e xporter, the specific terms and conditions of the 
other transactions are also irrelevant.  Its sole inte rest is to ensure that the importer buys its U.S. 
products.  To that end, it purchases a guarantee from the U.S. government that enables the importer to 
obtain funding to purchase U.S. goods.  The U.S. pr oducer/exporter is not involved in the negotiation 
of the separate transactions between the importer a nd the foreign bank, and between the foreign bank 
                                                                                                                                                                    
 
http://www.whitehouse.gov/OMB/expect more/detail.10002020.2005.html ).  (GSM ECGs "make commercial 
credit available at a reduced  cost to higher risk markets.") (emphasis added).   
288 Exhibit Bra-684 (CoBank presenta tion, p. 7, accessed March 2007 at 
http://www.cottoninc.com/2005EFSConferencePresentati onsSingapore/FinancingUSACottonImportsUnderGSM/ ).  
The deal flow chart on page 11 of this presentation confirms that the reference on page 7 to "your company" is a 
reference to the importer.  Brazil notes that CoBank's vi ews on this matter are well-informed, as it enjoys "60% 
market share of GSM loans globally".  See Id., p. 2.   
289 See Exhibit Bra-525 ("U.S. Financial Institutions Approved To Be Assignees Under CCC's Export 
Programs," USDA FAS Online, accessed October 2006 at http://www.fas.usda. gov/excredits/USbanks.html).   
290 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov, 
Section 1.2, accessed January 2007 at http://www.whitehouse.gov/OMB/e xpectmore/detail.10002020.2005.html ) 
(emphasis added).  See also Exhibit Bra-685 (USDA FAS publication, "Will you get paid for the sale you just 
made", p. 4, accessed March 2007 at h ttp://www.fas .usda.gov/excredits/LOANS.PDF ) (Characterizes a benefit 
from the ECG programs as the ability of foreign banks to "share the benefits of longer terms and lower rates" 
with importers;  if the foreign bank itself did not get lower rates from the U.S. bank, it would have nothing to 
"share" with the importer). 
291 See Exhibit Bra-685 (USDA FAS publication, "Will you get paid for the sale you just made", p. 4, 
accessed March 2007 at http://www.f as.usda.gov/excredits/LOANS.PDF ) (Characterizes a benefit from the 
ECG programs as the ability of foreign banks to "share the benefits of longer terms and lower rates" with 
importers;  if the foreign bank itself did not get lower rates from the U.S. bank, it would have nothing to "share" 
with the importer.).  Importers also have choices when considering which foreign bank to use.  See 
Exhibit Bra-526 (GSM Program Foreign Bank Oblig ors, USDA FAS Online, accessed September 2006 at 
http://www.fas.usda.gov/excr edits/foreignbanks.html). 
292 Panel Report, Brazil  – Aircraft  (21.5 II), para. 5.32 ("PROEX III payments may, in the absence  of 
some  limitation  placed  by Brazil  on the degree  of concessionality  of export  credits  supported  by interest  rate 
equalization , be expected to allow purchasers … to obtain export credits on terms more favourable than those 
available to them in the commercial market.")  (emphasis in original).  WT/DS267/RW 
 Page D-333 
 
 
and the U.S. lending bank.  Its interests are not affect ed, in the least, by the foreign obligors' costs of 
funds.   220. In this dispute, Brazil has focused on the initial transaction between the U.S. government and 
the U.S. producer/exporter regarding the purchase of fi nancial services to facilitate exportation of U.S. 
agricultural products.  To the extent that the U.S.  producer/exporter receives a financial contribution 
from the U.S. Government on better-than-market te rms, the United States confers a benefit on that 
producer/exporter under Article 1.1(b), regardless of wh ether that transaction also confers a benefit on 
third parties in separate transactions that are facilitated by the first transaction.  
 
221. Brazil's focus on the terms and conditions of the initial transaction between the U.S. 
government and the U.S. producer/exporter is fully cons istent with the requirement in Article 1.1(b) to 
prove that "a benefit" is conferred.  It is not n ecessary for Brazil to prove, in  addition, that the U.S. 
government also conferred a consequential benef it on a foreign borrower through reduced finance 
costs.  
 
96. The parties differ as to whether different types of loans can be compared as long as they have 
the same "average life."  What support (economic literature, etc. ) exists for your position on this 
issue?   
 
222. In his statement at the Panel meeting, Pr ofessor Sundaram offered a simplified example to 
illustrate the lack of comparability, in terms of cred it risk, between the bullet loan in the single valid 
data point offered by the United St ates, and credit extended under GSM 102.
293  The U.S. assertion of 
comparability hinges on the bullet loan's "average lif e" being sufficient to capture its riskiness.  
Professor Sundaram's example demonstrates that the U. S. "average life" argument is incorrect.    
 
223. In sum, Professor Sundaram demonstrated that two loans do not become equivalent in their 
credit-riskiness simply because they have the same average lives;  patterns of default must be taken 
into account.  The compliance Panel will recall that the U.S. example involves a two-year bullet loan, 
while a GSM 102 loan is a three-year amortizing loan.  One reason differing risks of default must be taken into account is that at any point in time, the principal exposures between the two-year bullet 
loan and the three-year amortizing loan can be different.  The amortizing loan will have a lower 
principal exposure than the bullet loan between years one and two, and a higher principal exposure 
between years two and three.  The United States wo uld have the Panel believe that if one "averages" 
out the lives of these two loans, the higher and lower exposures will offset one another.  As 
Professor Sundaram explained, this is not necessar ily so, because the likelihood of default in the 
two periods (between years one and two, on the one  hand, and between years two and three, on the 
other) may be different.  For example, while a co mpany may be solvent and pose relatively low risk 
of default in the short term, its long-term prospects might be uncerta in, and thus its risk of default 
enhanced.   224. The compliance Panel asks for support for this  explanation – more specifically, support for 
the conclusion that two-year bullet loans and thr ee-year non-amortizing loans are not equivalent, and 
that averaging out the lives of the two loans does not  make them so, in light of the varying risks of 
default.  As the compliance Panel can appreciat e, the finance and economics literature does not 
generally contain references to negatives;  that is , it does not state and prove "non-theorems".  Thus, 
while there are a number of instruments to which spreads on bullet loans are not
 equivalent – 
amortizing loans with "average lives" being one of  them – the literature generally focuses instead on 
theorems addressing instruments to which spreads on bullet loans are  equivalent.  
 225. To respond to the Panel's question, theref ore, Professor Sundaram prepared an expert 
statement attached as Exhibit Bra-686 to these r esponses.  Professor Sundaram's statement first 
                                                     
 
293 Brazil's Oral Statement, paras. 212-214 and 219-222. WT/DS267/RW  
Page D-334  
 
explains graphically why at any point in time, the principal exposures between the two-year bullet 
loan and the three-year amortizing loan can be di fferent, which in turn illustrates why the two loans 
pose potentially differing risks of default.  With references to the finan ce and economics literature on 
pricing, Professor Sundaram then employs the funda mental valuation principle of "risk-neutral 
valuation" to derive exact equations conn ecting spreads on bullet and amortizing bonds, 
demonstrating that the two are not equivalent.  
 
Questions to the United States    
 
97. Assuming that the Panel accepts the United St ates' argument that "benefit" is to be assessed 
on the basis of the "total costs of funds", what do you consider Brazil must establish in order to meet 
its burden of proof in that respect?  Must Brazil pr ove that a benefit is conferred in all instances (all 
transactions and all recipients)?  In most instances?    98. Does the United States dispute the accura cy of Brazil's comparison of GSM 102 fees with 
Exim Bank fees?  Does the United States agree t hat ExIm Bank and GSM 102 guarantees are (at least 
in certain circumstances) similar or comparable?    99. Please comment on Brazil's argument that th e GSM 102 fees are not sufficiently scaled to 
take into account country risk (i.e. they vary only mi nimally according with country risk) (see, inter 
alia, paras. 410-412 Brazil's  First Written Submission).  
 
Questions to Brazil   
 
100. Assuming the Panel were to agree with the United States that the proper benchmark to 
determine "benefit" is the "total cost of funds" of the transactions, what elements of evidence has 
Brazil provided the Panel in this respect (oth er than evidence from the Regulations that the 
programme targets situations where no credit would be available on the market)?  In answering, 
please address the United States' argument at para.  133 of its First Written Submission that "Brazil 
has made no attempt to provide such specific in formation on individual loan costs and fees or to 
identify comparable commercial loans and their terms".  
 226. The United States asserts that to implement its rigid "total cost of funds" approach to 
Article 14(c)
294, Brazil would need to provide data regardi ng "individual loan costs and fees" and "to 
identify comparable commercia l loans and their terms".295  Brazil is not in the position of an 
investigating authority in a countervailing duty proceed ing, with the powers provided by Part V of the 
SCM Agreement  to secure, through questionnaires and verifi cation visits, this type of data.  The 
United States itself does not know the rates at which lending is secured with and without GSM 102 
ECGs, as it noted in the original proceedings296, and as evidenced in these pr oceedings by its need to 
invoke second- or third-hand knowledge of  alleged lending from third parties.297  (This alone 
illustrates the severable nature of the transaction between the CCC and the U.S. exporter – the only 
terms of which the U.S. government is aware ar e those associated with the purchase of the GSM 102 
ECG.)    
 
                                                      
294 U.S. First Written Submission, para. 138.   
295 U.S. Rebuttal Submission, para. 137. 
296 See, e.g., Panel Report, U.S. – Upland  Cotton , Annex I-8 (U.S. 22 December 2003 Answers to Panel 
Questions, para. 109 ("CCC has no role in the arrangements between the foreign bank issuing the letter of credit 
and the importer, which is typically the acc ount party under the letter of credit.")). 
297 See U.S. [[       ]] examples at paragraphs 119-130 of the United States' First Written Submission.   
[[       ]] interest in cooperating with the United States in this dispute might be motivated by the fact that its 
lending business would be substantially impacted by the findings Brazil seeks.  [[                                              ]].  
Exhibit Bra-[[ ]] [[                                                                                                                              ]].  WT/DS267/RW 
 Page D-335 
 
 
227. Indeed, no complaining Member in a dispute under Part II of the SCM Agreement  enjoys such 
authority or such unfettered access to data.  This  is likely one reason why Article 14 does not, as a 
matter of law, apply directly to a dispute under Part II of the SCM Agreement .298  E v e n  i n  
countervailing measures disputes, the Appellate Bo dy has limited the rigid application of the 
quantification "guidelines" in Article 14.  In U.S. – Softwood Lumber IV , the Appellate Body relied on 
the term "guidelines" to inject flexibility into the provision.  
 228. In that dispute, the Appellate Body agreed with the United States "that the use of the term 
'guidelines' in Article 14 suggests that paragraphs (a) through (d) should not be interpreted as 'rigid 
rules that purport to contemplate ever y conceivable factual circumstance'."
299  Thus, according to 
settled case-law, Article 14 does not prescribe hard and fast rules, even in countervailing measure 
disputes, to which the provision is explicitly applicable.     229. Outside  the context of countervailing measure disput es, this flexibility is just as important to 
preserve.  The original panel's analysis is telling in this regard.  Although recognizing the need to 
appreciate the "general order of magnitude" of the subsidies at issue for the purposes of assessing their 
adverse effects in a dispute under Part III of the SCM Agreement
300, the original panel, citing the 
"unilateral" nature of countervaili ng duty investigations, forcefully rejected  the United States' request 
that it transfer the "quantitative focus and more deta iled methodological obligations of Part V into the 
provisions of Part III of the SCM Agreement ."301  
 
230. Preserving this flexibility is even more important in disputes under Part II of the 
SCM Agreement  (unlike in a dispute under Part V, where a duty must be calculated), where the 
amount of benefit need not be determined  with precision.  Rather, a showing of some  benefit suffices.  
In a dispute under Part II, only the existence of a "b enefit" under Article 1.1(b) must be established, 
and not the quantity of that benefit.  The origin al panel considered that imposing the "quantitative 
focus and more detailed methodological obligations of Part V" of the SCM Agreement on disputes 
preceding under Part III of the Agreement  was not appropriate, even where assessing the "magnitude" 
of the subsidy was required.302  For a dispute under Part II of the Agreement , where no assessment of 
the "magnitude" of the subsidy is required, there is no basis whatsoever to impose the "quantitative 
focus and more detailed methodological obligations of Part V …. "303   
 
231. Moreover, the "factual circumstances"304 in these proceedings under Part II of the 
SCM Agreement  are such that a "particularized showing"305, utilizing data concerning "individual loan 
costs and fees" or "comparable commercial loans and their terms"306, is not necessary.  Proof of some 
"benefit" can be established under Article 1.1(b) of the SCM Agreement  in this dispute without the 
type of evidence on which the United States insist s.  In proceedings involving claims against 
government guarantees under Parts II and V of the SCM Agreement , panels have already ruled twice 
                                                      
298 Appellate Body Report, U.S. – Softwood  Lumber  IV, para. 92.  See also U.S. First Written 
Submission, para. 132 ("… Article 14(c) applies, by its terms, only 'for the purposes of Part V' of the 
SCM  Agreement  …").  For Brazil's views on the proper interpreta tion of Article 14(c) in a dispute under Part II 
of the SCM  Agreement , see Brazil's Rebuttal Submission, paras. 400-413;  Brazil's Oral Statement, 
paras. 193-208;  Brazil's Closing Statement, paras. 28-29 ;  Brazil's 6 March Answers to Questions, paras. 54-57 
and Brazil's 16 March Comments on U.S. Answers, paras. 120-122. 
299 Appellate Body Report, U.S. – Softwood  Lumber  IV, para. 92.  
300 Panel Report, U.S. – Upland  Cotton , para. 1194. 
301 Panel Report, U.S. – Upland  Cotton , para. 1177.  See also Id., para. 1167. 
302 Panel Report, U.S. – Upland  Cotton , para. 1177.  See also Id., para. 1167. 
303 Panel Report, U.S. – Upland  Cotton , para. 1177.  See also Id., para. 1167. 
304 Appellate Body Report, U.S. – Softwood  Lumber  IV, para. 92.  
305 U.S. 6 March Response to Question 41, para. 80.  
306 U.S. Rebuttal Submission, para. 137. WT/DS267/RW  
Page D-336  
 
that evidence of the type insist ed on by the United States is not necessary to show that a benefit 
exists.
307  
 232. In this response, Brazil demonstrates that even  if "the proper benchmark to determine 'benefit' 
is the 'total cost of funds' of the transactions", th ere is sufficient evidence of  record, relevant to the 
"factual circumstances"
 308 at hand or otherwise, sufficient to prove a "benefit" under Article 14(c) of 
the SCM Agreement .  
  a. Recipient of a GSM 102 ECG does not secure credit 
 
 
233. Even assuming the relevance of the Article 14 guidelines to a dispute under Part II of the 
Agreement , it is not at all clear that Article 14(c) applies in the case of a GSM 102 ECG.    
 234. Article 14(c) presupposes that "the firm re ceiving the guarantee" is also "the firm that 
borrows funds and "pays on a loan".  As the Un ited States has reminded the Panel, however, a GSM 
102 ECG is provided to and paid for by the U.S. exporter, and not "the firm" that seeks or secures 
credit.
309  The benefit to the U.S. exporter is severab le, and measurable by the degree to which GSM 
102 fees are below relevant benchmarks.310  As a factual matter, therefore, Article 14(c) is not directly 
applicable to GSM 102.  While rigidly following an Article 14(c) approach might be appropriate in some circumstances, doing so here would mask an im portant "benefit" to a U.S. exporter, risking that 
"the subsidy disciplines in the SCM Agreement  … could be undermined or circumvented."
311  
 
 b. GSM 102 foreign obligors could not otherwise secure credit   
 
235. The panel in EC – DRAMs agreed that a government guarantee confers a "benefit" per se if 
without the guarantee, commercial lendi ng would not have been available.312  Brazil has 
demonstrated, using official, normative statements by  the U.S. government concerning GSM 102, that 
the program enables financing that could not otherw ise be secured at market.  Specifically, the GSM 
102 regulations state that GSM 102 operates  "where U.S. financial institu tions would be unwilling to 
provide financing without CCC's guarantee " and "where the guarantee is necessary  to secure 
financing of the export."313  USDA FAS' self-assessment of the program states that the program is for 
use where "obligors are too risky for the private sector,  but are marginally creditworthy."314  FAS' 
self-assessment goes on to characterize GSM 102 as targeting countries that are "not considered to be 
investment grade ."315 
                                                      
307 Panel Report, EC – CVDs  on DRAMs , para. 7.189;  Panel Report, Canada  – Aircraft  Credits  and 
Guarantees , para. 7.345. 
308 Appellate Body Report, U.S. – Softwood  Lumber  IV, para. 92.  
309 U.S. Rebuttal Submission, para. 107. 
310 Brazil's Oral Statement, paras. 205-208;  Brazil's Rebuttal Submission, paras. 402-413. 
311 Appellate Body Report, U.S. – Softwood  Lumber  IV, para. 100. 
312 Panel Report, EC – CVDs  on DRAMs , para. 7.190. 
313 Exhibit Bra-519 (7 C.F. R. § 1493.10(a)(2), GP O Access Online, January 2006, accessed July 2006 
at http://www.gpoacces s.gov/cfr/index.html ) (emphasis added). 
314 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov, 
Section 1.1, accessed January 2007 at 
http://www.whitehouse.gov/OMB/expect more/detail.10002020.2005.html ) (emphasis added).   
315 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov, 
Section 1.5, accessed January 2007 at 
http://www.whitehouse.gov/OMB/expect more/detail.10002020.2005.html ) (emphasis added).  See also Id., 
Section 2.1 ("The GSM-102/103 programs are primarily targeted to non-investment grade countries  (ICRAS 
grades D-E).") (emphasis added).  See also Exhibit Bra-685 (USDA FAS publication, "Will you get paid for the 
sale you just made," p. 4, accessed March 2007  at http://www.fas.usda .gov/excredits/LOANS.PDF ) (Quoting a 
U.S. bank as saying that "[t]he GSM programs help us accommodate the financing of U.S. agricultural exports  WT/DS267/RW 
 Page D-337 
 
 
236. In other words, GSM 102 ECGs are used wh ere commercial lending would not otherwise be 
available on any terms.  In these factual circumstances, as in EC – DRAMs , no quantitative assessment 
under the standard in Article 14(c) is required to show that a "benefit" is conferred on a foreign 
obligor.  Where official, normative statements by the U.S. government demonstrate that GSM 102 ECGs secure credit for foreign obligors that woul d otherwise not be available, those ECGs, by 
definition, lower the "total cost of funds"
316 involved in the transaction.  
 237. Commentators have noted that, in such cases,  the evidence demanded by the United States to 
implement its rigid "total cost of funds" appr oach to Article 14(c) is not obtainable:   
 
In some cases … it may be difficult to dete rmine the rate of interest which would 
have been paid in the absence of the gu arantee … especially in  those instances in 
which the program in question is initiated to  resolve a market failure, or in cases in 
which the program has supplanted a private sector market.
317 
 Interest rates charged for U.S. dollar-denomin ated "comparable commercial loans", within the 
meaning of Article 14(c), are not "observable"  for the simple reason that, according to the 
United States' own evaluation, such loans are not ava ilable.  Outside the context of this litigation, the 
United States has repeatedly confirmed that without a GSM 102 ECG, target foreign obligors could 
not secure commercial credit . 
  c. The US acknowledges that GSM 102 ECGs reduce borrowing costs
  
 
238. Official, normative statements by the U.S. government outside the context of this litigation 
confirm that GSM 102 ECGs reduce foreign obligors' borrowing costs.   239. The compliance Panel will recall that from the perspective of the U.S.  bank, a GSM 102 ECG 
means that a foreign obligor is essentially risk-free;   the GSM 102 ECG means that the foreign obligor 
carries the same credit rating as the U.S. government.  This enables the U.S. bank to offer the foreign 
obligor better credit terms than it would or coul d without the GSM 102 ECG, for the simple reason 
that a better credit rating enables a cheaper loan.     240. Official, normative statements by the U.S. govern ment demonstrate that this is precisely what 
happens.  USDA's FAS states that "[t]hese programs make commercial credit available at a reduced 
cost to higher risk markets."318  In other words, the U.S. government considers that the U.S. bank 
passes along to the foreign obligor at least a portion of the reduced cost of borrowing enabled by the 
GSM 102 ECG.  In other publications, FAS has conf irmed that U.S. banks pass along benefits to 
foreign obligors.319  The largest participant in the GSM program, CoBank, also characterizes the 
                                                                                                                                                                     
to emerging markets which, without the USDA guarantee, would be off limits  for most banks and exporters.") 
(emphasis added). 
316 U.S. First Written Submission, para. 138. 
317 Towe, Christopher M. "Government Contingent Li abilities and the Measurement of Fiscal Impact", 
IMF Working Paper, 1990.  This paper is available at:  
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=884863 . 
318 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov, 
Section 1.2, accessed January 2007 at http://www.whitehouse.gov/OMB/expect more/detail.10002020.2005.html
) (emphasis added). 
319 See Exhibit Bra-685 (USDA FAS publication, "Will you get paid for the sale you just made", p. 4, 
accessed March 2007 at http://www.f as.usda.gov/excredits/LOANS.PDF ) (Characterizes a benefit from the 
ECG programs as the ability of foreign banks to "share the benefits of longer terms and lower rates" with 
importers;  if the foreign bank itself did not get lower rates from the U.S. bank, it would have nothing to "share" 
with the importer). WT/DS267/RW  
Page D-338  
 
"benefit" to an importer as "better financing terms!!!"
320  If the U.S. bank fails to pass a portion of the 
"benefit", the list of CCC-approved U.S. banks is long321, and the foreign obligor will go to another 
CCC-approved U.S. bank to secure the savings enab led by the GSM 102 ECG.  (Even without the 
type of official, normative statements cited above , Brazil was subjected to  a similar pass-through 
assumption in Brazil – Aircraft (21.5 II) .322)  
 
 d. GSM 102 fees are below relevant benchmarks  
 241. In Canada – Aircraft Credits and Guarantees , a case under Part II of the SCM Agreement , the 
panel concluded that where government guarantee f ees are not market-based, it is "safe to assume" 
that the government guarantee lowers the cost of co mmercial credit, or in the United States' terms, 
that the guarantee lowers the "total co st of funds" involved in a transaction.
323  The panel did not insist 
on a rigid application of Article 14(c) with evidence to  prove that the total cost of funds was, in fact, 
reduced by cheap guarantees.     
242. In these proceedings, Brazil has demonstrated , on a country-by-country, tenor-by-tenor basis, 
that GSM 102 fees are dramatically below fees for similar products offered by the U.S. ExIm Bank.
324  
Unlike the comparison the United States asks the compliance Panel to require, the ExIm Bank 
exercise undertaken by Brazil identified financial in struments that approached as closely as possible 
the characteristics of GSM 102 ECGs, both in terms of the structure of the underlying loans and the effects of the coverage.  The fees for these instru ments could be calculated in a transparent manner, 
and the parameters for such calculation could be set so as to parallel exactly the characteristics of the 
GSM 102 ECGs.  The Panel, the United States and any other observer can readily replicate Brazil's 
comparison, without the need to issue counterva iling duty questionnaires or conduct verifications.  
 243. For a number of reasons, Brazil's ExIm Bank comparison is likely overly generous to the 
United States.
325  Nonetheless, it offers a useful referen ce point for the Panel in assessing the benefit 
to U.S. exporters from GSM 102 ECGs.  For that refe rence point to be useful, the Panel need not, as 
the United States curiously asserts, "assume that Ex-Im Bank guarantees are provided at below-market rates."
326  For the purpose of these particular proceed ings, the Panel can assume that the ExIm 
Bank products used in Brazil's comparison exercise are consistent with market.327 
                                                      
320 Exhibit Bra-684 (CoBank presenta tion, p. 7, accessed March 2007 at 
http://www.cottoninc.com/2005EFSConferencePresentati onsSingapore/FinancingUSACottonImportsUnderGSM/ ).  
The deal flow chart on page 11 of this presentation confirms that the reference on page 7 to "your company" is a reference to the importer.  Brazil notes that CoBank's vi ews on this matter are well-informed, as it enjoys "60% 
market share of GSM loans globally".  See Id., p. 2.   
321 See Exhibit Bra-525 ("U.S. Financial Institutions Approved To Be Assignees Under CCC's Export 
Programs," USDA FAS Online, accessed October 2006 at http://www.fas.usda.g ov/excredits/USbanks.html ).   
322 See Panel Report, Brazil  – Aircraft  (21.5 II), para. 5.31 (footnote 44) ("Neither party has suggested 
that lenders might not, in response to the offer of PR OEX III support, offer improved terms of conditions for 
export credits offered to buyers of Brazilian regional aircra ft.  We consider that it is very unlikely that lenders 
will not pass on at least part of the PROEX III payments in the form of better credit terms.  Otherwise, 
borrowers could simply choose other lenders."). 
323 Panel Report, Canada  – Aircraft  Credits  and Guarantees , para. 7.345. 
324 Brazil's First Written Submission, paras. 381-406.  See also Id., Annex III (Statement of 
Professor Rangarajan Sundaram);  Annex IV (Methodology for Comparison of GSM 102 Fees with Fees for 
ExIm Bank Products), and Exhibits Bra-536 and Bra-537. 
325 See Brazil's First Written Submission, paras. 382- 385, 389, 391-392, Annex III (Statement of 
Professor Rangarajan Sundaram, paras. 17-24), Annex IV (Methodology for Comparison of GSM 102 Fees with 
Fees for ExIm Bank Products, paras. 6-8, 10-12). 
326 U.S. 16 March Comments on Brazil's Answer to Question 41, para. 145. 
327 See Brazil's Oral Statement, para. 183.  With respect to paragraph 146 of the United States' 
16 March comments on Brazil's Answer to Question 41, if the United States considered that in undertaking its 
ExIm Bank comparison exercise, Brazil had benchmarked to instruments "with the highest fees", the  WT/DS267/RW 
 Page D-339 
 
 
244. The ExIm Bank fee comparison is sufficient to  discharge Brazil's burden in a dispute under 
Part II of the SCM Agreement , under the interpretation of Article 14 (c) set out by the Appellate Body 
in U.S. – Softwood Lumber IV328, and the panels in Canada – Aircraft Credits and Guarantees329 and 
EC – DRAMs .330  
 
245. The conclusion by the panels in Canada – Aircraft Credits and Guarantees and EC – DRAMs 
that below-market guarantee fees translate into lo wer costs for commercial credit, and thus a lower 
total cost of funds, is rooted in basic financia l economics.  The U.S. pos ition – that below-market 
GSM 102 fees might not translate into lower costs for commercial credit – runs counter to these basic principles of financial economics.  To explain, Braz il reveals the absurdity of the U.S. position.    
 
246. The Panel will recall that according to th e United States, a complainant in a dispute 
challenging government guarantees must prove that the total cost of financing,  including the premium 
and interest charges on a guaranteed loan, is less than  the total cost of financing either (i) with a 
commercial guarantee or (ii) without any guarantee.  
 
247. In the first of these two situations, the United St ates argues, in essence, that the interest that 
the lender charges on a loan guaranteed by the U.S. government could be higher than the interest it 
charges on a loan guaranteed by a commercial enterpri se.  Thus, for the United States' argument to be 
correct, a cheap U.S. government premium must be o ffset by higher loan charges, as exemplified in 
the table below: 
 
 CCC Guarantee Commercial Guarantee 
Premium 5 15 
Interest Charges 95 85 
Total Cost 100 100 
 
248. In this example, identically-situated borro wers obtain similar guarantees, one from the U.S. 
government, and the other from a commercial entity.  With the backing of these guarantees, funds are 
borrowed from the same commercial bank on the same terms, except for interest  charges.  The U.S. 
government guarantee is markedly cheaper than its mark et counterpart.  As a result, for the total cost 
of funds to be equal, the lending bank must charge more  for a loan backed by  the U.S. government 
than for a loan backed by a commercial entity.  
 
249. This is an absurd argument because, irr espective of the credit rating of the commercial 
guarantor, a loan backed by the U. S. government will present a lower risk to the lending bank – the 
U.S. bank in the GSM 102 scenario.  As a result, th at bank will inevitably charge the foreign obligor a 
reduced cost of borrowing on a loan that presents a lower risk.  As not ed above, if the bank does not 
do so, the foreign obligor will simply go to anot her lender to secure the savings enabled by the 
government guarantee (at least in the case of GSM 1 02, where the list of CCC-approved U.S. banks is 
                                                                                                                                                                     
United States had many opportunities over the course of  this dispute, subsequent to Brazil's First Written 
Submission, to propose comparable instruments with  lower fees.  Although the United States suggests 
otherwise, this situation is not unique to the current  proceedings;  a defending Member is always free to 
challenge the representativeness of a benchmarking instrume nt, if it is willing to take on the burden of doing so 
and does so within the timeframe required by a panel's working procedures. 
328 Appellate Body Report, U.S. – Softwood  Lumber  IV, para. 92. 
329 Panel Report, Canada  – Aircraft  Credits  and Guarantees , para. 7.345. 
330 Panel Report, EC – CVDs  on DRAMs , para. 7.189 ("[i]f the government charges less than a market 
fee for its guarantee in light of the sp ecific circumstances of the case, there w ould be a benefit to the recipient."). WT/DS267/RW  
Page D-340  
 
long
331).  Thus, if the U.S. government guarantee is priced better-than-market, the total cost of 
financing for the guaranteed loan will almost  certainly also be better-than-market.332  
 250. The existence of a benefit in the second s ituation indicated above, where there is no 
guarantee, can be illustrated by assuming  that ExIm Bank guarantees do not  confer benefits under 
Article 14(c) because they are priced at their "market"  value and do not alter the total cost of funds – 
i.e., ExIm Bank's fees precisely offset the inte rest savings resulting from ExIm Bank's guarantee.
333  
 251. On that generous assumption, the financing co sts in the "no guarantee" situation are the sum 
of the ExIm Bank premium and the interest charged by the lending bank on a loan guaranteed by 
ExIm Bank.  Because CCC and ExIm Bank guarant ees are both provided by the U.S. government, the 
risk to the lending bank of loans backed by each  of these guarantees is identical, and the interest 
charges on the loans would also be identical.   252. Because GSM 102 fees are considerably lowe r than their ExIm Bank counterparts, and 
because the interest charges on loan s backed by these two guarantees ar e the same, the total cost of 
funds in a CCC-guaranteed transaction must be lower th an the total cost of funds in an ExIm Bank-
guaranteed transaction.  Assuming that ExIm Bank f ees are equal to the Article 14(c) benchmark, the 
total cost of funds in a CCC-guaranteed transaction mu st also be lower than the cost of funds in a 
transaction without any guarantee, as illustrated by the table below:  
 CCC 
Guarantee ExIm Bank 
Guarantee No Guarantee 
Premium 5 15 0 
Interest Charges 85 85 100 
Total Cost 90 100 100 
 253. This explains why previous panels have regarded guarantee fe es as an appropriate benchmark 
for determining the existence of a "benefit", without e nquiring into the "total cost of funds".  For these 
reasons, it is "safe to assume" that a government guara ntee lowers the cost of commercial credit, or in 
the United States' terms, that th e guarantee lowers the "total cost of funds" involved in a 
transaction
334, where Brazil has demonstrated that GSM 102 fees are below relevant benchmarks.  
  e. GSM 102 repayment terms are below market 
 
 
254. Relevant jurisprudence provides that where government guarantee fees are not consistent with 
market, it is "safe to assume" that the government  guarantee lowers the cost of commercial credit.335  
This principle can be extended to other elements  of a government guarantee that are below-market, 
such as repayment terms.    
 
                                                      
331 See Exhibit Bra-525 ("U.S. Financial Institutions Approved To Be Assignees Under CCC's Export 
Programs," USDA FAS Online, accessed October 2006 at http://www.fas.usda.g ov/excredits/USbanks.html ).   
332 See Panel Report, Brazil  – Aircraft  (21.5 II), para. 5.31 (footnote 44) ("Neither party has suggested 
that lenders might not, in response to the offer of PR OEX III support, offer improved terms of conditions for 
export credits offered to buyers of Brazilian regional aircra ft.  We consider that it is very unlikely that lenders 
will not pass on at least part of the PROEX III payments in the form of better credit terms.  Otherwise, 
borrowers could simply choose other lenders."). 
333 With reference to paragraphs 145-146 of the United States' 16 March Comments on Brazil's 
Answers to Questions, Brazil notes that the results of its  analysis do not change if one assumes that ExIm Bank 
guarantees are provided at market rates, and not below  market rates.  As explained in Brazil's First Written 
Submission, this assumption is likely to be too generous to the United States. 
334 Panel Report, Canada  – Aircraft  Credits  and Guarantees , para. 7.345. 
335 Panel Report, Canada  – Aircraft  Credits  and Guarantees , para. 7.345.  WT/DS267/RW 
 Page D-341 
 
 
255. The benefit from a financial instrument must be assessed not only with reference to interest 
rates or fees, but also with reference to the repa yment terms extended the borrower to service its debt.  
As Brazil noted in its First Written Submission, not  even other U.S. government entities offer credit 
protection instruments for agricultural export tr ansactions with tenors exceeding 180 days or, 
exceptionally, 360 days.336  In contrast, GSM 102 ECGs are available for agricultural export 
transactions with repayment terms stretching out to three years.337  
 256. This difference involves a considerable benefit relative to the market.  The Chairman of the 
Board of CoBank stated in Congressional testimony that GSM 102's three-year tenor "is critical to the program's success," and that the program "provides for tenors that are typically unavailable in the 
market  and this is a crucial strength of the program."338  In the absence of GSM 102, such long 
repayment terms would be unavailable, even if th e U.S. exporter turned to ExIm Bank for similar 
protection (in which case, of course, the U.S. exporte r would also have to pay considerably higher 
fees).   
257. Added to the evidence concerning the inadequ acy of GSM 102 fees, the below-market nature 
of GSM 102 repayment terms gives the Panel yet fu rther grounds to conclude that it is "safe to 
assume"
339 that a GSM 102 lowers the cost of commercia l credit, or in the United States' words, 
lowers the "total cost of funds" involved in a transaction.    f. GSM 102 fees are insufficient to cover long-term costs 
 
 
258. Once again, as noted above, the jurispruden ce holds that where government guarantee fees are 
not consistent with market, it is "safe to assume" that the government guarantee lowers the cost of 
commercial credit.340  In these proceedings, making that assumption is particularly safe, since the 
record includes ample evidence demonstrating that GSM 102 fees are not even high enough to meet 
the program's costs over the long term.  
 259. For example, the record includes evid ence that GSM 102 fees are below the minimum 
premium rates ("MPRs") provided in the Organiza tion for Economic Co-opera tion and Development's 
("OECD") Arrangement on Officially S upported Export Credits (the "Arrangement")
341, in which the 
United States is a Participant.342  Citing item (j) of the Illustrative List of Export Subsidies, the OECD 
explains that the Arrangement's benchmark rates, in cluding MPRs, are set "to ensure that Participants 
to the Arrangement charge premium rates in addition to interest charges that … are not inadequate to 
cover long-term operating costs and losses asso ciated with the provision of export credits."343  The 
                                                      
336 Brazil's First Written Submission, paras. 391-392.  See also Brazil's Rebuttal Submission, 
paras. 434-436. 
337 Brazil's First Written Submission, paras. 334 and 355. 
338 See Exhibit Bra-528, ("GSM Programs Benefit U.S. Agriculture and the Rural Economy." 
Testimony of Otis Molz, Chairman of the Board of CoBank, to the U.S. Senate Committee on Agriculture, Nutrition and Forestry, 18 July 2000 (em phasis added), accessed November 2006 at 
http://agriculture.senate.gov/Hearings /Hearings_2000/Untitled/00718mol.htm
). 
339 Panel Report, Canada  – Aircraft  Credits  and Guarantees , para. 7.345. 
340 Panel Report, Canada  – Aircraft  Credits  and Guarantees , para. 7.345. 
341 Exhibit Bra-546 (OECD document TD/PG(2005)38/FINAL, 5 December 2005, Arrangement on 
Officially Supported Export Credits – 2005 Revision, accessed November 2006 at 
http://webdomino1.oecd.org/olis/2005doc.nsf/43bb61 30e5e86e5fc12569fa005d004c/23013c0293535d25c12570
cf003e35ed/$FILE/JT00195558.PDF ). 
342 See Exhibits Bra-548 and Bra-549.  See also Brazil's First Written Submission, paras. 438-440. 
343 Exhibit Bra-547 (OECD document TD/PG(2004)10/FINAL, 6 July 2004, para. 1, Premium and 
Related Conditions:  Explanation of the Premium Rules of the Arrangement on Officially Supported Export Credits (the Knaepen Package), accessed November 2006 at 
http://webdomino1.oecd.org/olis/2004doc.nsf/43bb61 30e5e86e5fc12569fa005d004c/a2c08162302d3415c1256e
c9003919f1/$FILE/JT00167196.PDF ). WT/DS267/RW  
Page D-342  
 
Arrangement's MPRs are on average 106 percent greater than GSM 102 fees, meaning that GSM 102 
fees are strikingly "inadequate to cover long-term  operating costs and losses associated with the 
provision of export credits".  
 
260. This fact is not only relevant to the assessment of GSM 102 under item (j).  It is also relevant 
to whether GSM 102 ECGs confer benefits.  The Pa nel will recall that the CCC borrows from, and is 
backed by the full faith and credit of, the United States Treasury.344  As a result, it enjoys a cost of 
funds significantly lower than that borne by a mark et-based financial institution.  Yet as the OECD 
MPR analysis demonstrates, GSM 102 fees are not ev en high enough for the CCC to turn a "profit" on 
the low cost of funds it enjoys as a U.S. government agency backed by the full faith and credit of the 
United States Treasury.345    
 
261. To survive over the long term, a market-based  entity would need to charge fees high enough 
to do more than simply break even – it would need  to make a profit on costs higher than those faced 
by GSM 102, and the profit would have to offer a suffi cient return to attract capital from investors.  
Proof that GSM 102 fees are too low to cover the U.S. government's already-low cost base over the long term is further proof that those fees are also below market.  
 
262. Brazil has also offered other evidence regardi ng the failure of GSM 102 to meet its costs over 
the long term.  In particular, Brazil notes CCC's forward-looking assessment of the amount by which 
costs and losses for the "cohorts" of GSM 102 ECGs  newly issued in FY 2006, FY 2007 and FY 2008 
will, over the long term, exceed  fees, penalties and recoveries.346  Using the same methodology, 
CCC's 2006 financial statements record its conclu sion that when ECGs outstanding on 31 September 
2006 are closed, the CCC expects to suffer a net loss of USD 220 million.347  The original panel relied 
on the same evidence for an earlier period.348    
 
 g. Conclusion  
 
263. In conclusion, Brazil respectfully submits that it would be contrary to the text of Article 14 of 
the SCM Agreement , as interpreted by the Appellate Body and two panels, as well as to the original 
panel's rejection of  the United States' attempts to transfer  the "quantitative focus and more detailed 
methodological obligations of Part V" to other Parts of the SCM Agreement349, to "agree with the 
United States that the proper benchmark to determin e 'benefit' is the 'total cost of funds' of the 
transactions,"350 without taking account of the "factual circumstances"351 at hand.  Prior adopted panel 
and Appellate Body reports crea te "legitimate expectations" amo ng WTO Members, and should be 
taken into account by panels when they are relevant to the resolution of a dispute.352 
 
264. If the compliance Panel nonetheless adopts a "rigid" 353 interpretation of Article 14(c) 
embodying the "total cost of funds" approach advocat ed by the United States to arrive at a precise 
amount of "benefit" conferred, Brazil believes that , consistent with the Panel's duty to make an 
objective assessment of the matter and to assist th e parties in achieving a positive solution to this 
dispute354, the Panel should make factual findings re garding the various "factual ci rcumstances"355 
                                                      
344 Panel Report, U.S. – Upland  Cotton , para. 7.858. 
345 Panel Report, U.S. – Upland  Cotton , paras. 7.857-7.858.  
346 Brazil's First Written Submission, paras. 433-437.  See also Exhibit US-71. 
347 Exhibit Bra-585 (Audit Report, Commodity Credit Corporation's Financial Statements for Fiscal 
Years 2005 and 2006, Report No. 06401-21-FM, November 2006). 
348 Panel Report, U.S. – Upland  Cotton , paras. 7.842-7.843 and 7.855. 
349 Panel Report, U.S. – Upland  Cotton , para. 1177.  See also Id., para. 1167. 
350 Question 100 from the Panel. 
351 Appellate Body Report, U.S. – Softwood  Lumber  IV, para. 92.  
352 Appellate Body Report, U.S. – Softwood  Lumber  V, para. 111. 
353 Appellate Body Report, U.S. – Softwood  Lumber  IV, para. 92.  
354 See Articles 3.7 and 11 of the DSU. 
355 Appellate Body Report, U.S. – Softwood  Lumber  IV, para. 92.   WT/DS267/RW 
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noted by Brazil in these proceedings and summari zed above, including factual findings regarding 
Brazil's ExIm Bank comparison exercise.  In case of an appeal, this would enable the Appellate Body to complete the analysis in the event that it reve rses an erroneous interpretation of Article 14(c).  
 
101. Brazil argues that "[w]here guarantees are res erved for circumstances in which credit would 
not otherwise be available, there is no "com parable commercial loan absent the government 
guarantee," within the meaning of Article 14(c) of the SCM Agreement."  (Brazil First Written 
Submission, para. 375).  The Panel understands th is argument of Brazil to focus on the foreign 
obligor.  Brazil elsewhere indicates that it is prin cipally concerned, in this proceeding, with the 
benefit to the US exporter (fees).  A re these two arguments at tension?  
 
265. The arguments offered by Brazil and cited by th e compliance Panel are not in tension.  Brazil 
has satisfied the "export subsidy" elemen t of its claim under Article 10.2 of the Agreement on 
Agriculture  in a number of ways.  As noted in Brazil's response to question 95 and as indicated in the 
Panel's question, however, Brazil's "principal[] concer n[]" is with, and the bulk of its evidence on this 
element of its claim relates to, the benefit confe rred by GSM 102 on a U.S. exporter.  Nonetheless, as 
described in its response to question 100, Brazil has also offered evidence to demonstrate that a 
benefit is conferred on fo reign obligors.  These arguments speak to  different benefits attendant to a 
GSM 102 ECG, and neither contradict or undermine one  another.  In this sense, they are not "in 
tension".  4. Item (j) of the Illustrative List  
 
Questions to both parties   
 
102. What, in your view, explains the different results achieved by the two methods advocated, on 
the one side, by the United States in paragraphs 87- 89 of its First Written Submission and by Brazil in 
Exhibit Bra-613 (other than the United States' cr iticism that Brazil has not taken recoveries 
corresponding to pre-1992 guarantees into account in its "cash basis" accoun ting calculations, of 
which the Panel is already aware)? 
 
266. Exhibit Bra-613 uses a retrospective, cash-basis accounting methodology.  Although the 
starting point for the methodology used to arrive at the results in paragraphs 87-89 of the U.S. First 
Written Submission is a forward-looking projection of future results, discounted back to present value 
terms, application of re-estimates effectively converts the process to a re trospective, cash-basis 
accounting methodology.   
267. The differing results are likely due to the fact  that Exhibit Bra-613 tracks cash results over the 
entire ECG portfolio on a fiscal year basis ( i.e., cash results on all ECGs issued post-1991 are 
combined), while the data in paragraphs 87-89 of  the U.S. First Written Submission reflect results 
broken down on a cohort-by-cohort basis. 
268. In principle, application of re-estimates to  initial estimates of long-term results on the cohort 
of ECGs actually issued in a given year should even tually converge on cash basis results.  This will 
only be the case, however, if all cohorts subject to the analysis are closed.  This is because the 
re-estimates, while intended to "'ta ke into account all factors that may have affected the estimate of 
each component of the cash flows, including prepayme nts, defaults, delinquencies, and recoveries,' to 
the extent that those factors have ch anged since the initial estimate was made,"
356 are not definitive 
until a cohort is "closed".  Only two of the cohorts included in the chart at paragraph 87 of the U.S. 
First Written Submission were, at the time of filing,  closed (1994 and 1995).  Data for the remaining 
12 open cohorts do not reflect final cash results, a nd instead continue, particularly for more recent 
                                                      
356 Panel Report, U.S. – Upland  Cotton , para. 7.843. WT/DS267/RW  
Page D-344  
 
cohorts, largely to reflect a forward-looking projection of future results, discounted back to present value terms.     269. As in the original proceedings, the United States argues to the comp liance Panel that every 
cohort will eventually show a profit when final re -estimates are made, the cohort closed, and cohort-
specific cash results effectively posted.  This argument  was rejected in the original proceedings.  As in 
the original proceedings, not all of the cohorts (including some relatively "old" cohorts, such as 1997 
and 1998) are currently showing a profit.
357  Indeed, six of the 14 cohorts tracked by the United States 
are not showing profits.  As noted by the original panel, the evidence does not establish "that cohort reestimates over time, will necessarily not give ri se to a net cost to the United States government."
358    
 
270. Moreover, militating against the U.S. positi on are CCC's 2006 financial statements, which are 
audited by the global accounting firm KPMG LLP.  Employing the same net present value ("NPV") 
methodology used to generate the estimate and re-es timate data tracked in paragraph 87 of the U.S. 
First Written Submission, the financial statements  record the CCC's conclusion that when ECGs 
outstanding on 31 September 2006 are closed, the CCC expects to suffer a net loss of USD 220 
million.359  
 
103. To what extent is evidence pertaining to  guarantees issued under the three programmes 
(GSM 102, GSM 103 and SCGP) under the prior fee sche dule relevant to the Panel's analysis of the 
revised GSM 102 programme under item (j)?  
 
271. Brazil believes that evidence related to the past performance of the three CCC ECG programs 
is of limited relevance to an ass essment of the adequacy of the amended GSM 102 fee schedule.  In 
the present case, evidence about the structure and design of the GSM 102 program, and forward-
looking or future-oriented assessments of th e GSM 102 program's performance on its own, are 
particularly important. 
 272. In this regard, Brazil recalls CCC's predicti on that the "cohorts" of GSM 102 ECGs issued in 
FY 2006 and FY 2007 (and thus unde r the amended GSM 102 fee sche dule) will suffer losses over 
the long term.  Specifically, using the net present value methodology required by the Federal Credit 
Reform Act ("FCRA"), CCC projects losses of USD 125 million and USD 114 million, respectively, 
for GSM 102 ECGs issued in FY 2006 and FY 2007 (before accounting for the costs of administering 
the program);  these projected losses amounted to 5.05  percent of the value of GSM 102 ECGs to be 
issued in FY 2006, and 4.48 percent of the value of GSM 102 ECGs to be issued in FY 2007.
360    
 273. This evidence is GSM 102 specific.  The F CRA NPV calculation used to arrive at these 
projections of losses on ECGs actually issued in a given year is critical, whether or not re-estimates 
are made over time.  U.S. law requires NPV projections because they "measure more accurately the costs of Federal credit programs" than does cash-basis accounting.
361  
 274. Brazil has offered other evidence, using both NPV and cash-basis accounting methodologies, that are not restricted to GSM 102.  Although data for GSM 103 and SCGP are included in these 
analyses, the contribution of these two programs is not  likely to change the results;  the Panel will 
                                                     
 
357 See chart at paragraph 87 of the U.S. First Written Submission. 
358 Panel Report, U.S. – Upland  Cotton , paras. 7.853 (and note 1028). 
359 Exhibit Bra-585 (Audit Report, Commodity Credit Corporation's Financial Statements for Fiscal 
Years 2005 and 2006, Report No. 06401-21-FM, November 2006). 
360 Brazil's First Written Submission, paras. 433-437. 
361 Exhibit Bra-545 (2 U.S.C. § 661(1)).  WT/DS267/RW 
 Page D-345 
 
 
recall that as of 1 July 2005, GSM 102 ECGs  accounted for 93 percent of all outstanding CCC 
ECGs.362    
275. Under the first such analysis, Brazil referre d to the CCC's 2006 financial statements, audited 
by the global accounting firm KPMG LLP, whic h demonstrate that the CCC does not anticipate 
covering the costs and losses of the ECG programs across all outstanding cohorts of ECGs issued 
since the inception of FCRA accounting.  In its audited 2006 financials, the CCC has concluded that 
when ECGs outstanding on 31 September 2006 are closed, the CCC expects to suffer a net loss of 
USD 220 million.363  Brazil recalls that the original pane l used the comparable figures from the CCC's 
earlier financial statements as support for its finding that the ECG programs met the terms of 
item (j).364  In short, this is not a "profitable" program.  
 
276. Under a second analysis, Brazil employed cash results of GSM 102, GSM 103 and SCGP to show that the programs are not breaking even.  As  shown in Exhibit Bra-613, Brazil replicated the 
approach relied upon by the original panel, upda ting the results of its cash basis accounting 
methodology to include data for FY 2003-2005.  Over the period FY 1993-2005, this analysis 
demonstrates program receipts of USD 2.9 billion, against program disbursements of USD 3.6 billion, 
for a net loss of over USD 689 million.  This shows that, in terms of historical performance, CCC's 
ECG programs did not break even over the long term.   277. In spite of its limited direct relevance, su ch data suggests that a revised schedule under which 
fees have increased 46 percent
365 but still remain below a statutoril y-enforced one-percent cap is not 
likely to make the programs break even in the long  term, much less turn them into the profitable 
enterprise alleged by the United States.     278. A simplified exercise demonstrates this conclu sion.  If the figures in the column "Premiums 
collected" in Exhibit Bra-613 are replaced with the same numbers multiplied by 1.46  (to reflect the 
average fee increase of 46% effected by the U. S. measures taken to comply, as asserted by the 
United States), the result would still be a net loss of over USD 574 million.  If the trade-weighted increase of 23% calculated by the United States
366 is used instead, the net loss would have been 
approximately USD 632 million.367  These figures do not depart significantly from the losses incurred 
with the fees actually charged over the period covered in Exhibit Bra-613.   
 104. Must a risk-based fee necessarily take into  account foreign obligor risk? Please discuss and 
provide any relevant support for your position. Can foreign obligor risk be treated differently than 
country risk in this respect, and if so, why?   
 
279. As stated in paragraphs 496-498 of Brazil's Rebuttal Submission, as long as a foreign obligor 
receives a credit rating inferior to that of its s overeign, the GSM 102 fee for a transaction involving 
that foreign obligor should include a premium above and beyond that associated with country risk.  
Brazil notes that none of the CCC-approved foreign banks enjoys a credit rating superior to that of its 
                                                     
 
362 See Brazil's Rebuttal Submission, paras. 14-15 an d Brazil's First Written Submission, para. 339. 
363 Exhibit Bra-585 (Audit Report, Commodity Credit Corporation's Financial Statements for Fiscal 
Years 2005 and 2006, Report No. 06401-21-FM, November 2006). 
364 Panel Report, U.S. – Upland  Cotton , para. 7.855. 
365 U.S. First Written Submission, paras. 7 and 74. 
366 U.S. First Written Submission, paras. 7 and 74. 
367 Exhibit Bra-687 (Cash Basis Accounting Worksheet).  In these calculations, the corrected figure of 
USD 21 million for premiums co llected in FY 2005 is used. See U.S. Rebuttal Submission, para. 96, 
footnote 145. WT/DS267/RW  
Page D-346  
 
sovereign.
368  As such, foreign obligor risk not only "[c]an  … be treated differently than country risk," 
as noted in the Panel's question, but must  be treated as additional  to country risk.    
280. Commercial banks could not a fford to ignore these risks in se tting the fee structure for their 
products.  Brazil notes that even ExIm Bank – another arm of the U.S. government – takes the cost of 
this additional risk factor into account, as reflected  in the "transaction risk increment" of its fee 
calculator.369  In contrast, any additional risk associated with a below-sovereign rating for a particular 
foreign obligor does not translate into an additional GSM 102 fee increment.  Accordingly, GSM 102 is not structured or designed to account fully for the risks involved in GSM 102-supported transactions or, ultimately, to meet the program's long-term costs and losses.     
281. While the United States argues that it can full y account for the riskiness of individual foreign 
obligors by implementing GSM 102 exposure limits for each foreign obligor
370, it offers no evidence 
of the way in which it does so.  What little it does of fer is not encouraging.  The United States refers 
to "the non-sovereign rating for [a  foreign bank's] country".371  This reference suggests that in setting 
exposure limits, the CCC does not account for differ ing ratings between individual non-sovereign 
foreign obligors in a country;  rather, it applies a single rating (" the … rating") for all non-sovereign 
foreign obligors within that country.   282. In any event, controlling for borrower risk solely through exposure limits, and not also 
through fees, is not sufficient, even if exposur e limits are implemented properly.  Prudent fiscal 
management compels commercial banks to take varying borrower risk into account not only via 
exposure limits, but also through fees.  In other words, managing risk requires a commercial bank to 
adopt both strategies;  one is not a substitute for the other, as the United States suggests.  Commercial 
lenders must control their exposure to concentrations  of risk (in other words, they must diversify) 
using exposure limits, and, at the same time, they must accurately price all applicable risks with 
respect to the exposure that they do take on.
372  A principal shortcoming of the GSM 102 program is 
its failure to adjust its guarantee fees to take account of material risks;  that failure is not cured by 
diversifying its portfolio of inaccurately-priced guarantees.  CCC's failure to take account of 
individual foreign obligor risk in setting GSM 102 fees means that its fee schedule is not truly "risk-based," and is not designed to cover the long-term costs and losses of the program, regardless of its 
exposure-based diversification policies.   
                                                     
 
368 Brazil's First Written Submission, para. 416 and Exhibit Bra-540 (Standard and Poor's Credit 
Ratings). 
369 See http://www.exim.gov/tools/fee_calc.cfm .  See also http://www.exim.gov/tools/calchelp.cfm , 
which includes an explanation of the "transaction risk in crement" field, noting that transaction risk increment 0 
is for "(1) sovereign risk transactions;  and (2) any non-s overeign risk (public or private) transactions deemed to 
be no riskier than the sovereign in a specific country.  Transaction risk increments 1 through 5 are for all other 
non-sovereign (public or priv ate) risk transactions." 
370 U.S. First Written Submission, paras. 78-79. 
371 U.S. First Written Submission, para. 78 (note 120) (emphasis added). 
372 Exhibit Bra-615 (Paul Bennett, "Applying Portfolio Theory to Global Bank Lending," 8 Journal  of 
Banking  and Finance  153-169, 163-164 (1984)).  In the context of modelling how each borrower's role in the 
portfolio's overall risk could be taken into account, Bennett observes that: 
Based on each credit's original risk ratin g, a certain standard markup over the 
cost of funds is specified.  This standard markup is intended to compensate for the 
borrower's own default risk (and accordingly it rises in increasingly large steps as ratings 
decline).  Contributions to portfolio risk should be reflected in deviations  of actual 
pricing from these standard markups.  For example, if a particular borrower adds a 
sizable amount of portfolio risk, then he should be charged more than just the standard 
markup.   WT/DS267/RW 
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105. What considerations must gui de the Panel's decision to a ccept or refuse new evidence or 
arguments on issues that were addressed by the or iginal Panel? Please discuss in light of the 
following:   
 
a. The original Panel found that original subsidy estimates , while not reflecting "actual" 
figures , nevertheless provide a reliable measure of the United States government's 
own assessment of the profitability of  the export credit guarantee programmes .  Is the 
United States asking the Panel to revisit that conclusion (see paras 108 ff . of the 
United States' First Written Submission) .  
 
b. The United States presents evidence which , it argues , demonstrates that the three 
programmes examined by the original panel w ere operated at no net cost to the US 
government .  Is there any issue as to wheth er the Panel can or should accept the 
United States' evidence in this respect?  
 
283. Parts (a) and (b) of the compliance Panel' s question are intimately related, and Brazil 
therefore answers them together.  However, in the final paragraph of this response, Brazil offers an 
additional response that is specific to part (b) of the Panel's question.  
 284. Despite the adoption of an amended GSM 102 fee schedule, the CCC predicts that costs and 
losses for the "cohorts" of GSM 102 ECGs newly issu ed in FY 2006, FY 2007 and FY  2008 will, 
over the long term, exceed fees, penalties and recoveries.
373  
 285. The original panel relied on this very same  evidence for earlier cohorts.  Taking a forward-
looking or future-oriented approach to its assess ment of the CCC ECG programs under item (j) of the 
Illustrative List, the original panel reviewed U. S. government projections concerning the long-term 
cohort-specific costs of the programs.  Those projections, issued each year for the cohort of ECGs 
newly issued in that year, employ a statutorily-mandated NPV methodology considered by U.S. law to "measure more accurately the costs of Federal credit programs".
374  
 286. During the original proceedings in this dis pute, the United States argued throughout its many 
submissions to the panel and Appellate Body that these projections are not appropriate for assessing 
the performance of an ECG program under item (j), because they do not refl ect actual, cash-basis 
results of the ECG programs calculated on a retrospective basis
375, and because they do not utilize 
ECG program-specific parameters.376  
                                                      
373 Brazil's First Written Submission, paras. 433-437.  See also Exhibit US-71. 
374 Exhibit Bra-545 (2 U.S.C. § 661(1)). 
375 The United States appealed this specific element of  the original panel's analysis.  U.S. Appellant's 
Submission in U.S. – Upland  Cotton , paras. 407 and 410-413 (and note 419), available  at 
http://www.ustr.gov/assets/Trade_Agreements/Monitori ng_Enforcement/Dispute_Settlement/WTO/Dispute_Set
tlement_Listings/asset_upload_file938_5598.pdf .  For U.S. arguments before the original panel, see U.S. 
11 July 2003 First Written Submission, paras. 176-178 ;  U.S. 11 August 2003 Answers to Panel Questions, 
paras. 157, 159, 170 and 173;  U.S. 22 August 2003 Rebuttal Submission, paras. 161-162, 167, 171;  U.S. 
30 September 2003 Further Submission, para. 151;  U.S. 18 November 2003 Further Rebuttal Submission, 
paras. 196-199;  U.S. 22 December 2003 Answers to Panel Questions, paras. 86, 90, 91-95, 96-99, 100-101, 
103, 117-121 and U.S. 11 February 2004 Answers to Further Panel Questions, para. 21. 
376 U.S. 30 September 2003 Further Submission, paras. 144 and 147 (emphasizing that estimates are 
reached under "government-wide accounting rules", "with out regard to the actual experience specific to the 
CCC export credit guarantee programs ");  U.S. 18 November 2003 Further Rebuttal Submission, para. 196 
("estimates are compelled by government-wide accounting rules for credit programs ….") and U.S. 3 December 
2003 Closing Statement, para. 10 (e mphasizing that CCC is subject to " government-wide requirements" for the 
calculation of estimates and re-estimates). WT/DS267/RW  
Page D-348  
 
287. The original panel and the Appellate Body re jected the United States' arguments, accepting a 
forward-looking approach to the assessment of the ECG programs under item (j).
377  As the original 
panel noted, although these projections are "initial estimates"378, "[t]hey are not … mere random 
guesses as to the amount of possible, but highly unlikely, costs to the government."379  To the original 
panel, these initial estimates of long-term losses we re probative because they are calculated with a 
"methodology used and relied upon by the United States government to assess the estimated long-
term net cost to the United States government of export credit guarantees."380    
 288. Addressing the United States' argument that the statutorily-imposed NPV methodology was not sensitive enough to adjust for CCC-specific experi ence with the ECG programs, the original panel 
found it particularly significant that the estimat es were based on CCC's historical experience
 with 
country and borrower markets, presumably because th at experience underscored the reliability of the 
estimates as indicators of long-term cost.381    
 289. Concluding its analysis, the original panel noted that the CCC's initial estimates 
 
indicate to us that the United States government believes, based on its own assessment, that it may not, even over the l ong term, be able to operate the export 
credit guarantee programmes without some net cost to the government.
382  
290. These adopted findings concerning the probity of the CCC's initial estimates should, in 
principle, be followed by subsequent panels and, specifically, by this compliance Panel.  In its 26 
February answer to question 2, Brazil explained th at prior adopted panel a nd Appellate Body reports 
create "legitimate expectations" among WTO Members,  and should be taken into account by panels 
when they are relevant to the resolution of a dispute.383  Further, where the issues before a panel are 
the same as those previously examined by the Appe llate Body, it is "not only appropriate," but to "be 
expected," that the panel would follow the Appellate Body's earlier conclusions.384    
 
291. With respect to compliance proceedings, in particular, the Appellate Body has stated that 
"Article 21.5 proceedings do not occur in isolation but are part of a ' continuum of events .'"385  The 
Appellate Body observed that "doubts could arise about the objective nature  of an Article 21.5 panel's 
assessment if, on a specific issue, that panel were to deviate  from the reasoning in the original panel 
report in the absence of any change in the underlying evidence."386 
                                                      
377 Appellate Body Report, U.S. – Upland  Cotton , paras. 763-764 and Panel Report, U.S. – Upland  
Cotton , paras. 7.842-7.843.  See also Id., para. 7.835 ("[T]he item (j) analysis need not be a purely retrospective 
one …."). 
378 The use of the term "initial" means cohort-specific estimates of long-term losses on the value of 
ECGs actually issued in a given fiscal year (rather than the value of ECGs bu dgeted or projected to be issued).  
The United States attempts to mislead the compliance Panel by erroneously stating that CCC initial estimates of 
long-term losses for GSM 102 are nothing more than the result of "an historically overly-optimistic projection of 
actual use of the program."  U.S. First Written Submi ssion, paras. 103 and 104.  Brazil demonstrated the 
erroneous basis for this U.S. assertion in its Rebuttal Submission.  See Brazil's Rebuttal Submission, 
paras. 506-511. 
379 Panel Report, U.S. – Upland  Cotton , para. 7.843. 
380 Panel Report, U.S. – Upland  Cotton , para. 7.843. 
381 Panel Report, U.S. – Upland  Cotton , para. 7.843 ("Actual historical experience is a 'primary factor' 
on which estimates are based."). 
382 Panel Report, U.S. – Upland  Cotton , para. 7.843. 
383 Appellate Body Report, U.S. – Softwood  Lumber  V, para. 111. 
384 Appellate Body Report, U.S. – OCTG  Sunset  Reviews , para. 188. 
385 Appellate Body Report, U.S. – Softwood  Lumber  IV (21.5), para. 103 (emphasis added) citing 
Appellate Body Report, Mexico  – Corn  Syrup  (21.5), para. 121.   See Brazil's First Written Submission, 
para. 28. 
386 Appellate Body Report, U.S. – Softwood  Lumber  VI (21.5), para. 103 (emphasis added).  WT/DS267/RW 
 Page D-349 
 
 
292. Notwithstanding these principles, in these Artic le 21.5 proceedings, the United States asks the 
compliance Panel to ignore the original panel and the Appellate Body's findings on the relevance of 
the CCC's initial estimates of long-term program lo sses.  The United States asks the compliance Panel 
to abandon the original panel and Appellate Body's  adoption of a forward-looking, future-oriented 
assessment under a methodology "used  and relied upon by the United States government to assess the 
estimated long-term net cost to the United States government of export credit guarantees,"387 in favor 
of a purely retrospective assessment of program performance.     293. The United States' bases its re quest for the Panel to ignore the original panel and Appellate 
Body's reliance on initial estimates on two related arguments.    
 
294. First , the United States argues that using an  NPV methodology to assess costs does not 
represent "actual losses".
388  Converting the NPV methodology into a retrospective, cash-basis 
accounting methodology by taking account of re-estimates, the United States argues that the original panel erred in relying on a forward-looking assessme nt using the NPV methodology that is "used and 
relied upon"
389 by the U.S. government to estimate the cost of the GSM 102 program.390  
 295. In short, the United States is suggesting th at the compliance Panel should discard the initial 
estimates of long-term losses, because when the "l ong-term" arrives, those estimates do not always 
turn out to have been accurate.   
296. The original panel considered this U.S. objection and rejected it.
391  The original panel 
accepted that a forward-looking assessment of the ECG programs under an NPV methodology was a solid basis on which to make findings under item (j), despite that fact that NPV calculations are by 
definition projections of future
 results, discounted back to present value terms.  
 
297. U.S. law has not changed in this respect since the original panel visited this question.  U.S. 
law continues to require long-term, forward-looking  projections of program performance using a net 
present value methodology because the results of th is methodology "measure more accurately the 
costs of Federal credit program s" than cash-basis methodologies.392    
 298. The U.S. government is not alone in this appr oach.  The NPV calculati on used to arrive at 
initial projections of losses on ECGs actually issued in a given year is critical, whether or not re-
estimates are made over time, and without regard to those re-estimates.  Bank regulators all over the world use projections of default probabilities and losses-given-default – the core of net present value 
methodology – to gauge the adequacy of a bank's capital.
393  Forward-looking assessments of long-
term costs are "used and relied upon"394 by the U.S. government for the same reason they are used and 
relied upon by the private banking sector – they dictate how a program, or a bank, should structure 
fees, exposure limits, capital reserves and the like to achieve a return on investment (or in the case of 
a government program, in the very least to break even). 
299. Second , the United States argues that even if a fo rward-looking approach involving estimates 
is an acceptable basis for an assessment under item (j), the NPV methodology applied by the U.S. 
                                                      
387 Panel Report, U.S. – Upland  Cotton , para. 7.843. 
388 U.S. Rebuttal Submission, para. 88. 
389 Panel Report, U.S. – Upland  Cotton , para. 7.843. 
390 U.S. First Written Submission, paras. 85-94. 
391 Panel Report, U.S. – Upland  Cotton , para. 7.843. 
392 Exhibit Bra-545 (2 U.S.C. § 661(1)). 
393 See "Internal Ratings-Based Approach" of the Ba sel Committee on Banking Supervision", described 
at http://www.bis.org/publ/bcbs128.htm . 
394 Panel Report, U.S. – Upland  Cotton , para. 7.843. WT/DS267/RW  
Page D-350  
 
government to assess the long-term costs of GSM 102 ECGs is inappropriate, as it entails assumptions 
that are not specifically-tailored to the GSM 102 program, making it unreliable.
395  
 300. The compliance Panel should reject the U.S. reproach of the original panel and Appellate 
Body's approach.  The process by which the CCC arri ves at initial estimates of long-term program 
performance has not changed since th e original proceedings;  nor have the criteria used by the CCC to 
make this assessment.     301. Once again, the United States is asking the Panel to revisit the original panel's findings, despite the fact that the original panel rejected th e U.S. argument, and the fact that now, as in the 
original proceedings, the NPV methodology "used and relied upon"
396 by the U.S. government is 
sufficiently tailored to generate reliable estimates of  the long-term costs of the GSM 102 program.    
 302. USDA's own "Agriculture Fi nancial Standards Manual" – not an agency far removed from the 
GSM 102 program, as the United States asserts
397 – states that expected loss rates, or estimated default 
costs, are based on "loan performance experience".398  If historical experience truly established that 
the NPV methodology required by U.S. law overstated the risk of default, the U.S. government would 
have adjusted it for the purpose of calculating future projections on new GSM 102 commitments.  Those adjustments have been made;  FAS' self-as sessment of the program states that the "credit 
models used to calculate the subsidy for the gua ranteed credits were revised in FY2001 and FY2003 
and currently provides reliable estimates
", and identifies the model applied specifically as "[t]he 
USDA model ".399  These "reliable estimates" show, as they have in every year since the inception of 
net present value accounting by the U.S. govern ment for credit accounts in 1992, that the 
CCC anticipates losses on the cohort of GSM 102 ECGs  issued under the amended fee schedule in 
FY 2006, FY 2007 and FY 2008.400  
 
303. In the face of the evidence described above, the United Stat es has not advanced any new, 
credible arguments to support its assertion th at a forward-looking assessment of the GSM 102 
program based on loss estimates calculated under th e NPV methodology used and relied upon by the 
U.S. government is no longer reliable.  There is, th erefore, no basis for this Panel to accept the United 
States' arguments that the estimates are unreliable.  These arguments were considered, and rejected, in 
the original proceedings in this dispute.  To fi nd now that the estimates are unreliable would involve a 
significant departure from the findings in the original proceedings, with no valid basis for that change.  
It would also involve a violation of the principle of res judicata , because the reliability of the 
estimates has been definitively resolved for purposes of  this dispute, and indeed verified by USDA's 
FAS.401  The United States is not entitled to re-litigate an  issue that has been de finitively resolved for 
purposes of this dispute. 
 
                                                      
395 U.S. Rebuttal Submission, paras. 108-125. 
396 Panel Report, U.S. – Upland  Cotton , para. 7.843. 
397 U.S. Rebuttal Submission, para. 115. 
398 Exhibit Bra-616 (U.S. Department of Agriculture, Office of the Chief Financial Officer, Credit, 
Travel, and Accounting Division, Agriculture  Financial  Standards  Manual  (May 2004), p. 121, accessed 
December 2006 at h ttp://www.ocfo.usda.gov /reports/index.htm ) ("In estimating default costs, the following risk 
factors are considered:  (1) lo an performance experience ….").  
399 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov, 
Section 3.CR2, accessed January 2007 at http://www.whitehouse.gov/OMB/e xpectmore/detail.10002020.2005.html ) 
(emphasis added).  
400 See evidence cited in Brazil's Oral Statement, para. 253.  See also Exhibit US-71. 
401 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov, 
Section 3.CR2, accessed January 2007 at http://www.whitehouse.gov/OMB/e xpectmore/detail.10002020.2005.html ) 
(The "credit models used to calculate the subsidy fo r the guaranteed credits were revised in FY2001 and 
FY2003 and currently provides reliable estimates .") (emphasis added).   WT/DS267/RW 
 Page D-351 
 
 
304. Brazil concludes with a final thought on part (b ) to the Panel's question.  As noted above, the 
United States is essentially asking the compliance Pa nel to revisit the original Panel and Appellate 
Body's conclusion that an NPV measure of long-term  costs is appropriate to this dispute, because 
projected losses might not always materialize for every cohort.402  In this sense, Brazil believes that 
parts (a) and (b) of the Panel's question are in timately related;  the response offered above 
demonstrates why the United Stat es request should be rejected.  
 305. Alternatively, the United States might be aski ng the compliance Panel, effectively, to reverse
 
the findings and conclusions of the original pane l that the original measures – the ECG programs 
before they were amended on 1 July 2005 – were oper ated at a loss and, therefore, to conclude that 
they did not involve export subsidies under item (j).   Those findings and conclusions were upheld on 
appeal, and the DSB's recommendation are based upon them.  This Panel may not depart from the 
findings made in the original dispute on this issue, for two reasons.     306. First , as we are reminded by the United States' requests for preliminary rulings, the 
compliance Panel's terms of reference extend solely  to "measures taken to comply".  The amended
 
GSM 102 program is a measure taken to comply ;  the original GSM 102, GSM 103 and SCGP 
programs are not.     307. Second , under the principle of res judicata , the United States is not entitled to re-litigate an 
issue that has been definitively resolved for purposes of this dis pute.  The United States' request 
should be rejected.  
 
106. The parties disagree as to whether Brazil should include recoveries for pre- 1992 guarantees 
in its cash basis accounting formula (Exhibit Bra- 613).  Is the Panel correct in understanding that 
Brazil's formula does not includes amounts for (1 ) claims paid after 1992 under pre-1992 guarantees;  
(2) fees paid on pre-1992 guarantees? If so, pl ease explain the relevance or non-relevance of 
including recoveries under pre-1992 guarantees in light of the non-inclusion of  costs and other revenues related to the same guarantees.   
 
308. The compliance Panel's understanding that Brazil's cash basis accounting formula does not 
include costs and revenues associated with pre-1992 gua rantees is correct.  In Brazil's view, it would 
not be appropriate to include recoveries under pr e-1992 guarantees in the accounting analysis if all 
costs and other revenues related to the same guarantees are left out.  If the United States believes that 
recoveries for guarantees issued prior to FY 1992 shou ld be included in the formula, then the formula 
should be extended back to the years before FY 1992 so that claims and other expenses associated 
with those guarantees are also accounted for (which means including not only claims paid after 1992, 
as the United States did in its Rebuttal Submission, but also before that date).  Otherwise, the results 
for the post-1991 cohorts demonstrated in Brazil' s analysis as shown in Exhibit Bra-613 should be 
sufficient for a long-term cash b asis analysis of the programs.  
 309. An approximate indication of the results that  would be obtained if guarantees issued in fiscal 
years prior to 1992 were to be included in the analysis can be given on the basis of information 
provided in the General Accounting Office ("GAO") re port previously submitted as Exhibit Bra-584.    
 310. GAO points to claims of USD 6.5 billion fo r the period 1980-1994.  If one subtracts 
approximately USD 1.0 billion in claims paid out in  connection with post-1991 cohorts (as indicated 
in Exhibit Bra-613), and adds the claims paid from FY 1995 onwards (USD 692 million, according to 
                                                     
 
402 See U.S. Rebuttal Submission, paras. 93-94, 98 ("[T]hese financial results showing that the 
programs charged premium rates more  than adequate to cover the long-term operating costs and losses of the 
programs were generated by the export credit guarantee pr ograms as previously configured and examined by the 
original panel .") (italics in original;  underlining supplied). WT/DS267/RW  
Page D-352  
 
the liquidating account data shown in footnote 150 of  United States' Rebuttal Submission), one is left 
with approximately USD 6.2 billion in claims for those pre-1992 guarantees.     311. On the recovery side, GAO reports approxi mately USD 600 million recovered in the period 
1980-1994.  Subtracting recoveries associated with  post-1992 cohorts (USD 470 million) and adding 
recoveries registered in the liquidating account from FY 1995 onwards (approximately 
USD 5.06 billion), the result is USD 5.2 billion.  Leaving aside interest revenue and expenses and 
administrative costs
403, a gap of USD 1 billion would have to be covered by the collection of ECG 
fees.   
312. Assuming an "average" fee of 0.6% for the period 1980-1992 (equal to the ratio between fees 
collected and guarantees issued in the period consid ered by the original panel during the period 
FY 1993-2002 – respectively, USD 186.5 million and USD 32.9 billion
404), noting GAO's statement 
that USD 51.1 billion in guarantees were issued in the period 1980-19 94, and subtracting from that 
amount the guarantees issued in FY 1993 and 1994 (U SD 7.1 billion), the estimated amount of fees 
would be 0.006 times 44.0, i.e., USD 264 million.   
 313. This is insufficient to cover the above-m entioned gap of USD 1 billion.  Therefore, 
consideration of pre-1992 cohorts would, if anything, add a loss of  approximately USD 750 million to 
the negative results already s hown for the post-1991 cohorts.  
 Questions to the United States   
 
107. What can explain the discrepancy between th e "credit guarantee liability" recorded in the 
CCC's financial statements (which suggest that the program is provided at a net cost to the US 
government) and the evidence presented by the US in  para. 87 of its First Written Submission?  
 
108. Please explain why the "liability" figure in the CCC's financial statements should not be 
considered by the panel to provide, if not the amount  of actual losses, at least a reliable estimate of 
the CCC's own perception of the cost to the government  of the programmes since their inception. Is 
the Panel wrong in understanding that a "credit guarantee liability
" in this context means that the 
CCC considers that the programmes will not co ver their costs and losses in the long term?  
 
109. Please indicate to the Panel whether there have been occurrences of reschedulings prior to 
the occurrence of defaults and the payment of claims by the CCC.   110. Is it possible to calculate the "subsidy estimate net of reestimates" for GSM 102 alone 
(similar to what the US has done for all three progra mmes in para. 87)?  If so, please provide a table 
recording the results of this exercise.   111. In paragraph 7.853, the original Panel stated that it "disagree(d) with the United States that 
we should "eliminate" the data for certain, more recent , cohorts in our analysis."  Is the United States 
asking that this Panel eliminate such data for the most recent cohorts (the table at para. 87 of the 
United States' First Written Submission includes data up to 2005 only).  Why should this Panel do 
what the original refused to do?  What would be the result of the United States "re-estimates" exercise 
if the original subsidy estimate for th e 2006 and 2007 cohorts were included?   
 
                                                     
 
403 Brazil notes that interest revenue and expenses shown in table 3 of the original panel report indicate 
that, for the 10-year period 1993-2002, interest expenses exceed  interest revenue by over USD 100 million.  
Therefore, the assumption in the above analysis is conservative, and if anything is highly likely to be in the 
United States' favour. 
404 For the amount of guarantees issued, see Exhibit US-7.  WT/DS267/RW 
 Page D-353 
 
 
112. Please explain whether and how the CCC lim its risks or control costs of the GSM 102 
programme as regards foreign ban ks' individual credit ratings.  
113. Please explain whether and how CCC country risk categories correspond to ICRAS ratings. 
Question to Brazil  
 
114.  Brazil argues that "(t)hat the United States has , on one view of the data, beaten the odds and 
met its costs and losses over a series of years does not mean that ECG programs are structured and 
designed to do so" (para. 503, Brazil's Rebuttal).  Is Brazil arguing that evidence regarding the actual 
operation and "profitability" of the programme (i.e . retrospective evidence) is irrelevant to the 
Panel's analysis under item (j)?   
 
314. Brazil is not arguing that retrospective eviden ce regarding cash results of an ECG program is 
irrelevant to the Panel's analysis under item (j).   Brazil has demonstrated that on a review of 
retrospective evidence regardi ng the cash results of the ECG programs – either including ( see Brazil's 
response to question 106, above) or not including ( see Exhibit Bra-613) pre-1992 ECGs – the 
programs are operating at a loss.    
 315. However, Brazil is mindful of the original pa nel's finding that "the item (j) analysis need not 
be a purely retrospective one," but instead "also appropriately takes into account elements of the 
structure, design and operation of the measure …."
405    
 
316. Forward-looking evidence regarding the structure, design and operation of the GSM 102 
program is particularly relevant in these proceed ings.  Much as the "long term" qualification in 
item (j) is meant to smooth out aberrant losses suff ered by an otherwise cost-neutral ECG program, 
breaking even against the odds does not take an ECG program that is not structured or designed to meet long-term costs and losses beyond the reach of item (j).    
 
317. In short, avoiding losses by good fortune is not the same as designing a program to meet its long-term costs and losses.  As Brazil has previously  noted, the U.S. view of item (j), which deems 
relevant only retrospective evidence of cash results, n ecessarily means that an ECG program could 
charge no fees  whatsoever, and be excluded from item (j) if program administrators were lucky 
enough not to suffer any defaults in a given period.  Leaving administrative costs aside, the U.S. view 
is that this program would then have "broken even" in  that period.  In Brazil's view, it could hardly be 
maintained that this program is structured and designed  to meet its long-term costs and losses, 
however.  The original panel agreed;  it recognized  that a purely retrospective approach was overly-
simplistic, and would fail to account for serious st ructural flaws in an ECG program's fiscal 
management.  
 
318. It is important to note that undertaki ng a forward-looking assessment of GSM 102 does not 
mean foregoing a quantitative assessment of program performance .  As noted in response to 
question 105, above, despite the adoption of th e amended GSM 102 fee schedule, the CCC offers 
quantitative assessments of the amount by which co sts and losses for the "cohorts" of GSM 102 ECGs 
newly issued in FY 2006, FY 2007 and FY 2008 will,  over the long term, exceed fees, penalties and 
recoveries.406  These forward-looking estimates are derived with a statutorily-mandated net present 
value ("NPV") methodology heralded by U.S. law as "measure[ing] more accurately the costs of 
Federal credit programs".407  Using the same NPV methodology, CCC's 2006 financial statements 
record its conclusion that when ECGs outstandi ng on 31 September 2006 are closed, the CCC expects 
                                                      
405 Panel Report, U.S. – Upland  Cotton , para. 7.835. 
406 Brazil's First Written Submission, paras. 433-437.  See also Exhibit US-71. 
407 Exhibit Bra-545 (2 U.S.C. § 661(1)). WT/DS267/RW  
Page D-354  
 
to suffer a net loss of USD 220 million.
408  The original panel relied on this very same evidence for 
earlier cohorts.409  
 319. Comparing GSM 102 fees to OECD Arrangement MPRs, as discussed in response to question 100, also facilitates a forward-looking, quantitative assessment of the program.  The Panel 
will recall the OECD's explanation that the Arrange ment's benchmark rates, including MPRs, are set 
"to ensure that Participants to the Arrangement ch arge premium rates in addition to interest charges 
that … are not inadequate to cover long-term opera ting costs and losses associated with the provision 
of export credits."
410  The Arrangement's MPRs are on average 106 percent greater than GSM 102 
fees, meaning that GSM 102 fees are strikingly "inadequate to cover long-term operating costs and 
losses associated with the provision of export credits".   
 
                                                      
408 Exhibit Bra-585 (Audit Report, Commodity Credit Corporation's Financial Statements for Fiscal 
Years 2005 and 2006, Report No. 06401-21-FM, November 2006). 
409 Panel Report, U.S. – Upland  Cotton , paras. 7.842-7.843, 7.855. 
410 Exhibit Bra-547 (OECD document TD/PG(2004)10/FINAL, 6 July 2004, para. 1, Premium and 
Related Conditions:  Explanation of the Premium Rules of the Arrangement on Officially Supported Export Credits (the Knaepen Package), accessed November 2006 at 
http://webdomino1.oecd.org/olis/2004doc.nsf/43bb61 30e5e86e5fc12569fa005d004c/a2c08162302d3415c1256e
c9003919f1/$FILE/JT00167196.PDF ).  WT/DS267/RW 
 Page D-355 
 
 
ANNEX D-13 
 
RESPONSES OF THE UNITED STATES TO THE  
PANEL'S SECOND SET OF QUESTIONS 
 
(2 April 2007) 
 
 
TABLE OF CONTENTS  
 
Page   
TABLE OF EXHIBITS  
356 
A. S COPE OF THIS PROCEEDING  359 
B. C LAIMS OF BRAZIL REGARDING PRESENT SERIOUS PREJUDICE  378 
1. Significant price suppression - Article 6.3(c) of the SCM Agreement   378 
2. Increase in world market share - Article 6.3(d) of the SCM Agreement  410 
C. C LAIM OF BRAZIL REGARDING THREAT OF SERIOUS PREJUDICE  411 
D. E XPORT CREDIT GUARANTEES  419 
1. Outstanding export credit guarantees  419 
2. Legal Bases for Brazil's export subsidies claims  421 
3. "Benefit" under Articles 1.1 and 3.1(a) of the SCM Agreement   421 
4. Item (j) of the Illustrative List  429 
 WT/DS267/RW  
Page D-356  
 
TABLE OF EXHIBITS  
 
 
Exhibit US-  Title  
140 NASS Prospective Plantings Report (March 30, 2007)  
141 7 U.S.C. 5622 
142 7 C.F.R. 1493 (Subparts A and B) 
143 The New Shorter Oxford English Dictionary  at 793, Volume 1, (2005 Edition) 
144 Economic Research Service, Commod ity Costs and Returns available at 
http://www.ers.usda.gov/data/CostsandReturns/   
145 Comparisons of USDA February Projections to Final Estimates 
146 Comparison of NCC Planting Intentions Report Data to Final NASS Acreage Data 
147 Updated Cotton, Corn, and Soybean Futures Data for 2007 (Year To Date) 
148 The New Shorter Oxford English Dictionary  at 1350, Volume 1, (2002 Edition) 
149 The Handbook of Fixed Income Securities , 6th ed. (2001), Fabozzi, Frank J.  
(McGraw-Hill Professional), pp. 588-592 
150 Marshall, John F.  "Futures Versus Swaps:   Some Considerations for the Thrift 
Industry," Review of Business ;  Winter 1990/1991;  12, 3, pp. 15-23 
151 BSC Bond Street Capital;  Credit Tenant Lease Loans - Minimum $10,000,000. 
http://www.bisonfinancial.com/loans/bsc_ctl.html  
152 Glennon, Dennis and Nigro, Peter;  "Measuring the Default Risk of Small Business 
Loans:  A Survival Analysis Approach," Journal of Money, Credit, and Banking , 
Vol. 37, No. 5 (October 2005), pp. 923-947 
153 Notice to GSM-102 Program Participants:  USDA Clarifies Method for Computing 
Interest Coverage Under GSM-102 Program (15 July 2005)  
http://www.fas.usda.gov/scriptsw/PressRe lease/pressrel_dout.asp?PrNum=0105-05 
154 Wall St. Journal prime rates from Februa ry, 2000 to the present, available at 
http://www.hsh.com/indices/prime00s.html  (accessed 20 March 2007) 
155 Comparison of interest rate coverage  of CCC GSM-102 export credit guarantees and 
Ex-Im Bank Letter of Credit Insurance fo r Banks (1 July 2005 - 1 March 2007) 
156 26-week T-bill rates as provided by the U.S.  Department of Treasury for the period 1 
July 2005 - 20 March 2007, available at http://treasurydirect.gov/RI/OFAuctions  
157 Remarks by Ben S. Bernanke, Chairman of the United States Federal Reserve Board,  
"Modern Risk Management and Banking Supe rvision" (12 June 2006) available at 
http://www.federalreserve.gov/boardDo cs/speeches/2006/200606123/default.htm  
158 Overview:  US Standard General Ledger available at 
http://www.fms.treas.gov/ussgl/about.html  
159 Standard General Ledger cover;  Treasury Financial Manual Transmittal 
Letter No. S2 06-02 (14 July 2006), which immediately follows the cover, 
and pages III-146 and III-151 of the Ledger.   
http://fms.treas.gov/ussgl/tfm_rel eases/06-02/ussgl_06-02.pdf   (Pages 972, 977) 
160 Office of Management and Budge t Circular A-136 available at 
https://max.omb.gov/maxportal/pdf /circular_a136_section_6.1.pdf  WT/DS267/RW 
 Page D-357 
 
 
Exhibit US-  Title  
161 2008 U.S. Government Budget Appendix :  CCC Export Loans Program Account, 
pp. 104-106 
162 Federal Reserve Board Supervis ory Letter SR 94-12 available at 
http://www.federal reserve.gov/BOARDDOCS/SRLETTERS/1994/SR9412.HTM 
163 "Applying the CAMEL Framework", As ian Development Bank available at 
http://www.adb.org/Documents/Guidelines/Financial  part060302.asp 
164 Government Accountability Office Report No. GAO-04-531  WT/DS267/RW  
Page D-358  
 
1. The United States submits below responses to th e Panel's questions directed at either both 
parties or the United States alone.  Before turni ng to those questions, the United States notes that 
important new data has become available since th e meeting with the Panel providing even further 
support for the U.S. arguments that marketing loan  and counter-cyclical payments do not "numb" the 
planting decisions of the U.S. farmers.  As the Pa nel may recall, in the meeting with the Panel, the 
United States submitted the recently-issued survey of MY 2007 upland cotton planting intentions, 
showing that U.S. producers intended to pull back on their upland cotton plantings in MY 2007 by approximately 14 percent in response to such factors as the relatively more attractive prices for corn 
and the poor performance of U.S. exports since August 2006 (at which time the Step 2 program was 
eliminated).  This evidence clearly contradicted Brazil's claims that U.S. farmers do not respond to 
market signals and continue to plant upland cotton in situations where – without marketing loan and 
counter-cyclical payments – they would not do so.  2. Brazil has attempted to dismiss this eviden ce asserting that "[i]f marketing loan and CCP 
subsidies did not exist, and if U.S. cotton farmers would have to react to market price signals, far 
more than 14 percent of cotton acreage predicte d by the NCC would switch to substitute crops."
1  
Brazil has not substantiated that assertion, nor explained how a projected 14 percent year-over-year decline in planted acreage is consistent with the proposition that U.S. cotton farmers' planting 
decisions are numbed and do not react to market signals.  Moreover, recent data published by USDA 
show that, in fact, "far more than 14 percent of co tton acreage" is projected to switch to other crops in 
the upcoming crop year.  According to the "Prosp ective Plantings" report published by the National 
Agricultural Statistics Service ("NASS") based on su rveys conducted by USDA in the first two weeks 
of March from a sample of more than 86,000 farm operators across the United States, "upland cotton acreage is expected to total 11.9 million, down 21 percent from last year and the lowest since 1989 ."
2  
The magnitude of the acreage shift is even more remarkable when one considers regional responses.  
According to the NASS report, "due to the increased  demand and higher prices of crops used for bio-
fuels," acreage is expected to decline dramatically in every single area in which upland cotton is 
grown .  These shifts are so substantial that, in ma ny cases, planted acreage is at historically low 
levels;  levels lower than they were in years well before either the marketing loan or counter-cyclical 
payments came into effect3: 
 
• Upland growers in the Delta States (Arkan sas, Louisiana, Mississippi, Missouri, and 
Tennessee) are expecting the largest decre ase in acreage. Producers intend to plant 
2.91 million acres, a 31 percent decrease from the previous year . 
 
• Farmers in Mississippi expect to plant 740,000 acres, 40 percent less than last year 
and the lowest acreage since 1983 . 
 
• In Louisiana producers intend to plant 380,000 acres, the lowest since 1975 . 
 
• In the Southeastern States (Alabama, Florida, Georgia, North Carolina, South 
Carolina, and Virginia) growers intend to plant 2.55 million acres, a decrease of 
24 percent from last year .  
 
• The planted area in North Carolina is expected to decline 570,000 acres, 34 percent 
less than 2006 . 
 
• Producers in Texas, Oklahoma, Kansas, and New Mexico intend to plant 6.01 million 
acres, a 13 percent decrease from last year .   
 
                                                      
1 Oral Statement of Brazil, para. 73. 
2 NASS Prospective Plantings Report, p. 1 (March 30, 2007) (Exhibit US-140). 
3 See NASS Prospective Plantings Report, pp. 28-29 (March 30, 2007) (Exhibit US-140).  WT/DS267/RW 
 Page D-359 
 
 
• Texas producers expect to plant 5.70 million acres, down 700,000 acres from last 
year.  
 
• Upland planted acreage in California and Ar izona is expected to total 390,000 acres, 
down 18 percent from last year .  
 
• California producers intend to plant 210,000 acres, the lowest since USDA began 
tracking upland cotton acreage intentions in 1941 . 
 3. In other words, there is no longer any question of " if U.S. cotton farmers would have to react 
to market price signals."  The ev idence proves definitively that, ev en under Brazil's arguments, U.S. 
cotton farmers do react to market price signals and othe r planting and production signals (such as 
considerations of weather, pests, and good agronomi c practices).  This is a matter of fact.  And no 
amount of econometric gymnastics performed by Brazil for purposes of this proceeding – which 
appears, increasingly, to be the main eviden tiary basis for its claims – detracts from it. 
 
4. As a large number of the Panel's questions deal  with the question of the effect of marketing 
loan and counter-cyclical payments on planti ngs, production and exports , the above data are 
particularly important in reviewi ng the U.S. and Brazilian responses. 
 A. S
COPE OF THIS PROCEEDING  
 
Questions to both parties  
 
44. The European Communities argues in resp ect of the preliminary objection raised 
by the United States regarding the claims of Brazil relating to export credit 
guarantees for pig meat and poultry meat under the GSM 102 programme that "the 
important issue is the nexus or the degree of interrelatedness or interdependence between different elements of the measure."  (Oral Statement of the European Communities, para. 6)  The European Comm unities submits in this regard that:   
 
"the Panel should examine the original measure at issue and the 
'measures taken to comply,' and, with particular reference to the 
'elements of the measure' that the United States argues are outside the Panel's terms of reference, en quire into the extent to which 
these are interrelated or interdependent with measures or 'elements of measures' that the United States accepts are within the Panel's 
terms of reference."  (Oral Statement of the European 
Communities, para. 11)   
Do the parties agree with the approach suggested by the European Communities 
and with the considerations in paragraph 13 of the Oral Statement of the European 
Communities?  
 1. The United States does not agree with the appr oach suggested by the European Communities.  
Nor does the United States agree that the "factors" listed in paragraphs 13 of the EC Oral Statement 
support expanding the scope of this proceeding to  include GSM 102 export credit guarantees provided 
for exports of pig meat and poultry meat.  
2. The scope of matters that are properly review ed in an Article 21.5 proceeding are established 
by Article 21.5 of the DSU.  That Article provides that:  WT/DS267/RW  
Page D-360  
 
Where there is disagreement as to the ex istence or consistency with a covered 
agreement of measures taken to comply with the recommendations and rulings such dispute shall be decided through recourse to  these dispute settlement procedures. . . . 
3. Two things about this language indicate the proper approach to determining the measures that 
are properly within the scope of an Article 21.5 proceeding: 
 
• First, the text provides for dispute se ttlement procedures for the resolution of 
disagreements regarding "measures taken to comply with the recommendations and 
rulings  [of the DSB]." 
 
• And, second, the text does not provide for "measures taken to comply with the 
recommendations and rulings" of the DSB and any other "interrelated" or 
"interdependent" measures . 
 4. By the terms of Article 21.5, the touchstone  for determining what is a "measure taken to 
comply" is the recommendations and rulings of the DSB.  It is these recommendations and rulings 
that – necessarily and logically – drive what measur es are taken to comply and, thus, what measures 
are properly the subject of a "compliance" proceedi ng under Article 21.5 of the DSU.  Considerations 
of "interrelatedness" or "inter dependence" may be implicated in resolving as a factual matter what the 
measure taken to comply is  in a particular dispute.  However, the "interrelatedness" or 
"interdependence" that is relevant in th at context is between elements of the new measure taken to 
comply (e.g., EC – Bed Linen (21.5) )
4 or multiple new measures that may not all be declared by a 
responding Member as being taken to comply w ith the DSB's recommendations and rulings but 
nonetheless are properly deemed measures taken to co mply given the particular recommendations and 
rulings in the original proceeding and the facts of the dispute (e.g., Softwood Lumber (21.5), Australia 
Leather II (21.5) , and Australia – Salmon (21.5) ).5   
 
5. Moreover, it is not "interrelatedness" or "inter dependence" in the abstract that is important 
but, rather, such a connection vis-a-vis the DSB's recommendations and rulings .  Thus, if the DSB's 
recommendations and rulings distinguish between di fferent elements of a measure or different 
measures then that distinction is determinative for purposes of the compliance proceeding as well.  
There is no fresh test of "interrelatedness" or "i nterdependence" applied under Article 21.5 of the 
DSU such as the one the European Co mmunities now espouses that would allow any measure  deemed 
                                                      
4 In EC – Bed Linen (21.5)  a question raised was whether a ll elements of the new dumping 
redetermination on imports from India should be considered  part of one indivisible measure such that even those 
elements that had not changed since the original proceeding and had not been subject to any recommendations 
and rulings therein should be subject to renewed challeng e in the Article 21.5 proceeding.  The Appellate Body 
explained that: 
we are of the view that the investigating au thorities of the European Communities were not 
required to change the determination as it related to the "effects of other factors" in this particular dispute.  Moreover, we do not see wh y that part of the redetermination that merely 
incorporates elements of the original determin ation on "other factors" would constitute an 
inseparable element of a measure taken to co mply with the DSB rulings in the original 
dispute.  Indeed, the investigating authorities of the European Communities were able to treat 
this element separately. Therefore, we do not agree with India that the redetermination can 
only be considered "as a whole new measure." 
 EC – Bed Linen (AB) , para. 86. 
5 The Australia – Salmon (21.5) , Australia – Leather (21.5) , and U.S. – Softwood Lumber IV (21.5)  
disputes all dealt with situations in which two new measures were taken close in time – one that was declared to 
achieve compliance – and another that the complaining party alleged "undid" the compliance achieve by the 
first.  In those disputes, the panels assessed the conn ectedness of the new measures to determine whether they 
should both be considered "measures taken to comply" su ch that compliance is examin ed by reference to both.  WT/DS267/RW 
 Page D-361 
 
 
to be "interrelated" or "interdepe ndent" with a measure taken to comply to be swept into the scope of 
a compliance proceeding.  6. In the present dispute, the DSB's recommenda tions and rulings clearly distinguish "export 
credit guarantees under the GSM 102, GSM 103 and SCGP export credit guarantee programmes . . . in respect of exports of upland cotton and other unscheduled agricultural products s upported under 
the programmes, and in respect of one scheduled product (rice) "
6 from other export credit guarantees 
under those programs.  This is because the original  panel found that Brazil had only made its case 
under Articles 10.1 and 8 of the Agreement on Agriculture  and Articles 3.1(a) and 3.2 of the 
SCM Agreement  with respect to export credit guarantees pr ovided in respect of exports of rice and 
unscheduled products.7   
 7. By contrast, the original panel found that "[i]t has not been established . . . that such actual circumvention has resulted in respect of the tw elve other United States scheduled commodities."
8  
According to the original panel, "in these ci rcumstances, and as Brazil has also not made a prima 
facie  case before this Panel that the programmes do not  conform fully to the provisions of Part V of 
the Agreement on Agriculture, this Panel must trea t them as if they are exempt from actions based on 
Article XVI of the GATT 1994 and Article 3 of  the SCM Agreement in this dispute."9 
 8. Whether one understands the original panel's finding to have been made with respect to 
guarantees or the export credit guarantee programs that provided for the guarantees, what is 
indisputable is that the original panel drew a clear distinction  between some of the measures (or 
aspects of measures) and others.  And as a result of that distinction, neither all export credit 
guarantees (nor the entirety of the programs) were su bject to findings of WTO- inconsistency or to the 
DSB's recommendations and rulings on their basis.  Pu t another way, the origin al panel and Appellate 
Body did not consider export credit guarantees in resp ect of exports of pig meat, poultry meat, or any 
of the other twelve scheduled products to be so "interrelated" to, or "interdependent" with, export 
credit guarantees in respect of unscheduled products  and rice that they found themselves unable to 
make separate findings of WTO-c onsistency with respect to the two.  The original panel and 
Appellate Body did not consider the two to be so "interrelated" or "interdependent" that the same 
implementation obligations  had to be extended to both.  Indeed , Brazil does not contest the fact that 
"there is no adopted finding that the original  GSM 102 program is applied in a manner that 
circumvents the United States' commitments with respect to pig meat and poultry meat."
10  Moreover, 
Brazil admits that "[d]uring implementation, the Un ited States could have taken steps to amend the 
GSM 102 program exclusively with respect to the terms and conditions applicable to rice and unscheduled products."
11  
 
9. In short, the original panel distingui shed between the different guarantees, the 
DSB's recommendations and rulings distinguished between the different guarantees, and the U.S. 
obligations only applied to – a nd could have been implemented by – action only with respect to 
certain of the guarantees.  Under these conditions , there is no reason why all guarantees under the 
GSM 102 program – or the program itself – must be considered one "indivisible" measure for 
purposes of this compliance proceeding as th e European Communities has suggested.   
 
10. Moreover, this is true regardless of the fact  that the United States chose to make the same 
improvements vis-a-vis  all guarantees under the program.  The European Communities' own 
arguments in EC – Bed Linen (21.5)  – and the compliance panel's adoption of those arguments and the 
                                                      
6 Upland Cotton (Panel) , para. 8.1(d) (emphasis added). 
7 Upland Cotton (Panel) , para. 8.1(d). 
8 Upland Cotton (Panel) , para. 7.881. 
9 Upland Cotton (Panel) , para. 8.1(d)(ii). 
10 Brazil Responses to Panel Section A-C Questions, para. 14 (February 26, 2007). 
11 Brazil Responses to Panel Section A-C Questions, para. 15 (February 26, 2007). WT/DS267/RW  
Page D-362  
 
resulting DSB rulings – are instructive on this issue.  In that dispute, the original panel made – and the 
Appellate Body upheld – a finding that the Eur opean Communities acted inconsistently with the 
AD Agreement  by, inter alia , "determining the existence of marg ins of dumping on the basis of a 
methodology incorporating the practice of zeroing."
12  The European Commun ities was asked to bring 
the measure at issue – a dumping order on imports of  bed linens from India – into conformity with its 
obligations under the AD Agreement .13  Although the only measure subject to the recommendations 
and rulings was the order as it applied to Indian imports, the European Communities chose to make a 
redetermination of dumping, without applying any "methodology incorporating the practice of 
zeroing," with respect to all imports under the or der, including imports from Pakistan and Egypt.14  As 
a result of this redetermination, the European  Communities found that imports from Pakistan and 
Egypt had not been dumped.15  That, in turn, necessitated a re assessment of injury to determine 
whether imports of bed linens from India alone caused injury (and the EC found that they did).   
 11. In the Article 21.5 proceeding that followed, India challenged not only the redetermination of 
dumping with respect to imports from India but also the redetermination of dumping with respect to 
imports from Pakistan and Egypt as well as the redetermination of injury with respect to imports from 
India alone.  India argued that these other redetermin ations were so "closely connected to the Panel 
and Appellate Body reports in the original dispute"  that they were properly within the scope of the 
Article 21.5 proceeding.
16  The European Communities disagreed, arguing that "[n]ot all the measures 
that are somehow 'connected' to the measure in dispute in the origin al panel proceedings qualify as 
measures 'taken to comply.'"17 According to the European Communities: 
 
The EC considers  that since there were no rulings by the DSB concerning the 
anti-dumping measures agains t imports from Egypt and Pakistan, there was nothing 
for the EC to "comply" with, and no obliga tion to undertake any reassessment of the 
original findings.   Therefore, the EC maintains that Regulation 160/2002 
[(redetermination of dumping with respect  to imports from Pakistan and Egypt)] 
cannot be considered as a measure "ta ken to comply" within the meaning of 
Article 21.5.   Similarly, the EC asserts that the injury redetermination in 
Regulation 696/2002 was rendered necessary by the decision of the EC authorities to 
re-examine the findings of dumping for Pakistan and Egypt, which decision was not 
itself a measure "taken to comp ly" with the DSB's recommendation.   Thus, the 
EC asserts this measure was also independent , and not a measure "taken to comply."   
In the EC's view, India's claims against these two measures can only be heard in the 
context of a new dispute.18 
12. The panel agreed with the Eur opean Communities.  It noted that: 
 
[N]either the Panel nor the Appellate Body found any violation with respect to the 
anti-dumping measures concerning imports from Egypt or Pakistan.  As a consequence, the DSB's rulings cannot have touched upon these anti-dumping measures.  Nor could the DSB have recommended that the EC bring into conformity 
                                                     
 
12 EC – Bed Linen (Panel) , para. 7.2(g). 
13 EC – Bed Linen (Panel) , para. 7.5;  see also EC – Bed Linen (AB) , para. 86(1) ("upholds the finding 
of the Panel in paragraph 6.119 of the Panel Report that the practice of "zeroing" when establishing "the 
existence of margins of dumping", as applied by the European Communities in the anti-dumping investigation at 
issue in this dispute, is inconsistent with Article 2.4.2 of the An ti-Dumping Agreement.") 
14 EC – Bed Linen (Panel) , para. 6.9-6.10. 
15 EC – Bed Linen (Panel) , para. 6.9-6.10. 
16 EC – Bed Linen (Panel) , para. 6.12. 
17 EC – Bed Linen (Panel) , Annex D-3 (Oral Statement of the European Communities, para. 5 
(September 10, 2002)). 
18 EC – Bed Linen (Panel) , para. 6.11.  WT/DS267/RW 
 Page D-363 
 
 
with its obligations measures as to which th ere was no finding of violation.  Thus, the 
EC was under no legal obligation to do anything with respect to the anti-dumping measures on imports from Egypt and Pakistan. 
The EC chose, at its own volition, to open the determinations of dumping with respect 
to imports from Egypt and Pakistan so as  to apply to those determinations the 
conclusion of the adopted Reports finding the pr actice of "zeroing" to be inconsistent 
with the AD Agreement. While this deci sion on the part of the EC may have been 
prudent, and is commendable, it was not re quired by the DSB's recommendation in 
the original dispute, which was to bring the measure at issue, viz., the antidumping 
measure on imports of bed linen from India, into conformity with the EC's obligations 
under the AD Agreement .
19 
13. The Panel found, on this basis, that the re determination of dumping for imports from Egypt 
and Pakistan were not properly the subject of th e Article 21.5 proceeding.  Further, even though the 
redetermination of injury applied in respect of imports from India, the panel found that it was not 
within the scope of the proceeding because it was not alleged to " undo the compliance effectuated by 
the [measure asserted to be taken to comply ( i.e., the redetermination of dumping with respect to 
imports from India)]."20  In this way, the panel distinguished the facts of EC – Bed Linen (21.5)  as 
being "fundamentally different"21 from the facts of Australia – Leather (21.5) , in which "the 
complaining Member . . . argued that Australia had taken two measures, the first of which was 
purported to implement the DSB's ruling, while the second measure undid the purported compliance."
22  While the  Australia – Leather (21.5)  panel considered that it was appropriate to deem 
the second new measure a "measure taken to comply " under the circumstances of that dispute, the 
same reasoning did not apply under the facts of EC – Bed Linen (21.5) . 
 14. The analysis in EC – Bed Linen (21.5)  confirms that there is no blanket test of 
"connectedness" or "interrelatedness" that applies in Article 21.5 proceedings.  Moreover, the mere 
fact that improvements have been made to more than  just the original measure s subject to findings of 
WTO-inconsistency and DSB recommendations and rulings does not render all changed measures 
"measures taken to comply."  Where the improvements are made to measures that were in existence at the time of the original panel proceeding and that were nonetheless not subject to any DSB 
recommendations and rulings, the compliance proceeding must respect the fact that the DSB's recommendations and rulings do not apply to the measures. 
 
15. Here, if the United States had not made any changes with respect to guarantees for exports of 
pig meat and poultry meat, Brazil could not – in th e European Communities' words – "have requested 
an Article 21.5 panel to complain about the absence of implementation measures."
23  The right to 
make such a complaint does not arise merely becau se the United States decided not to wall off those 
guarantees from all other guarantees in applying the positive changes it was making to bring the other 
guarantees into compliance with the DSB's recommenda tions and rulings with respect to the latter.  
That just means that the United States went beyond its implementation obligations.  Voluntary 
improvements such as these by Members are "prudent" and, in the view of the EC – Bed Linen (21.5)  
                                                      
19 EC – Bed Linen (Panel) , para. 6.18-6.19 (emphasis added). 
20 EC – Bed Linen (Panel) , para. 6.21. 
21 EC – Bed Linen (Panel) , para. 6.16. 
22 EC – Bed Linen (Panel) , para. 6.16.  The panel similarly distinguished Australia – Salmon (21.5) , 
which also involved two measures, one notified to the DSB and another not so notified that might have 
undermined the measure taken to comply. 
23 EC – Bed Linen (Panel) , Annex D-3 (Oral Statement of the European Communities, para. 9 
(September 10, 2002)). WT/DS267/RW  
Page D-364  
 
panel, "commendable."
24  They do not transform all measures subject to the changes into measures 
taken to comply with the recommendations and rulings of the DSB.25 
 16. Finally, the United States notes that  the European Communities references U.S. – Softwood 
Lumber IV (21.5)  in connection with its arguments.  However, the facts and reasoning of U.S. – 
Softwood Lumber IV (21.5)  are inapposite.  Indeed, U.S. – Softwood Lumber IV (21.5)  simply built on 
the reasoning in Australia – Leather II (21.5)  and Australia – Salmon (21.5)  in clarifying when the 
scope of a compliance proceeding may be expanded to include a new measure that is issued at approximately the same time as the one declared to be the measure taken to co mply and that is alleged 
to "undo" the compliance achieved by th e declared "measure taken to comply."
26  Because EC – Bed 
Linen (21.5)  did not involve any such situation, the EC – Bed Linen (21.5)  panel found the facts 
before it to be "fundamentally different" from the facts in Australia – Leather II (21.5)  and Australia 
– Salmon (21.5)  and declined to apply the reasoning from those disputes.  Precisely the same factual 
difference exists here between the facts of this dispute and those in U.S. – Softwood Lumber IV (21.5) . 
 
45. Could the parties comment on the observations made by the European 
Communities in paras. 15-24 of its Oral Statement on the issue of whether the marketing loan and counter-cyclical payme nt programmes are within the scope of 
the Panel's proceeding? 
 
17. The United States disagrees with a number of  the European Communities' observations in 
paragraph 15-24 of its oral statement. 
 
(1) There is no basis for the Euro pean Communities' suggestion that 
statutory/regulatory provisions authoriz ing payments and individual payments 
thereunder can be conflated "for the purposes of a compliance panel" if the 
statutory/regulatory provisions set out the conditions under which payments are 
to be made. 
 
18. The United States disagrees with the Eur opean Communities' suggestion that where 
"entitlement to payment is conditional . . . onl y upon certain essentially factual requirements, 
essentially in the hands of the recipient" the dis tinction between the statutory/regulatory provisions 
authorizing the payments and particular payments thereunder "may be less clear" than in other 
circumstances, "and there may be a degree of nexus  or interrelatedness of interdependence between 
the (for example, fiscal) programme and payments unde r it, such as might justify their treatment as 
indivisible for the purposes of a compliance proceeding."
27  Moreover, the United States considers 
that the suggestion has no application here. 
 
19. First, the present situation is not one in whic h "entitlement to payment is conditional . . . only 
upon certain essentially factual requirements, essen tially in the hands of the recipient."28  Payments 
under the Step 2, marketing loan, and counter-cyclical payment programs are conditional upon, inter 
alia, certain price conditions prevailing.  Whet her or not these price conditions prevail is not a matter 
within the hands of any potential recipients.  In fact, the recipients cannot even know whether they 
will, in fact, receive such payments at the time that planting decisions must be made.  Thus, the 
European Communities' suggestion that it is permi ssible to conflate the statutory and regulatory 
provisions authorizing payments and the payments  themselves where "entitlement to payment is 
                                                      
24 EC – Bed Linen (Panel) , para. 6.18-6.19 (emphasis added). 
25 EC – Bed Linen (Panel) , para. 6.18-6.19 (emphasis added). 
26 See e.g., U.S. – Softwood Lumber IV (21.5) , para. 74. 
27 Oral Statement of the European Communities, para. 19. 
28 Oral Statement of the European Communities, para. 19.  WT/DS267/RW 
 Page D-365 
 
 
conditional . . . only upon certain essentially factua l requirements, essentially in the hands of the 
recipient"29 simply has no application here.  
 20. Second, even leaving aside the lack of rele vance, the premise that a compliance panel may 
conflate two distinct measures – the statutory and regulatory provisions authorizing payments and the 
payments themselves – where the former set out par ticular circumstances in which the payments are 
to be made is arbitrary and without basis.
30  Not surprisingly, the Eu ropean Communities does not 
provide a single citation to support this assertion.  It identifies no provision of the WTO agreement that justifies it.  Nor does the European Comm unities articulate any rationale that would support 
simply disregarding in the asserted circumstance s that the statutory and regulatory framework 
authorizing payments and particular paymen ts made thereunder are distinct measures as a matter 
of fact . 
 21. The distinction between "a measure of genera l and prospective application" – the epitome of 
which is a statutory/regulatory provision – and individual instances of its application is well-
established in WTO dispute settlement.  Indeed, the European Communities acknowledges that very 
distinction.
31  The United States is not aware of any basi s in the DSU or in WTO dispute settlement 
practice for the suggestion that statutory/regula tory provisions cease to be  measures distinct from 
individual instances of their application solely because of what the statutory/regulatory 
provisions say . 
 
22. A statutory or regulatory provision does not cease to be "a measure of general and prospective 
application" if it identifies conditions under which pa yments are to be made.  And the considerations 
that underpin the distinction between such measures and particular instances of their application are 
no less applicable in those circumstances.    
23. Specifically, where a complaining Member challenges statutory/regulatory provisions and 
other measures of general and prospective applica tion themselves, they "by definition" assert:   
 
that a Member's conduct—not only in a particular instance that has occurred, but in future situations as well— will necessarily be inconsistent with that Member's WTO 
obligations .  In essence, complaining parties br inging "as such" challenges seek to 
prevent Members ex ante  from engaging in certain conduct.  The implications of such 
challenges are obviously more far-reac hing than "as applied" claims.
32 
 Because of this, the Appellate Body underscore d the "seriousness" of as such claims against 
measures of general and prospective application.33 
 
24. The European Communities has provided no r eason why challenges to statutory/regulatory 
provisions should be considered any less serious, or any less far-reaching than "as applied" claims if 
the provisions set out particular c onditions under which payments are to be made.  This is especially 
true where, as here, the asserted WTO-inconsistency relates to the effects of subsidies under specific 
market conditions.  The fact that particular pa yments may have caused adverse effects under the 
particular market conditions prevailing in one marketing year, does not necessarily mean that if 
payments are made "in future situations . . . [they]  will necessarily be inconsis tent with that Member's 
                                                      
29 Oral Statement of the European Communities, para. 19. 
30 Oral Statement of the European Communities, para. 19. 
31 Oral Statement of the European Communities, para. 17 ("[t]he European Communities agrees with 
the United States that there is a distinction betw een a subsidy programme within the meaning of the 
SCM Agreement  (which may be a measure at issue) and instan ces of a subsidy under such programme (each of 
which may also be a measure at issue). . . .These measures should not normally be conflated.") 
32 U.S. – Oil Country Tubular Goods from Argentina (AB) , para. 172 (emphasis added). 
33 U.S. – Oil Country Tubular Goods from Argentina (AB) , para. 172. WT/DS267/RW  
Page D-366  
 
WTO obligations."
34  While a Member is certainly free to argue  that will be the case, if it does so, the 
complaining Member bears the burden of proving its cl aims.  This is no different in a situation where 
a statute sets out the conditions when payments are to be made.  25. Indeed, Brazil's arguments confirmed precisely th is point in the original proceeding.  There, 
in the case of its "as such" challenge to the prov isions of the 2002 FSRI Act and the 2000 ARP Act 
providing for Step 2, marketing loan, and c ounter-cyclical payments, Brazil argued that: 
 
[T]he Panel needs to evaluate whether the U.S. subsidies will necessarily threaten to 
cause serious prejudice  at price levels below the trigger prices of the U.S. subsidies.  
Second, the Panel needs to consid er whether the U.S. subsidies threaten to cause 
serious prejudice even at price levels at which only crop insurance subsidies and 
direct payments are made ."
35 
 Moreover, Brazil asked the Panel "to find that  the mandatory provisions of the 2002 FSRI Act 
and the 2000 ARP Act together with their implementing regulations, as listed above, cannot be 
applied in a WTO consistent manner ."36 
 26. In addition, the EC has provided no reason why the well-established distinction between the 
statutory/regulatory provisions providing for paym ents and particular paym ents provided thereunder 
is any less important "for the purposes of a compliance panel."  In U.S. – Countervailing Measures on 
Certain EC Products , the panel articulated succinctly the limited purpose of "compliance" 
proceedings pursuant to Article 21.5 of the DSU:  "[t]he purpose of Article 21.5 is to provide an 
expeditious procedure to establish whether a Member has properly implemented the DSB 
recommendations and rulings."
37  Moreover, it noted many of the attendant limitations on the 
applicable procedures:  
[T]here is no provision for a "reasonable period" to implement the ruling in an 
Article 21.5 dispute.  Thus, an Article 21. 5 panel ruling . . . may immediately give 
rise to rights for compensation or suspension of concessions under Article 22 DSU.  Moreover, the parties do not have the same opportunity to present evidence and arguments in Article 21.5 proceedings.  [I]mportant facts and issues . . . [may] continue[] to surface quite late into the Ar ticle 21.5 proceedings, proceedings that are 
already abbreviated. . . . Finally, the shorter timeline significantly limits both the 
panel's opportunity to interact with the par ties and the panel's time to deliberate. The 
panel typically has only one opportunity to meet with the parties, unlike the normal proceedings where two substantive meetings take place.
38 
27. It is precisely in these circumstances that maintaining  the well-established distinction between 
the statutory/regulatory provisions providing fo r payments and particular payments provided 
thereunder would seem all the more  important, especially given the seriousness of "as such" claims 
underscored by the Appellate Body in U.S. – Oil Country Tubular Goods from Argentina .39 
 
                                                      
34 U.S. – Oil Country Tubular Goods from Argentina (AB) , para. 172 (emphasis added). 
35 Brazil Further Submission, para. 426 (9 September 2003) (emphasis added).  
36 Brazil Further Submission, para. 435-436 (9 September 2003) (emphasis added).  As the Panel 
declined to address Brazil's claims against the "2002 FSRI Act and the 2000 ARP Act together with their 
implementing regulations," however, the Panel neither conducted the requested evaluations, nor made any 
findings along the lines requested by Brazil. 
37 U.S. – Countervailing Measures on Certain EC Products (Panel) , para. 7.74.  This panel report was 
not appealed. 
38 U.S. – Countervailing Measures on Certain EC Products (Panel) , para. 7.75, n. 294. 
39 U.S. – Oil Country Tubular Goods from Argentina (AB) , para. 172.  WT/DS267/RW 
 Page D-367 
 
 
28. Third, the European Communities' arguments are again based on the untenable premise that 
there is a blanket test of "interrelatedness" or "interdependence" under Article 21.5 of the DSU such 
that even measures not found to be WTO-inconsiste nt in an original proceeding may nonetheless be 
swept into the scope of an Article 21.5 proceeding if  they nonetheless are deemed to be "interrelated" 
to, or "interdependent" with, the measures found to be WTO-inconsistent.  As discussed above, that 
premise is unfounded.  In the European Commun ities' own words in a dispute in which it was the 
responding party, "[n]ot all the measures that are so mehow 'connected' to the measure in dispute in the 
original panel proceedings qualify as measures 'taken to comply.'"40 
 29. The EC's new assertion of a blanket "interrelate dness" or "interdependence" test is not only 
unfounded, it makes little sense, especially in the cont ext of this dispute.  The EC has not offered any 
reason why a measure should be considered "indivi sible" from another "for purposes of a compliance 
panel" where the measures were not "indivisible" for purposes of an original proceeding.  Indeed, this 
was a critical consideration in resolving a second scope question in EC – Bed Linen (21.5) .  There the 
Appellate Body rejected an attempt by India to ha ve the scope of an Article 21.5 proceeding expanded 
to include an element of a measure taken to comply  (the "other factors" analysis in an antidumping 
redetermination) that was identical to an element that had been found to be WTO-consistent in an 
original measure.  India argued that the element was an inseparable part of the measure taken to 
comply.  But the Appellate Body disagreed, expl aining that "we do not see why that part of the 
redetermination that merely incorporates elements of the original determination on 'other factors' 
would constitute an inseparable element of a measu re taken to comply with the DSB ruling in the 
original dispute.  Indeed, the investigating authorities were able to treat this element separately ."
41  
Similarly here, Brazil, the United States, and th e original panel all were able to treat the 
statutory/regulatory provisions providing for pa yments separately from particular payments 
thereunder in the original proceeding.  There is  no reason why those measures should be treated as 
inseparable in this compliance proceeding. 
 
(2) There is no basis to the EC's argument that "if there is sufficient nexus between 
payments and programme for one programme;  and if there is sufficient nexus  
between all payments;  this in turn suggests a sufficient nexus  between all three 
programs, such that the whole new bundle can and should be treated as indivisible for the purposes of this compliance proceeding."
42 
 30. The United States disagrees with EC's argument that "if there is sufficient nexus between 
payments and programme for one progr amme;  and if there is sufficient nexus  between all payments;  
this in turn suggests a sufficient nexus  between all three programs, such that the whole new bundle 
can and should be treated as indivisible for the purposes of this compliance proceeding."
43   
 
31. First, the EC argument again assumes incorrec tly that original measures never found to be 
WTO-inconsistent may be within the scope of an  Article 21.5 proceeding simply because they are 
deemed to have some "nexus" either with orig inal measures or measures taken to comply with 
recommendations and rulings of the DSB.  This is patently incorrect, for the reasons discussed above.  
Indeed, the EC argument would effectively make  Article 21.5 proceedings an "open season" for 
complaining parties to challenge measures "as such" that had either not been challenged or had been 
challenged unsuccessfully in orig inal proceedings.  There will always be a "nexus" between statutory 
and regulatory provisions and individual instances in  which they are applied.  If the EC argument 
were credited, a complaining party could simply challenge one instance of the application of a 
statutory/regulatory provision in an original  proceeding and save any claims against the 
                                                      
40 EC – Bed Linen (Panel) , Annex D-3 (Oral Statement of the European Communities, para. 5 
(September 10, 2002)). 
41 EC – Bed Linen (AB) (21.5 – India) , para. 86. 
42 Oral Statement of the European Communities, para. 21. 
43 Oral Statement of the European Communities, para. 21. WT/DS267/RW  
Page D-368  
 
statutory/regulatory provisions th emselves until a compliance proceeding where "there is no provision 
for a 'reasonable period,'" and "the parties do not have the same opportunity to present evidence and 
arguments" as in an original proceeding.
44  The negotiators of the DSU never agreed that compliance 
proceedings could be used (some could argue "abused") in this way.  
32. Second, the fact that the original panel cumu lated the effects of the Step 2, marketing loan, 
and counter-cyclical payments made in MY 19 99-2002 in assessing whether they caused "present" 
significant price suppression does not mean that tho se measures became one "indivisible" measure for 
purposes of WTO dispute settlement.  That argument bears no connection to reality.  Payments under 
the three programs are distinct measures as a matter of fact and as a matter of WTO dispute 
settlement, regardless of whether th eir effects can be added together  in assessing whether there is 
sufficient "price suppression" to meet the standard  of "significant price suppression" for purposes of 
Article 6.3(c) of the SCM Agreement . 
 33. Third, the unreasonableness of the approach suggested by the Europ ean Communities here is 
especially apparent when one considers that th e European Communities argued – successfully – in EC 
– Bed Linen (21.5)  that an analysis of "other factors" did not share a sufficient "nexus" with the other 
parts of the same determination to be deemed one "indivisible"  measure.   In other words, even though 
they were all part of a single antidumping redetermination that was part of a single EC regulation 
involving imports of bed linens from India and fo rmed an integral and necessary basis for the 
imposition of a single antidumping order, the EC argued (and th e panel agreed) the "other factors" 
analysis should not be considered an "inseparable" part of the redetermination.  Yet, here, for some 
reason, the European Communities suggests that entirel y distinct payments made to entirely different 
recipients under entirely different conditions a nd under entirely different statutory/regulatory 
provisions must somehow be considered one indivisible measure for purposes of this compliance proceeding simply because their effects were examin ed cumulatively in the original dispute.  The 
United States submits that this is an entirely untenable argument. 
 34. Moreover, the Appellate Body has clarified th at the "measure" identified as being subject to 
WTO claims cannot "vary depending on the subs tance of the legal provision invoked by a 
complainant and the interpretation that a panel might give to that provision."
45  The European 
Communities' suggestion that what is a "measu re" depends on how effects were examined for 
purposes of Articles 5(c) and 6.3(c) of the SCM Agreement  is not consistent with  the Appellate Body's 
clarification and should be rejected on that basis as well.  
(3) The European Communities is mistaken in  its suggestion that the United States 
has argued that "the fact that somethin g has not changed . . . necessarily means 
that it is outside the scope of a compliance proceeding."
46 
 
35. The European Communities appears to misunders tand the U.S. arguments.  The United States 
has never suggested that "the fact that something has not changed necessarily means that it is outside 
the scope of a compliance proceeding."47  The United States fully agrees that where the "something" 
that "has not changed" is a measure that was subject to DSB recommendations and rulings, it is 
possible – although not always – that a compliance proceeding could determine that no measure taken 
to comply exists.  36. The United States has simply argued that where a measure is not one that was subject to DSB 
recommendations and rulings, and where it is not a measure taken to comply ( evidence  of which is the 
                                                     
 
44 U.S. – Countervailing Measures on Certain EC Products (Panel) , para. 7.75, n. 294. 
45 EC – Customs (AB) , para. 132. 
46 Oral Statement of the European Communities, para. 22. 
47 Oral Statement of the European Communities, para. 22.  WT/DS267/RW 
 Page D-369 
 
 
fact that it has not changed), that measure is  not properly within the scope of a compliance 
proceeding.  
(4) The European Communities' argument that "claims of present serious prejudice 
and threat  of serious prejudice are closely interrelated, such that a threat claim 
in an original panel may inevitably give rise to a claim of present serious 
prejudice in a compliance panel"
48 is illogical. 
 
37. The United States notes a number of flaws in  the European Commun ities' argument that: 
 
Finally, and significantly , the European Communities observes that there is support in 
the case law for the view that claims of present serious prejudice and threat  of serious 
prejudice are closely interrelated, such that a threat claim in an original panel may 
inevitably give rise to a claim of presen t serious prejudice in a compliance panel.49 
38. First, despite the asserted "significance" of the point, the European Communities fails even to 
identify the alleged "support in the case law."50  Indeed, there is not a single citation provided by the 
European Communities;  the point is entirely unsupported.  39. Second, this assertion is not logical.  The claims that a Member makes in an original 
proceeding do not limit the claims  that it makes in a compliance proceeding so long as, in the 
compliance proceeding, the claims apply with respect to a measure taken to comply.  In contrast, if 
there are no measures taken to comply then only one claim is available – that no measures taken to 
comply exist.  40. Here, the marketing loan program and count er-cyclical payment programs are not original 
measures subject to any finding of WTO-inconsistenc y.  "As a consequence," in the words of the EC 
– Bed Linen (21.5)  panel, "the DSB's rulings cannot have touched upon these [programs].  Nor could 
the DSB have recommended that the [United States ] bring into conformity with its obligations 
measures as to which there was no finding of viola tion.  Thus, the [United States] was under no legal 
obligation to do anything with respect to the [mar keting loan program and counter-cyclical payment 
programs]."
51  In these circumstances, there is obviously  no basis for Brazil to claim that the 
United States failed to bring those measures in to conformity with any (non-existent) DSB 
recommendations and rulings. 
 41. Moreover, the marketing loan program a nd counter-cyclical payment programs are not 
measures taken to comply with any recommendations and rulings in respect of other measures 
(i.e., measures that were found to be WTO-inconsistent).  The Appellate Body has explained before 
that "[i]n our view, the phrase 'measures taken to comply' refers to measures which have been, or 
which should be, adopted by a Member to bring about compliance with the recommendations and 
rulings of the DSB ."
52  Neither the marketing loan program, nor the counter-cyclical payment 
program, nor any marketing loan payments or count er-cyclical payments, nor some combination of 
these measures was "adopted by [the United St ates] to bring about compliance with the 
recommendations and rulings of the DSB."  In fact , these measures were in existence and were even 
at issue in the original proceeding.  And, as Br azil acknowledges, they have  not been changed since 
that proceeding to implement any DSB recomme ndations and rulings or for any other reason.53  Thus, 
                                                      
48 Oral Statement of the European Communities, para. 23. 
49 Oral Statement of the European Communities, para. 23. 
50 This is aside from the fact that  there is no such thing in the WTO as "case law."  The WTO is not a 
common law system. 
51 EC – Bed Linen (Panel) , para. 6.18-6.19 (emphasis added). 
52 Canada – Aircraft (AB) (21.5 – Brazil) , para. 36. 
53 Brazil Submission Regarding U.S. Requ ests for Preliminary Rulings, para. 35. WT/DS267/RW  
Page D-370  
 
under the express terms of Article 21.5 of the DSU, those measures cannot be the subject of any claims of inconsistency "with a covered agreement"  – whether or "present" serious prejudice, "threat" 
of serious prejudice or anything else – in this compliance proceeding.  
46. In its Oral Statement, the European  Communities characteri zes Brazil's and the 
United States' respective approaches as the "measure model" and the "element of 
the measure model" (Oral Statement of the European Communities, para. 7).  
Please discuss whether you agree with this characterization and whether, in your 
view, the application of a measure alleged to be a subsidy to different agricultural 
products relates to a "measure" (or elements thereof) or if, rather it relates to a 
"claim".  Would it be permissible for a compliance panel to examine a "claim" 
that relates to subsidies (granted as part of measures taken to comply) provided to 
agricultural products to which the "initial measure" did not apply?  
 
42. With respect to the first of the Panel's qu estions, the United States does not agree with the 
European Communities regarding the characterization of the parties' views, the appropriateness of 
framing the question of the scope of Article 21.5 proceedings through an elaborate construct of 
"models" that is not found anywhere in the text (but  instead has been made up by the EC for purposes 
of this proceeding), or the necessity of any such c onstruct in resolving the question of whether or not 
GSM 102 export credit guarantees in respect of exports of pig meat and poultry meat are within the 
scope of this proceeding. 
 
43. The United States recalls that the Members ha ve expressly agreed in Article 3.2 of the DSU 
that the WTO dispute settlement system "serves to  preserve the rights and obligations of Members 
under the covered agreements, and to clarify the existing provisions of those agreements  in 
accordance with customary rules of interpretation of public international law."  The United States 
does not see "element of measure model," "measur e model" or any other similar language in 
Article 21.5 of the DSU.  What the United States do es find, instead, is the following language, which 
identifies both the measures that are properly within  the scope of Article 21.5 proceedings and the 
claims that can be made therein:  
Where there is disagreement as to the ex istence or consistency with a covered 
agreement of measures taken to comply with the recommendations and rulings such 
dispute shall be decided through recourse to  these dispute settlement procedures. . . . 
44. This language makes clear that only measure s "taken to comply" with the recommendations 
and rulings of the DSB are properly before a comp liance panel.  Where the DSB's recommendations 
and rulings are limited to partic ular things – regardless of whether those things are measures or 
elements of a measure – it follows that the focus of a compliance proceeding is whether those things 
have been brought into compliance consistently with the DSB's recommendations and rulings and 
with the provisions of the WTO Agreement cited by the complaining party.  There can be no 
presumption that the responding Member's measures ta ken to comply are inconsistent with its WTO 
obligations;  the burden is on the compla ining party to prove inconsistency. 
 
45. Applying that logic in the present dispute, the same result obtains whether one understands 
GSM 102 guarantees as elements of the GSM 102 progr am or as individual measures themselves;  the 
latter being the correct understanding, in the U.S.  view for the reasons explained previously.
54  I n  
either case, the fact is that the original pane l found that Brazil had only established its case with 
respect to export credit guarantees in respect of exports of rice and unscheduled products.55  Neither 
the original panel nor the Appellate Body found that Brazil had proven its case with respect to 
guarantees provided in respect of the twelve othe r scheduled products (export credit guarantees in 
                                                      
54 U.S. Comments on Brazil's Answers to Fi rst Set of Panel Questions, paras. 9-17. 
55 Upland Cotton (Panel) , para. 8.1(d)(i).  WT/DS267/RW 
 Page D-371 
 
 
respect of exports of wheat, coarse grains, vegetabl e oils, butter and butter oil, skim milk powder, 
cheese, other milk products, bovine meat, pigmeat , poultry meat, live dairy cattle, or eggs).56  As the 
original panel clearly distinguished between these different guarantees, there is no basis for either 
ignoring the fact that it did so or suggesting that no such distinction can be drawn in this compliance proceeding.  Indeed, given the abbreviated and e xpedited nature of compliance proceedings, discussed 
above, it is all the more important that Brazil not be permitted to eliminate such distinctions here. 
 46. Turning to the Panel's second question – whether "the application of a me asure alleged to be a 
subsidy to different agricultural pr oducts relates to a 'measure' (or elements thereof) or if, rather it 
relates to a 'claim'" – the United States considers that  the fact that a measure is applied to particular 
products (or is applied generally  to all products) is necessarily  relevant to understanding the nature 
and scope of the measure.  However, it may also be relevant in assessing the particular claim being 
made.  In the case of Brazil's claims against the export credit guarantees, it was relevant to both.  
Consider the following examples:  
• Section 1207 of the Farm Security and Ru ral Insurance Act ("FSRI Act") of 2002 – 
the Step 2 program – that Brazil challenged, as such, for providing prohibited export and import substitution subsidies in the orig inal proceeding was limited by its terms 
only to upland cotton.
57  This fact was relevant to understanding the nature and scope 
of the measure being challenged in the origin al proceeding.  However, the fact that 
Section 1207 applied with respect to  upland cotton was not an important 
consideration in assessing the prohibited subsidy claims that Brazil made. 
 
• By contrast, Sections 1201-1205 of the 2002 FSRI Act – the marketing loan program 
– provides for non-recourse loans and loan deficiency payments with respect to a 
number of different products.58  Brazil challenged separately (a) the provisions 
themselves to the extent that they applied to upland cotton and (b) individual 
instances of their application (payments made in MY 1999-2002 and payments allegedly "mandated" to be made in MY 2003-2007).  The particular product to which 
the measure applied was important, in bot h cases, in understanding the nature and 
scope of the measure(s) challenged.   
 
However, the fact that Section 1201-1205 applied with respect to upland cotton was 
also relevant to the claims made by Brazil under Articles 5 and 6 of the 
SCM Agreement  because the claims required the identification of a "subsidized 
product" and an examination of the effects of payments under the programs on the "subsidized product."
59  Brazil could only prevail on its claims against these measures 
if it could show the requisite effects w ith respect to the "subsidized product." 
 
• Similarly, Section 202 of the Agricultural Trade Act of 1978 allows the Commodity 
Credit Corporation ("CCC") to guarantee the "repayment of credit made available to 
finance commercial export sales of agricultural commodities."60  To avoid the 
application of the mandatory-discretionary pr inciple – which would have been fatal to 
any "as such" claim given that these provi sions clearly do not even mandate the 
provision of guarantees, let alone the provision of export subsidies  – Brazil argued 
                                                      
56 Upland Cotton (Panel) , para. 8.1(d)(ii). 
57 See 2002 Farm Security and Rural Investment Act (Exhibit BRA-29). 
58 See 2002 Farm Security and Rural Investment Act (Exhibit BRA-29).  The United States does not 
include the counter-cyclical payment program in this discussion because it does not provide for payments in 
respect of any particular product.  It simply authorizes payments in respect of historical base acres. 
59 See Articles 6.3(c) and 6.3(d) of the SCM Agreement . 
60 7 U.S.C. 5622 (Exhibit US-141).  See also , implementing regulations in 7 C.F.R. 1493 
(Exhibit US-142), which maintain the same product scope. WT/DS267/RW  
Page D-372  
 
that its claims of actual circumvention under the Agreement on Agriculture were "akin 
to . . . 'as applied' claim[s]" with respect to the export credit guarantees.
61  However, 
Brazil did not initially limit its challenge to  the provision of guarantees to any subset 
of eligible products.  The original pane l therefore considered whether Brazil had 
proven its claims of circumvention with respect to all guarantees in respect of all 
eligible products.   
 
Nonetheless, Brazil was only successful in proving that the provision of export credit 
guarantees to exports of rice and unsch eduled products resulted in actual 
circumvention under the Agreement on Agriculture  or in breach of any obligations 
under the SCM Agreement .  Therefore, the products to which the guarantees applied 
were important in defining the scope of me asures that were subject to any finding of 
WTO-inconsistency, DSB recommendations  and rulings, or any implementation 
obligation on the part of the United States.  This is no different, for example, than if Brazil had challenged, under Articles 5 and 6 of the SCM Agreement , the marketing 
loan program not only as it applied to upla nd cotton but all other products eligible for 
payments thereunder.  If, in those circumst ances, it had been ab le to make its case 
only in respect of upland cotton, that fact would have been impor tant in understanding 
both the scope of U.S. implementation obliga tions and the scope of measures taken to 
comply.  The same is true in the case of the export credit guarantees. 
 
47. This brings us to the third question presente d by the Panel – whether it would be "permissible 
for a compliance panel to examine a 'claim' that rela tes to subsidies (granted as part of measures taken 
to comply) provided to agricultural products to which the 'initial measure' did not apply."  The 
United States recalls, again, that by the very terms of Article 21.5, the touchstone of any analysis of 
"measures taken to comply" is the recommendations and rulings of the DSB and the consideration of 
whether or not a challenged measure is properly understood to have been "taken to comply" with 
those recommendations and rulings.  The Panel's question appears to assume that critical consideration since it asks whether subsidies that  are "part of measures taken to comply" may be 
subject to claims in a compliance proceeding.   It is  difficult – in the abstract – to conceive of why a 
Member would comply with DSB recommendations a nd rulings relating to subsidies provided to one 
product by providing subsidies in respect of other products. 
 
48. That is, in any event, an entirely different s ituation than the one before this Panel.  Here, 
Section 202 of the Agricultural Trade Act of 1978
62 and its implementin g regulations permit 
guarantees to be made to the exact same group of agricultural products as before.  The question is 
whether the United States – through the various ch anges it has made – has brought into conformity 
with the DSB's recommendations and rulings and with any provisions of covered agreements cited by 
Brazil those guarantees that were found to have been  provided in a WTO-inconsistent manner by the 
original panel.  The guarantees provided in respect of exports of pig meat and poultry meat are not 
measures taken to comply with any recommendations and rulings of the DSB, nor are they part of any measures taken to comply with any r ecommendations and rulings of the DSB.
63  
 
                                                      
61 Brazil's Answers to Additional Questions Follo wing Second Panel Meeting, paras. 11, 37 
(20 January 2004). 
62 7 U.S.C. 5622 (Exhibit US-141). 
63 As discussed above, the mere fact that they were subjected to the same improvements as the 
guarantees that were subject to the DSB's recommendations and rulings do not render them measures taken to 
comply or elements of any measures taken to comply.  WT/DS267/RW 
 Page D-373 
 
 
Questions to the United States   
 
47. The United States has raised a preliminary objection regarding Brazil's claims of 
(threat of) serious prejudice in respect of  the marketing loan and counter-cyclical 
payment programmes.  Is the Panel's understanding correct that, apart from this 
preliminary objection regarding programmes,  the United States also considers that 
the issue of whether payments made under the marketing loan and counter-cyclical payment programme after 21 September 2005 cause serious prejudice to the 
interests of Brazil is not properly within the scope of this proceeding? 
 49. Yes.  As depicted in the chart below, the or iginal panel (a) made a finding of "present" serious 
prejudice only with respect to payments made under the Step 2, marketing loan and counter-cyclical 
payment program in MY 1999-2002;  (b) declined to make any finding of "threat" of serious prejudice 
with respect to payments allegedly "mandated" to  be made in MY 2003-2007;  and (c) declined to 
make any find of "threat" of serious prejudice with respect to the Step 2, marketing loan, and counter-
cyclical payment programs themselves (which would have implicated all payments under the 
programs).  In these circumstances, the only measur es subject to any finding of WTO-inconsistency, 
and DSB recommendations and rulings based there on, or any implementation obligations were 
payments made under the Step 2, marketing loan  and counter-cyclical payment program in MY 1999-
2002 ( i.e., through July 31, 2003).  Thus, unless Brazil we re to establish that payments made after 
September 21, 2005 were measures taken to comply  with the recommendations and rulings of the 
DSB – and, for the reasons explained in the U.S.  comments on Brazil's response to Question 15 in the 
first set of questions from the Panel, the United St ates does not consider that Brazil has presented any 
basis to make such a finding – those payments are not properly within the scope of this Article 21.5 
proceeding.  
Measure 
Challenged Claim 
Made Resolution by 
Original Panel Paragraph in 
Panel Report 
"U.S. subsidies provided during 
MY 1999-2002" "Present" serious prejudice 
under Articles 5(c) and 6.3(c) 
of the SCM Agreement  Finding of WTO-inconsistency against 
Step 2, marketing loan, and counter-
cyclical/market loss assistance programs 7.14168.1(g)(i) 
"U.S. subsidies 
provided during MY 1999-2001" "Present" serious prejudice 
under Articles 5(c) and 6.3(d) of the SCM Agreement  Rejected for failure to make prima facie  
case 7.14658.1(g)(ii) 
"U.S. subsidies 
provided during MY 1999-2002" "Present" serious prejudice 
under Articles XVI:1 and XVI:3 of the GATT 1994 Declined to address, inter alia , because 
of finding of inconsistency with Articles 5(c) and 6.3(c) of the 
SCM Agreement  7.1476 
"U.S. subsidies" 
allegedly 
"mandated" to be 
provided during MY 2003-2007 "Threat" of serious prejudice 
under Articles 5(c) and 6.3(c) 
of the SCM Agreement  Declined to address in light of finding 
of inconsistency with Articles 5(c) 
and 6.3(c) and 3.1(a) and 3.2 of the 
SCM Agreement  7.1503 
"U.S. subsidies" 
allegedly 
"mandated" to be 
provided during MY 2002-2007 "Threat" of serious prejudice 
under Articles 5(c) 
and 6.3(d) of the 
SCM Agreement  Rejected for failure to make prima facie  
case 7.1504 
"U.S. subsidies" 
allegedly 
"mandated" to be 
provided during MY 2003-2007 "Threat" of serious prejudice 
under Articles XVI:1 and 
XVI:3 of the GATT 1994 Declined to address, inter alia , because 
of finding of inconsistency with 
Articles 5(c) and 6.3(c) of the SCM 
Agreement  7.1505 WT/DS267/RW  
Page D-374  
 
Measure 
Challenged Claim 
Made Resolution by 
Original Panel Paragraph in 
Panel Report 
"selected provisions of the FSRI Act of 2002 and the ARP Act 
of 2000" "Threat" of serious prejudice 
under Articles 5(c) and 6.3(c) of the SCM Agreement  Declined to address in light of findings 
regarding export subsidies, import subsidies, "present" serious prejudice, and "threat" of serious prejudice 7.1511 
"selected 
provisions of the FSRI Act of 2002 and the ARP Act 
of 2000" "Threat" of serious prejudice 
under Articles 5(c) and 6.3(d) of the SCM Agreement  Same as above 7.1511 
"selected 
provisions of the 
FSRI Act of 2002 
and the ARP Act of 2000" "Threat" of serious prejudice 
under Articles XVI:1 and 
XVI:3 of the GATT 1994 Same as above 7.1511  
 
48. How does the United States address the argument of Brazil that "[i]f the 
United States were to prevail on its view that subsequent mandatory and price-
contingent marketing loan and CCP payme nts are not properly before this Panel, 
the grant of annual recurring subsidies beco mes 'a moving target that escape from 
[the WTO subsidy] disciplines'"?  (Closing Statement of Brazil, para. 4) 
 
50. As the United States explained in its comments on Brazil's response to Question 15 in the first 
set of questions from the Panel, the United States does not consider this to be a valid argument.  
Under the reasoning of the original panel, not hing prevents Members from challenging present 
adverse effects of past or current payments, threat of serious prejudice of past, current, or future payments, or present adverse effects or threat of  serious prejudice from payment programs as such.  
Indeed, Brazil availed itself of many of those opportu nities in the present dispute.  The obligations of 
a responding Member depend on what the outcome is of those challenges.  Where, as here, a 
complaining Member only prevails  on one claim – that of "present" serious prejudice with respect to 
particular payments made in particular year s – the Member is bound by that outcome.  The 
complaining Member cannot seek to avoid that outcome either through post hoc  attempts to rewrite 
the original panel report, or by complaining that its  remedy is more limited that it would have been 
had the original panel's findings of WTO-inconsistency been made with respect to a different and 
broader set of measures.  
 51. Nor is this a situation where Brazil had no reme dy under the original panel's findings.  Brazil 
has itself expressly recognized otherwise.  Before  the Appellate Body, Brazil argued that subsidies 
provided in MY1999-2002 must be found to be capable of having "present" effects at the time of the 
appeal ( i.e., in late 2004 to 2005) in order for it to have any remedy in the dispute.  Brazil argued, 
specifically, that if the U.S. arguments to the c ontrary were credited "Brazil will have no remedy 
under Article 7.8 of the SCM Agreement for its ser ious prejudice, since it is allegedly legally 
impossible for the MY 2002 price-contingent recurri ng subsidies to have any adverse effects after 
31 July 2003 (the close of MY 2002)."
64  The Appellate Body agreed, finding that "the effects of a 
'recurring' subsidy may continue af ter the year in which it is paid."65 
 52. Under Brazil's own arguments, then, it would have had "a remedy unde r Article 7.8 of the 
SCM Agreement for its serious prejudice" even in  years after the MY 1999-2002 subsidies were 
                                                     
 
64 Upland Cotton (AB) , para. 529. 
65 Upland Cotton (AB) , para. 484.  WT/DS267/RW 
 Page D-375 
 
 
provided.  This not only confirms that the U.S. measures were not, in fact, "a moving target" but that Brazil specifically understood the limited scope of the original panel's findings.  Had the findings 
been with respect to the programs themselves and/ or all future payments as Brazil alleges, there 
would have been no basis for Brazil to allege that "Brazil will have no remedy under Article 7.8 of the 
SCM Agreement for its serious prejudice" since the findings of serious prejudice found by the original 
panel would have extended beyond MY  2002 to all times in the future in which Step 2, marketing 
loan, and counter-cyclical payments were to be made.  53. At the same time, it is clear that claims of serious prejudice under the SCM Agreement have a temporal scope.  This is established by the text of  the agreement, for example the distinction between 
present and "threat of" serious prejudice.  The fa ct that the negotiators specifically agreed on 
obligations that have a temporal scope means th at a Member is not free in dispute settlement 
proceedings to complain that the temporal scope constrains their remedies.  
49. Could the United States comment on the argument of the European Communities 
that the text of Article 21.5 of the DSU does not limit the temporal scope of that 
provision in the manner suggested by the United States?  (para. 29 of the Oral Statement of the European Communities) 
 
54. It is unclear from the oral statement of  the European Communities what it means by 
"limit[ing] the temporal application [of Article 21. 5] in the manner advocated by the United States."
66  
In any event the European Communities' arguments do  not appear to respond to the arguments that the 
United States has actually made.  55. Specifically, the United States has argued that Brazil has not identified any textual basis that 
requires the Panel to make findings regarding complia nce as of the end of the six-month period set out 
in Article 7.9 of the SCM Agreement rather than as of the date of panel establishment pursuant to 
Article 21.5 of the DSU.  Contrary to Brazil's suggestions, neither Article 21.5 of the DSU nor Article 7.9 of the SCM Agreement  require this.  Moreover, prior panels in EC – Bed Linen (21.5)  and 
U.S. – Shrimp (21.5)  have properly assessed compliance as of the date of establishment of the panel. 
 56. The European Communities' assertion that there is no temporal limitation in Article 21.5 of 
the DSU is, thus, fully consistent with the U.S. argument.  Indeed, in EC – Bed Linen (21.5) , the 
European Communities made precisely this point, no ting that the absence of a temporal limitation 
applicable to compliance proceeding supported its argument that "the relevant date for assessing the 
consistency of the measures 'taken to comply' with the covered agreements is the date of 
establishment of the panel, and not that of the end of the 'reasonable period of time.'"
67  Specifically, 
the European Communities argued there that: 
 
As noted by the panel in US – Shrimps (Ar ticle 21.5), "the DSU is silent as to the 
date on which the existence or consistenc y of the implementing measure must be 
assessed".  The same panel went on to find that: 
… it should take into account all the relevant facts occurring until the 
date the matter was referred to it.   By applying this approach, an 
Article 21.5 panel can reach a decision that favours a prompt settlement of the dispute.  Indeed, it avoids situations where implementing measures allowing for compliance with the DSB 
recommendations and rulings would be disregarded simply because 
they occur after the end of the reasonable period of time.  The Panel, 
                                                     
 
66 Oral Statement of the European Communities, para. 29. 
67 EC – Bed Linen (21.5) , Annex A-2, First Written Submission of the European Communities, 
para. 35. WT/DS267/RW  
Page D-376  
 
while mindful of the obligation of the United States to bring its legislation into conformity by the end of the reasonable period of time, considers that it is consistent with the spirit of Article 3.3 of the 
DSU to take into account any relevant facts until the date on which the matter was referred to the Panel. 
. . . .[T]he EC submits that the relevant  date for assessing the consistency of the 
measures "taken to comply" with the covere d agreements is the date of establishment 
of the panel, and not that of the end of the "reasonable period of time". 
Of course, the EC is not suggesting th at the implementing Member is under no 
obligation to implement the DSB's ru lings and recommendations within the 
"reasonable period of time". That obligation, however, does not flow from 
Article 21.5, but instead from Article 21.3 of  the DSU, which states in pertinent part 
that 
If it is impracticable to co mply immediately with the 
recommendations and rulings, the Me mber concerned shall have a 
reasonable period to comply. 
It is obvious, nevertheless, that a finding that a Member has violated Article 21.3 of 
the DSU by implementing late the DSB's recommendations and rulings would be necessarily declaratory, since there is nothi ng that such Member could do in order to 
correct that violation.  In any event, as discussed below, in the present case India did 
not state in its panel request any claims based on Article 21.3 of the DSU.
68 
57. When India clarified in EC – Bed Linen (21.5) that it was looking for two findings – one 
regarding compliance as of the end of the reasonabl e period of time and one as of the date of 
establishment of the panel, the European Communities again forcefully argued that the former was not 
within the compliance panel's terms of reference:  
The EC has requested the Panel to make a ru ling to the effect that the relevant date 
for assessing the consistency of the measure s "taken to comply" with the covered 
agreements is the date of establishment of the Panel. 
India agrees with that request.  Neverthel ess, it argues that, in addition, the Panel 
should assess the consistency of the measures "t aken to comply" also as of the date of 
expiry of the "reasonable period of time". 
India's request is not within the Panel's term s of reference.  The obligation to comply 
within the "reasonable period of time" do es not arise from Article 21.5, but from 
Article 21.3 of the DSU.  Yet, India has not cited Article 21.3 in its panel request. 
In any event, the ruling requested by India would serve no useful purpose and would 
complicate unnecessarily the Panel's task.  If the Panel found that the EC did not 
comply as of end of the 'reasonable period of time', but did so as of the date of 
establishment of the panel, there would be nothing else that the EC could do in order 
to remedy that temporary lack of compliance. 
. . .  . While it may be true that no Member has ever invoked a violation of 
Article 21.3 in Article 21.5 proceedings, th is does not prove that it is unnecessary to 
                                                     
 
68 EC – Bed Linen (21.5) , Annex A-2, First Written Submission of the European Communities, 
paras. 34-37.  WT/DS267/RW 
 Page D-377 
 
 
state that claim separately.  Rather, it seems more likely that no Member has ever bothered to invoke a violation of Article 21.3 because a ruling that the implementing Member has complied late would be declaratory and devoid of practical 
consequences.
69 
58. In response to questions, the European Co mmunities clarified its view that "the position 
expressed in paragraph 35 of the EC's First Written Submission" – i.e., that "the relevant date for 
assessing the consistency of the measures 'taken to co mply' with the covered agreements is the date of 
establishment of the panel, and not that of the end of  the 'reasonable period of time'" – did not depend 
on the particular terms of reference of a panel but, rather, "is valid with respect to all Article 21.5 
disputes."70 
 
59. There is no basis for the European Communities to argue that the analysis should somehow be 
different here.  In particular, the United States notes the European Communities' argument now that 
"whether or not Brazil's request would ever be capab le of having any practical utility is a different 
matter that this Panel does not need to address, being essentially a matter for Brazil, exercising its 
judgement in good faith."71  This would appear diametrically oppos ite to its argument that the panel in 
EC – Bed Linen (21.5)  should review compliance as of the da te of establishment because "the ruling 
requested by India would serve no useful purpose and would complicate unnecessarily the Panel's task.  If the Panel found that the EC did not comply  as of end of the 'reasonable period of time', but 
did so as of the date of establishment of the panel, there would be nothing else that the EC could do in order to remedy that temporary lack of compliance."
72 
 
60. While the European Communities' position ma y differ depending on whether or not its own 
measures are at issue, the fact remains that the panel in EC – Bed Linen (21.5)  considered the 
reasoning identified by the European Communities in EC – Bed Linen (21.5)  to be persuasive and 
proper and applied it to dismiss India's request.  The panel explained: 
 
It appears India considers that we must make two decisions on the existence or 
consistency of measures taken to comply – one as of the end of the reasonable period 
of time, and one as of the date of establishment of the Panel.  We do not consider that it would be either necessary or appropriate, as a matter of judicial economy, to first examine whether compliance had occurred as of the end of the reasonable period of 
time, and second consider compliance as of the later date.
73 
61. This mirrored the reasoning of the U.S. – Shrimp (21.5)  panel invoked by the European 
Communities and set out above.  The United States recalls – and agrees with – the European 
Communities' argument that the reasoning underpin ning this result "is valid with respect to all 
Article 21.5 disputes."74  The same result is certainly valid here. 
 
Question to Brazil  
 
50. Does Brazil maintain its claims with respect to the three unscheduled products 
(lyocell, lysine, wood products) identified  by the United States as falling outside the 
                                                      
69 EC – Bed Linen (21.5) , Annex D-3, Rebuttal Submission of the European Communities, 
paras. 12-19. 
70 EC – Bed Linen (21.5) , Annex E-3, Answers of the European Communities to Questions from India, 
para. 3. 
71 Oral Statement of the European Communities', para. 29. 
72 EC – Bed Linen (21.5) , Annex D-3, Rebuttal Submission of the European Communities, paras. 18. 
73 EC – Bed Linen (Panel) (21.5 – India) , para. 6.28. 
74 EC – Bed Linen (21.5) , Annex E-3, Answers of the European Communities to Questions from India, 
para. 3. WT/DS267/RW  
Page D-378  
 
scope of the Agreement on Agriculture? (see paragraph 83 of the United States' 
Rebuttal) 
B. C
LAIMS OF BRAZIL REGARDING PRESENT SERIOUS PREJUDICE  
 
1. Significant price suppression - Article 6.3(c) of the SCM Agreement   
 Questions to both parties
  
 
51. The parties disagree on whether or no t the marketing loan and counter-cyclical 
payments have more than minimal effects on  production of upland cotton.  Could 
each party explain how its approach to the analysis of the impact of these payments 
on production of upland cotton is supported by the provisions of Articles 5 and 6 of 
the SCM Agreement and by any other relevant WTO provisions?  
 
62. Brazil makes two claims of "present" serious prejudice under Article 5(c) of the 
SCM Agreement , one alleging significant price suppression unde r Article 6.3(c) and the other alleging 
a comparative increase in world market share w ithin the meaning of Article 6.3(d) of the 
SCM Agreement .  In either case, the key consideration is what "the effect of the subsidy is" at present 
(i.e., for purposes of this dispute, MY 2006).75  The use of the present tense -- "is" – is important not 
only because it helps to identify the proper period for ex amination of the effects but also confirms that 
the effects that are important are those that exist in fact – not any potential or speculated effects that 
may or may not arise under different market circumstances.  "Is" means, inter alia , "that which exists, 
that which is;  the fact or quality of existence."76  "Is" comes from the verb "to be," which itself 
means, inter alia , "have place in the realm of fact, exist,  live" "be the case or the fact;  obtain."77   
 63. That the concern of Articles 6.3(c) and 6.3(d) is with "effects that exist in fact" is further 
confirmed by the ordinary meaning of "effect" which is, inter alia , "something accomplished, caused 
or produced;  a result, a consequence" a nd "reality, fact as opp[osed] to appearance."
78  Thus, to prove 
its claims under Articles 5(c) and 6.3(c) or 6.3(d), Brazi l's must show that the effects that exist in fact 
of marketing loan and counter-cyclical payments are either significant price suppression or an increase in world market share as, respectively, contemplated under those provisions.  
64. Brazil has argued that effects of marketing loan and counter-cyclical payments on production 
of upland cotton are a key element of the alleged causal link between the payments and significant 
price suppression/increase in world market share.  According to Brazil, marketing loan and counter-
cyclical payments induce U.S. farmers to plant uplan d cotton in circumstances where, without (or "but 
for") the marketing loan and counter-cyclical paymen ts they would not have done so.  Brazil asserts 
that this allegedly subsidy-induced level of planti ng leads to overproduction, which leads to increased 
exports (under Brazil's theory pre-Panel meeting) – or unsold stocks (under Brazil's theory as of the 
Panel meeting) – and, ultimately, to the adverse e ffects with respect to price/market share claimed by 
Brazil.  65. To examine whether marketing loan and count er-cyclical payments have these alleged effects 
on the production of upland cotton, it is necessary to look at the particular decision matrix of U.S. 
producers and the factors that they actually consider as they decide whether and what to plant. 
Moreover, it is important to look at the way that  the marketing loan and counter-cyclical payment 
programs actually operate and interact with production deci sions.  These considerations underpin the 
                                                     
 
75 This was the marketing year in effect at the time this Panel was established on September 28, 2006.  
See Minutes of Meeting, para. 49  WT/DSB/M/220 (circulated November 2, 2006). 
76 The New Shorter Oxford English Dictionary  at 1421, Volume 1, (1993 Edition) (Exhibit US-129). 
77 The New Shorter Oxford English Dictionary  at 195, Volume 1, (1993 Edition) (Exhibit US-130). 
78 The New Shorter Oxford English Dictionary  at 793, Volume 1, (2005 Edition) (Exhibit US-143).  WT/DS267/RW 
 Page D-379 
 
 
U.S. approach to examining the effects of ma rketing loan and counter-cyclical payments on 
production in this proceeding.  66. By the same token, the United States submits  that for Brazil's arguments regarding planting 
decisions – to be given any weight – must be consistent with, at the very minimum, the basic facts of 
upland cotton production and with how the market ing loan and counter-cyclical payment programs 
operate.  This means, for example, that the argument s cannot be inconsistent with the fact that in each 
year when a farmer sits down to decide  whether to plant cotton, he does not know : 
 
• whether the weather will cooperate and how  much cotton will ultimately be produced, 
what the demand and consumption situation will look like at the time of harvest, and 
what price cotton will ultimately fetch on the market at harvest, 
 
• what the supply, demand, and price situ ation will be for other competing crops, 
 
• whether the adjusted world price (or "AWP")  will be below 52 cents so that he might 
receive a marketing loan payment with resp ect to upland cotton that he decides to 
grow (or whether he might receive a marketing loan payment for a competing crop), 
 
• what his variable costs will ultimately be if he decides to grow upland cotton (versus 
some other crop or versus putting his land to some other use), and 
 
• (while it does not depend on whether he pl ants upland cotton or not) if the season-
average farm price for the marketing year  to come will ultimately be below the 
threshold at which he might receive a count er-cyclical payment with respect to any 
upland cotton or other crop base acres that he holds. 
 
67. The farmer's planting decision must  be made on the basis of expectations about, inter alia , 
weather, supply, demand, prices, government paymen ts, and variable costs both with respect to 
upland cotton and competing crops.  Whether or not his expectations ultimately turn out to be correct or incorrect is not a relevant fact or in his planting decision;  he can not rewind time and make different 
production decisions based on how things actually  turn out.  Brazil has conceded this both in this 
proceeding
79, and in the original proceeding.80  Moreover, this is the general approach underlying 
Brazil's modeling efforts both in this and the original proceeding.81 
 68. The United States has shown that much of the evidence and arguments presented by Brazil 
fails to withstand scrutiny when examined in the lig ht of these basic facts of upland cotton production.  
For example: 
                                                     
 
79 See Brazil First Written Submission, Annex I, para. 36 ("U.S. cotton producers respond to the 
expected prices and expected rates of subsidy that apply at the time pl anting and other key decisions are made in 
the production cycle") (emphasis added) and Brazil First Written Submission, Annex I, para. 58 ("[t]he 
magnitude of the impact on incentives to produce cotton is equal to the expected difference between the loan 
rate, which is known at planting time, and the grower's expectations at the time of planting about the AWP for 
cotton that will apply when the grower makes that ma rketing loan transaction.") (emphasis added). Brazil 
Further Submission, Annex I, para. 17-18.  
80 US – Upland Cotton (AB) , para. 440 ("Brazil counters that farmers decide what to plant based on 
expected market prices as well as expected payments under the challenged subsidy programs, such that planted 
acreage responds to both these factors.") 
81 Brazil First Written Submission, Anne x I, para. 4 ("U.S. producers resp ond to revenue they expect to 
receive from market prices and expect ed government subsidies, where releva nt expectations are those that are 
held around the time that planting and other key production decisions are made.  U.S. producers do not know with certainty what actual prices and subsidies will turn out to be as they unfold during the marketing year.  
Therefore, as in reality, the model assumes that actual pr ices or subsidies in a marketing year do not affect 
cotton growers' behavior in that marketing year.") WT/DS267/RW  
Page D-380  
 
• Brazil has repeatedly attempted to show effects on upland cotton production in 
MY 2006 (or MY 2005, under Brazil's preferred approach) based on the actual prices received and/or actual payments received in those years, effectively assuming that 
production decisions were made on the basis of  facts that do not even materialize until 
many months after planting decisions are made
82;   
 
• Brazil has repeatedly ignored the fact that U.S. farmers consider net revenue, planting 
conditions and other relevant factors for competing crops vis-a-vis upland cotton – 
and not just such factors as they relate to  upland cotton in isolation – in determining 
what to plant83; 
 
• Brazil has repeatedly attempted to establish production effects with reference to actual 
levels of production in a particular year, wh ich are affected substantially by factors 
entirely out of the farmer's control (such f actors as pests, weather, and technological 
changes), rather than with respect to effects on planting ( i.e., the actual production 
decision within the hands of the farmer)84; 
 
• Brazil denies in the face of fact that the use of genetically-improved varieties in the 
United States and elsewhere have resulted in a dramatic increase in yields that has changed substantially the cost structure of upland cotton farmers in the United States and other countries (for example, India)
85; 
 
• Brazil repeatedly attempts to frame productio n decisions by reference to costs other 
than the variable (or operating) costs actua lly considered by U.S. farmers in their 
decision matrix86;  and 
 
• Brazil fails to take into account or distinguish  in its analysis the effects on price that 
are the result of factors on the demand side of the economic balance, including, importantly, the influence of China's upla nd cotton trade on world market prices.  
These are effects confirmed by the very evidence Brazil submits, including a report 
by the International Cotton Advisory Committee ("ICAC") showing the strong 
correlation between Chinese supply and demand and the A-Index
87, the fact that the 
A-Index itself has been changed to refl ect the influence of Chinese trade on the 
upland cotton market, as well as market reports  observing the role of China's trade in 
"prevent[ing] a significant price increase in 2005/2006."88 
 69. Brazil's theories about the allegedly significant effects that marketing loan and counter-
cyclical payments are having on production, exports  (or, under the latest theory, unsold stocks), and 
ultimately world market prices are divorced from r eality and are, instead, heavily dependent on the 
modeling exercise it has commissioned precisely for the purposes of showing significant price effects.  
As the United States has shown, that modeling exerci se is flawed in its structure and operation as well 
                                                     
 
82 See e.g. , Brazil First Written Submission, paras. 127, 144-145;  Brazil Rebuttal Submission, 
para. 191;  Oral Statement of Brazil, para. 31. 
83 See e.g. , Brazil First Written Submission, para. 142,  Brazil Rebuttal Submission, paras. 221-224. 
84 See e.g. , Brazil First Written Submission, paras. 93, 96, 124. 
85 See e.g.,  Brazil Comments on U.S. Oral Statement, para. 32. 
86 See e.g.,  Brazil First Written Submission, paras.  159-164, Brazil Rebuttal Submission, 
paras. 245-253, Oral Statement of Brazil, paras. 63-78. 
87 See ICAC "Review of the World Market Situation" for May-June 2006 at p. 8 (Exhibit BRA-485). 
88 U.S. First Written Submission, para. 315-316 (citing,  for example, "Cotton:  Review of the World 
Situation", International Cotton Advisory Committee at 7 (May-June 2006) (BRA-485)).  WT/DS267/RW 
 Page D-381 
 
 
as in the parameters and assumptions upon which it rests.89  Indeed, to get the most exaggerated 
results possible, Brazil has attempted to di scredit its own earlier modeling as "unnecessarily 
complicated and cumbersome" and "not directly appropriate to the issue at hand."90 Brazil has 
submitted in its stead a model that its own creator (B razil's economist in this dispute) described as a 
"simple model" that "does not represent the depth of  analysis that would be appropriate to support a 
trade remedy proceeding or a serious prejudice claim before a WTO panel."91  Not only this but Brazil 
has systematically adjusted virtually each and every parameter in order to produce even greater 
impacts on production and prices than would have obta ined had it used even the elasticities employed 
in its original modeling exercise (whi ch were themselves often overstated).92 
 
70. In short, the United States submits that a lthough Brazil bears the burden of proof of proving 
its claims under Articles 5(c)/6.3(c) and 5(c)/6.3(d) of the SCM Agreement , it has failed to show that 
marketing loan and counter-cyclical payments are having the kind and degree of effects on planting 
and production that it has alleged.  Under Brazil's own theory that is a critical first step in establishing 
a causal link between the payments and the adverse effects alleged to exist. 
 
71. What the data do show – instead – is that for the entire period MY 2002-2007, U.S. cotton farmers expected to meet or exceed their variable costs of planting cotton.  Moreover, compared to 
key competing crops, upland cotton was the most attractive option from the standpoint of costs and revenue in at least three of the years (MY 2003, MY 2004, and MY 2006).  In two of the other three 
years (MY 2002 and 2007), where cotton was not the most attractive option, upland cotton plantings 
declined substantially  consistent with the signals from the market.  And in the single year (MY 2005) 
in which acreage shifts did not line up with th e different relative attractiveness of cotton and 
competing crops, other factors were clearly respons ible (most importantly, a shift away from soybean 
acreage due to concerns about an outbreak of  Asian soybean rust at the end of MY 2004).
93  Thus, 
U.S. upland cotton farmers' planting decisions are en tirely consistent with the decisions that they 
would have made had there been no marketing lo an and counter-cyclical payments, and are fully 
consistent with both market signals and ot her planting and produc tion considerations. 
 72. The fact that U.S. upland cotton production in these years was both economically rational and 
consistent with market and planting/production consid erations is further confirmed by the fact that 
U.S. production has been generally stable as a perc entage of world production throughout the entire 
period that U.S. marketing loan and counter-cyclical  payments have been made and for a great many 
years before that as well.  This evidence shows that – contrary to Brazil's assertions – marketing loan 
and counter-cyclical payments have not been indu cing U.S. farmers to plant, produce, and export 
where market signals would cause their foreign counter parts to pull back.  The stable share of U.S. 
production and exports over this period indicates that whatever signals the "world market" is sending, 
U.S. producers are receiving it clearly and responding to it in much the same way as their foreign 
counterparts.  73. The independent studies that the United States has submitted – which, unlike Brazil's 
modeling exercise, were not commissioned for the pu rposes of this proceeding – lends further support 
for the argument that the challenged payments are not having effects on production that are likely to 
lead to "significant" price suppression.  These studies show, in particular, that counter-cyclical 
payments likely have minimal effects on acreage and hence production and that a substantial part of 
                                                     
 
89 U.S. First Written Submission, Annex I;  U.S. Rebuttal Submission, Annex I, U.S. Oral Statement, 
Statement of Dr. Glauber. 
90 Brazil Rebuttal Submission, Annex I, para. 4. 
91 Daniel A. Sumner.  "Boxed In:  Conflicts Be tween U.S. Farm Policies and WTO Obligations." 
Center for Trade Policy Studie s, The Cato Institute, Decem ber 2005.  (Exhibit US-108) 
92 Of course, many of the elasticities in the model us ed for purposes of the original proceeding were 
already overstated. 
93 See U.S. Comments on Brazil's "Oral" Presentation, paras. 70-72. WT/DS267/RW  
Page D-382  
 
counter-cyclical payments paid are capitalized into higher land rents and land values.  Moreover, data 
regarding the planted acreage and base acreage show th at U.S. farmers do, in fact, use the planting 
flexibility afforded by the direct and counter-cyc lical payment programs (indeed, even before the 
dramatic decline in expected cotto n planted acres for the upcoming marketing year, the data show that 
U.S. cotton farmers holding cotton base acres are planting approximately 40 percent less  upland 
cotton than they planted at the time base acres were set).  In addition, a significant – and growing 
percentage – of cotton is gr own on farms that do not hold any upland cotton base acreage or on 
planted acreage that is in excess of the upland cotton  base acreage held by a farm.  That is, for these 
cotton farmers, there can be no link – even allege d – between cotton base counter-cyclical payments 
and upland cotton production because these farmers are growing cotton on acreage beyond any cotton 
base acreage.
94 
 74. This data reinforces other evidence submitte d by the United States;  for example, data 
regarding cost of production shows that for most U.S. production (at least 92 percent) market revenue 
not only covers variable costs of production but also all costs of production.  As discussed further 
below in response to Question 59, this is highly significant because the "total" costs of production 
reported by USDA include imputed economic opportunity  costs.  These are not even actual cash costs 
for many – if not most – upland cotton farmers and, thus, may not ever need to paid out.  The data 
show, therefore, that the vast majority of U.S. farmer s are not only able to meet their variable costs of 
producing upland cotton – the costs that are important from a short-run perspective – they are able to 
meet their total cash costs of producing upland cotton and they are able to meet economic opportunity 
costs that are, for the most part, not even real expe nditures that need to be made in order for the farm 
to stay in business.  When one considers this togeth er with the fact that whole-farm decisions about 
whether or not to close down operations are made on the basis of whole-farm costs and revenue – not 
just the costs and revenue relating to individual crop s – it is clear that U.S. upland cotton farming in 
the United States is an entirely economically rational business and one that does not depend on 
marketing loan and counter-cyclical paymen ts for its continued financial viability. 
 75. Finally, consistent with the evidence befo re the Panel showing that marketing loan and 
counter-cyclical payments do not have the kind of "major" production enhancing effects that Brazil's 
claims assume, Brazil's own modeling exercise reflects minuscule price effects when the modeling parameters are re-adjusted to mo re realistic levels (that is, even without  adjusting the model itself for 
the many fundamental flaws in its structure a nd operation).  Any possible price suppression would 
only be in the range of 1 to 1.5 percent in the re-calibrated run of the Sumner II model for MY 2006-
2008.  Even though this result is overstated, it translates into a less than one cent per pound impact on 
world market prices at present A-Index levels.
95  Brazil has provided no evidence to establish that 
such an impact – exaggerated as it is – nonetheless constitutes "significant" price suppression of the 
world market price for upland cotton.  Indeed , Brazil's approach would effectively equate any effect 
on prices with significant  price suppression and, thereby, write "significant" out of Article 6.3 of the 
SCM Agreement  altogether.  Neither that approach – nor the specific arguments made by Brazil as to 
production effects – is supported by th e text of Articles 5 and 6 of the SCM Agreement . 
 
52. In its Third Party Submission New Zealand observes: 
 
"Marketing loan payments are am ber box measures, the category 
in which are included the non-prohibited measures with the most trade distorting effect on produc tion and trade."  (para. 5.19) 
Do the parties consider that the fa ct that under the Agreement on 
Agriculture a subsidy is included in the 'amber box' is relevant to 
                                                     
 
94 See U.S. First Written Submission, paras. 220- 225;  U.S. Rebuttal Submission, 263-266. 
95 The average A-Index for January 2007 was 60.44 cents/lb.  WT/DS267/RW 
 Page D-383 
 
 
the analysis of the subsidy's consistency with Articles 5 and 6 of the 
SCM Agreement?  
76. No.  The fact that a measure is notified as an amber box measure does not indicate that it is 
causing adverse effects within the meaning of Article 5(c) of the SCM Agreement .  The "amber box" 
is simply a catch-all category that refers to " domestic support measures in favour of agricultural 
producers" that do not fit within the so-called "green"96 (measures that Members agree are non- or 
minimally-trade distorting) or "blue" (direct  payments under production limiting programs) boxes.97  
While "amber box" measures may not meet all th e requirements necessary to be deemed non- or 
minimally-trade distorting for purposes of the "boxes" set out in the Agreement on Agriculture , this 
does not mean that they are causing any of the adverse effects identified in Article 5 of the 
SCM Agreement .   
 77. To the contrary, the different effects discussed above simply serve to illustrate that there is a 
spectrum of effects that support measures may have , with no or minimal effects on one end of the 
spectrum and adverse effects on the other.  Articles 5 and 6 of the SCM Agreement  are only concerned 
with measures that are at the latter end of the spect rum.  Those provisions are not concerned with the 
non- or minimally-trade distortive measures within the "green box," or with any "amber box" measures that – while they might have somewhat greater effects on trade than green box measures – 
are not causing any adverse effects within the meaning of Articles 5 and 6.   78. This spectrum of effects is a relevant consideration in assessing Brazil's claims that 
effectively any degree of price suppression must be considered to be "significant" price suppression 
for the purposes of the present dispute.  Brazil's ar guments ignore the fact that some amount of trade 
distortion is expected and tolerated for domestic s upport measures and that it is only when the trade 
distortion is found to rise to the level of significant  price suppression, or one of the other adverse 
effects identified in Articles 5 and 6 the SCM Agreement  that the obligation to either withdraw the 
measure or eliminate the adverse effects thereo f arises under Article 7.8 of that agreement. 
 Questions to the United States
 
 
53. The United States argues that Brazil has not provided evidence of 'actual 
production inducing' effects of marketin g loan and counter-cyclical payments and 
that Brazil 'purports to demonstrate indi rect production effects through its claim 
that the US planting, production, and exports are not responsive to prices.'  (Opening Statement of the United States at the meeting of the Panel with the parties, paras. 62 and 69, emphasis in original) 
 
(a) Could the United States explain further the distinction between what it 
terms "actual production inducing effects "and "indirect production effects"?  Could the United States also elaborate on how this distinction is legally relevant in the context of Articles 5 and 6 of the SCM Agreement? 
 
79. The United States does not intend to draw a distinction between "actual production effects" 
and "indirect production effects."  In the paragra phs of the U.S. Oral Statement listed above, the 
United States argues two different things.    80. First, the United States argues that Brazil' s own theory of causation under Articles 5(c) 
and 6.3(c) – and the ordinary meaning of the treat y terms therein – require an examination of the 
                                                     
 
96 See Article 6.1 and Annex 2 of the Agreement on Agriculture . 
97 Article 6.5 of the Agreement on Agriculture .  Certain reduction commitments apply to "amber box" 
measures unless they are covered by the de minimis  or agricultural and rural development provisions of the 
Agreement on Agriculture .  See Article 6.4 and 6.2 of the Agreement on Agriculture , respectively. WT/DS267/RW  
Page D-384  
 
actual  effects that marketing loans and counter-cyc lical payments are having on U.S. farmers' 
planting decisions.
98 In the U.S. view, this requires that  any evidence be consistent with the 
fundamental facts of how planting/production decisions are made by upland cotton farmers.  These facts are discussed above in response to Question 51 .  As discussed therein, much of the data that 
Brazil submits is not consistent with these facts and, thus, sa ys little about the effects of marketing 
loan and counter-cyclical payments on U.S. farmers' planting decisions. 
 81. Second, the United States addresses Brazil's arguments that a link between payments under 
the marketing loan and allegedly artificially high U. S. planted acreage, production, and exports can be 
gleaned indirectly by what it has asserted is the absence  of a "link" between "prices, on the one hand, 
and [U.S.] planted acreage, production, and exports, on the other hand. . . ."
99  According to Brazil's 
argument, if it can show that there is no link be tween prices for upland cotton and U.S. planting, 
production, and exports, this means that marketing loans and counter-cyclical payments must have 
somehow "insulated" U.S. producers' planting, pr oduction and exports from market signals.  The 
United States submits that this reasoning is flawed  at its inception because U.S. planting, production, 
and exports react to factors other than just the pri ce of upland cotton (and, in terms of prices, respond 
to expected not actual prices).  For example, as discussed above, the decision to plant upland cotton 
results from considerations including of expected net revenue for upland cotton and competing crops , 
expected planting and production conditions, and other su ch factors.  It is, therefore, unrealistic to 
suggest that there should be a one-to-one link betw een upland cotton planting, production, and exports 
and upland cotton prices. 
 
82. Moreover, the comparisons that Brazil has atte mpted to make to demonstrate the absence of a 
"link" are inconsistent with the very facts of upland cotton production discussed by the United States 
above.  For example, recall that Brazil has argued th at there is no link between U.S. upland cotton 
production in each year and U.S. farm prices.  As th e United States has explained this ignores the fact 
that (a) planting decisions cannot be explained throug h an examination of cotton prices alone, (b) U.S. 
farmers base planting decisions on expected not actual prices and (c) "producers do not decide on production, but on plantings.  Ultimate production is  affected by weather and other factors affecting 
yields."
100   
 83. Indeed, the same alleged "absence" of a "li nk" between absolute production levels and prices 
is apparent when one compares foreign production to movements in the A-Index.
101  So, either all 
producers are cut off from market signals – applyi ng Brazil's reasoning – or, in fact, the evidence 
submitted by Brazil does not in fact support its assertions of market insulation.  The United States submits that the latter is the more logical conclusion.  
                                                     
 
98 See Upland Cotton (AB) , para. 97 ("Brazil explains that United States upland cotton farmers base 
planting decisions on expected net retu rns, meaning expected ma rket prices together with expected government 
support.");  Brazil First Written Submission, Annex I,  para. 36 ("U.S. cotton producers respond to the expected 
prices and expected rates of subsidy that apply at the time planting and other key decisions are made in the 
production cycle") (emphasis added) and Brazil First Wr itten Submission, Annex I, para. 58 ("[t]he magnitude 
of the impact on incentives to produce cotton is equal to the expected difference between the loan rate, which is 
known at planting time, and the grower's expectations at the time of planting about the AWP for cotton that will 
apply when the grower makes that marketing loan transaction.") (emphasis added). Brazil Further Submission, 
Annex I, para. 17-18. 
99 Brazil First Written Submission, para. 145. 
100 Brazil Appellee Brief, para. 706, n. 995. 
101 The United States uses the A-Index because the U. S. farm price is not th e price for foreign-grown 
cotton.  However, given that Brazil considers that there are "broad similarities" between the U.S. farm price and 
the A-Index, it presumably considers the comparison of U.S. and foreign production to the A-Index to be 
analogous to the comparison Brazil makes above between U.S. production and farm prices.  Brazil First Written 
Submission, para. 97.  WT/DS267/RW 
 Page D-385 
 
 
84. Similarly, Brazil has also attempted to comp are annual U.S. upland cotton export levels and 
the average farm price for the marketing year to show the alleged absence of a link between exports 
and prices.  However, there again, Brazil's eviden ce ignores the reality – readily recognized by its own 
cotton industry outside this dispute – that U.S. exports  have reacted to a drama tic decline in U.S. mill 
use and the contemporaneous increase in foreign consumption.102  It is those market conditions,  rather 
than marketing loan and counter-cyclical payments that explain U.S. export behavior in the years 
prior to the FSRI Act coming into effect.  Since the Act came into effect, U.S. export behavior has 
been entirely consistent with that of foreign counterparts. 
 85. Brazil has also presented a third set of compar isons purporting to show that planting decisions 
in a marketing year do not correlate to the prices for upland cotton that prevail many months later
103 
or to the futures prices of upland cotton alone .104  Here, too, Brazil's analysis fails to account for the 
actual bases on which planting decisions are made;  in  particular, the fact that planting decisions are 
made on the basis of expectations  about net revenues not only for cotton but for competing crops  (as, 
revealingly, reflected in Brazil's own economic model in this dispute) .  Moreover, the analysis that 
Brazil presents in this regard – flawed as it is – actually undermines  Brazil's claims.  For example, 
Brazil's analysis of shifts in U.S. versus fore ign harvested acreage compared to futures prices for 
upland cotton shows U.S. harvested acreage shifting c onsistently with harvested acreage in the rest of 
the world in most years.  However, where the two di verge, it is because U.S. harvested acreage reacts 
more conservatively than foreign acreage to increasing futu res prices for upland cotton (as in 
MY 2003 and 2006).105  Indeed, the only year since the FSRI Act came into effect in which U.S. 
harvested acreage shifts were less conservative was MY 2005, and that  difference is easily explained 
when one takes into account such factors as (a) th e shift in acreage from soybeans to upland cotton in 
the Delta and Southeast regions of the United States due to fears of another soybean rust outbreak;  
and (b) exceptionally good growing co nditions resulting in low abandonment. 
 
86. In short, the United States submits that Brazi l has not substantiated its  argument that U.S. 
planted acreage does not react to market, planting and production signals.  The data show, instead, 
that U.S. production and exports shift consistently with producti on and exports elsewhere in the 
world.  This – and an examination of changes in U.S. planted acreage in light of expected revenues 
and other factors both for upland cotton and competing crops – confirms that U.S. producers receive 
and react to market signals in an economically ra tional manner that is entirely consistent with the 
behavior of their foreign counterparts. 
 
(b) What is the response of the United States to the argument that the fact that 
"U.S. upland cotton producers know that  their overall revenue will always be 
protected by marketing loans and counter-cy clical payments ... plays a major role in 
their planting decisions"?  (Rebuttal of Brazil, para. 185;  see also Third Party 
Submission of New Zealand, paras 5.20-5.21) 
 
87. The United States submits that any eligible recipient of income support knows that he or she will receive some income protection due to paymen ts under the income support program.  That is the 
very nature and intent of income  support programs – to ensure that producers receive some income 
that they would not otherwise get on the market.  This is true for payments under the direct payment 
program, payments under the counter-cyclical paym ent program, payments under the marketing loan 
program, and for any other income support program  of any Member (for example, those supporting 
elderly or low-income recipients) .  This is preci sely the point that Brazil illustrates in the graph it 
submits purporting to show that not only marketing lo an and counter-cyclical payments but also direct 
                                                     
 
102 See e.g.,  U.S. First Written Submission, para. 249. 
103 See e.g.,  Brazil First Written Submission, paras. 144-145. 
104 See e.g.,  Brazil First Written Submission, paras. 142-143 and Brazil Rebuttal Submission. 
paras. 221-224. 
105 See U.S. Rebuttal Submission, para. 306. WT/DS267/RW  
Page D-386  
 
payments, crop insurance payments, and cottonsee d payments provide revenue support to U.S. 
producers.
106 
 88. The mere fact that income support programs  provide income support to agricultural producers 
does not, however, mean that the payments have "m ajor" effects on planting or cause any of the 
adverse effects listed in Articles 5 and 6 of the SCM Agreement .  If that were true, income support 
could not  be listed as one of the types of so-called "green box" measures listed in Annex 2 of the 
Agreement on Agriculture , which by definition only have "no, or at most minimal, trade-distorting 
effects or effects on production."  
89. Whether or not marketing loans and counter-cyclical payments are in fact  having "major" 
effects on planting and causing U.S. producers to pl ant upland cotton where they would not otherwise 
do so is a question of fact and one that Brazil must  prove in the affirmative through evidence of how 
upland cotton farmers actually make their prod uction decisions and how the programs actually 
operate.  Moreover, the ques tion is not merely proving any effect on production.  As the United States 
has noted before, most economists agree that any type of payment to a producer of agricultural 
products will have some effect on risk and wealth a nd that this may, in turn, have some effect on 
production.  In fact, the Agreement on Agriculture  contemplates that even "green box" payments – 
measures that Members considered may be freel y provided without limitation by domestic support 
reduction commitments – may have minimal  effects on production.  The question is whether Brazil 
has shown that the risk, wealth, or production eff ects rise to the level that they cause – under existing 
market conditions – the significant  price suppression that Brazil has alleged to exist in the present 
proceeding.  The United States submits that for th e reasons above a nd explained in the prior U.S. 
submissions, Brazil has not so shown.  
(c) In its Opening Statement at the meeting of the Panel with the Parties, Brazil 
observed: 
 
"...we have demonstrated that these subsidies stabilized cotton 
producers' revenue despite wildly fluctuating market prices, thereby insulating and numbing acreage response to market price signals.  These subsidies also cover the huge long-term gaps between market 
returns and total costs of production.  Both effects are closely 
interrelated."  (para.55) 
Is the United States only arguing that Brazil has not empirically substantiated that 
these two "effects" have actually occurred or is it also the position of the United States that these effects are in any event legally irrelevant to an analysis of 
whether a subsidy causes significant price suppression within the meaning of 
Article 6.3 (c) of the SCM Agreement?  
 
90. The United States is arguing two things in respect  of this assertion.  First, the very purpose of 
income support programs is to add to the income of r ecipients.  Therefore, Brazil's assertion that it has 
"demonstrated" that payments under the marketi ng loan and counter-cyclical payment programs 
"stabilize" the income of eligible producers is not re markable.  There is no need for an elaborate graph 
to "demonstrate" this – it is clear from the very  formula for payment under the marketing loan and 
counter-cyclical payment programs that payments are made when prices fall below certain thresholds.   
 91. The fact that upland cotton farmers may end up receiving marketing loan and counter-cyclical 
payments in a year in which prices are below the applicable thresholds does not mean, however, that 
the payments have had the effect of "insula ting and numbing acreage response to market price 
                                                     
 
106 See Brazil First Written Submission, para.133, Figure  8 and Brazil Rebuttal Submission, para. 189, 
Figure 6.  WT/DS267/RW 
 Page D-387 
 
 
signals," as Brazil asserts.107  For one, planting decisions are made in light of expectations  about 
revenue and other factors at the time of planting,  not the actual revenue ultimately received or other 
factors that actually come about much later on when the marketing year actually starts.  Moreover, the 
question of whether expectations of income s upport under the marketing loan and counter-cyclical 
payments actually cause U.S. producers to plant mo re upland cotton than they otherwise would based 
on market, planting, and production signals alone is  a question of fact.  And the evidence does not 
support Brazil's assertion of such substantial planting/production effects.  92. Again, it is indisputable that decisions on whether to plant upland cotton are made many 
months before a single penny is paid out under the marketing loan and counter-cyclical payment 
programs.  In making these decisions, an upland cotton fa rmer eligible for payments is likely take into 
account the fact that he will receive a payment unde r the marketing loan and counter-cyclical payment 
programs if market prices fall below the level at wh ich such payments are made.  The key question is 
whether this fact will cause him to plant upland cotton where he otherwise would not have done so 
based solely on market signals and whether this will result in such substantial excess planting and 
production that there will be significant suppression of world market prices within the meaning of 
Article 5(c) and 6.3(c) of the SCM Agreement .  The answer depends on a comparison of what he 
would do based on market signals vis-a-vis  what he does when one adds in the possibility of receiving 
payments under the marketing loan and counter-cyclical payment programs.  93. In the case of the counter-cyclical payment programs, there is no reason for the farmer to 
plant upland cotton to receive any payments.  He w ill receive that payment regardless of whether he 
chooses to plant upland cotton, a competing crop (such as soybeans or corn), or decides to let the land 
sit idle.  Thus, the rational farmer would plant th e crop that he is best able to plant (based on 
expectations about weather, pests, his own experti se etc.) and that he expects will obtain the highest 
revenue for him on the market.  While the expect ation that he may receive payments under the 
counter-cyclical program may have indirect effect s on production by making him less risk averse, the 
research suggests that such effects are li kely to be minimal and not crop-specific.
108  So, it is highly 
unlikely that – even if  the farmer expects to receive paymen ts under the counter-cyclical payment 
program – these expectations will induce him to plant upland cotton to any substa ntially greater extent 
than if he was simply responding to signals from the market.  And consiste nt with this economic 
analysis, independent studies and empirical data show  that counter-cyclical payments likely have had 
minimal effects on acreage and hence production.109 
 94. In the case of marketing loan payments, the an alysis is somewhat different because there the 
farmer does have to decide to plant upland cotton in order to get payments under the program.  The 
question is whether he will do so where he otherw ise would not have based on market signals (and 
other planting/production signals) alone.  The data sh ow, however, that in every single marketing year 
since the FSRI Act came into effect, it would ha ve been economically rational for upland cotton 
farmers to plant upland cotton rather than allowing th eir land to sit idle because the farmers expected 
that, even without any payment from the governme nt, market revenue for upland cotton was more 
than sufficient to cover variable costs.  In some of these years, however, it would have been more 
economically rational (using average U.S. price expectations and costs) to plant a competing crop (for 
example, corn in MY 2002 and MY 2007).  Consistent  with that analysis, in those years, the acreage 
data show a corresponding drop in U.S. upland cotton plantings.  Indeed, the only year there was not 
such a corresponding shift in acreage was MY 2005, a nd the data also show precisely why that was 
                                                     
 
107 Brazil Opening Statement, para. 55. 
108 See e.g.,  Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act:  Production 
Effects Likely to be Limited" at 203 (Exhibit US-35), Lin, William and Dismukes, Robert.  "Supply Response 
Under Risk:  Implications for Counter- cyclical Payments' Production Impacts ," Review of Agricultural 
Economics–Volume 29, Number 1–Pages 64-86 , (Spring 2007), p. 81 (Exhibit US-85). 
109 See e.g.,  U.S. First Written Submission, paras. 203-276 ;  U.S. Rebuttal Submission, paras. 226-267, 
282-295. WT/DS267/RW  
Page D-388  
 
the case – namely, shifts in acreage away from soyb eans to cotton in the Southeast and Delta regions 
due to fears of another outbreak of Asian soyb ean rust and other planting/production-related 
considerations.  95. In other words, in each of the years under FSR I Act, shifts in U.S. planted acreage were 
consistent with what one would expect if there we re no marketing loan payments or counter-cyclical 
payments and U.S. farmers were basing their planting decisions solely on market price signals and other considerations relevant to planting and production.  This is true regardless of whether the 
particular year was one in which expected pri ces were at levels at which farmers believed both 
marketing loan payments and counter-cyclical pa yments were likely (such as MY 2002 and 2005) or 
one in which expected prices were higher and the e xpectations were that marketing loan payments 
were unlikely (such as MY 2003, MY, 2005, and MY 2006).   96. This brings us to the third U.S. argument re lating to Brazil's assertion that marketing loan and 
counter-cyclical payments allegedly "cover the huge long-term gaps between market returns and total 
costs of production."  As discussed in response to  Questions 51 and 59, Brazil's assertion of "huge 
long-term gaps" and their alleged significance make improper use of the "total cost" figures published 
by USDA.  To illustrate the fallacy in the "total co st" approach that Brazil advances, recall that, in its 
"oral" presentation to the Panel, Brazil submitted charts comparing total costs of producing cotton, 
corn, and soybeans to total gross re venue earned in respect of the crop.
110  Brazil claimed that this 
proved the "economically irrational business of grow ing cotton in the United States without marketing 
loan and CCP subsidies."111  What it showed, however, was the unreasonableness of Brazil's analysis.  
 97. According to Brazil, U.S. farmers would have lost money across the board  producing any of 
these crops (or would have expected to do so) in any of  the years in examined.  In fact, if one were to 
apply Brazil's flawed reasoning more broadly, on e would obtain similar results for virtually all major 
field crops in the United States.  Thus, for exampl e, according to Brazil's theory, producers of every 
single major field crop except for soybeans would have lost money in MY 2005 and, even for soybeans, U.S. farmers would have eked out no more than $1/acre.  
Total Gross Value of Producti on/Acre v. Total Costs/Acre 
for Major Field Crops (MY 2005) 
 
 Cotton 
(USD) Corn 
(USD) Wheat 
(USD) Rice 
(USD) Sorghum
(USD) Barley 
(USD) Oats 
(USD) Sugarbeet
(USD) Peanut 
(USD) Soybean
(USD) 
Total gross value 
of production 483 285 121 469 118 148 142 880 564 265 
Total Costs 544 402 203 703 282 255 154 965 665 264 
Total Value - 
Total Costs -87 -117 -82 -235 -164 -107 -25 -85 -101 1 
 
98. In other words, Brazil's analysis of "rati onal" farming behavior would require the Panel 
accept that none of the 434 million acres of cropland in the United States should have been planted to 
any major field crop in MY 2005.  Under Brazil's approach no upland cotton, corn, wheat, rice, 
sorghum, barley, oats, sugarbeet, or peanuts should have been grown.  And any evidence that they 
were in fact grown must be accepted as evidence of  the production effects of the marketing loan and 
counter-cyclical payments.112 
 
                                                      
110 Brazil Oral Statement, para. 57 and paras. 57-91. 
111 Brazil Oral Statement, para. 57 and paras. 57-91. 
112 Notably, no payments were made in respect of wheat or soybeans in MY 2005 (and have never been 
made in respect of those crops).  WT/DS267/RW 
 Page D-389 
 
 
99. The absurdity of these results confirms that Brazil's "total cost" approach is a fundamentally erroneous approach to assessing the planting decisi ons of U.S. farmers.  Rather, any proper 
assessment of the "economic rationality" of upland cotton farming must look to, inter alia , the 
variable costs of production.  Indeed, the fact that  variable costs are the relevant consideration in 
planting decisions is well-accep ted in agricultural economics
113, and has been recognized by the 
Appellate Body.114  It is also evidenced by  the fact that there is no economic model  of which the 
United States is aware that uses total costs in its  supply response equations (that is, to examine the 
planting decision).  100. The "total costs" that Brazil uses to assert the existence of "long-term gaps between market 
returns and total costs of production" can neither be  used to examine planting decisions, nor do they 
permit a proper assessment of the long-term viability of U.S. upland cotton farmers.  As discussed in 
response to Question 59, Brazil's argument on the b asis of these alleged "gaps" that U.S. farmers 
would close down their operations if marketing loan  and counter-cyclical paym ents were not available 
is simply wrong. 
 
54. Could the United States explain whether, and, if so, why, it is of the view that this 
Panel should not rely on the findings and analysis by the original Panel regarding the effects of marketing loan and counter-cyclical payments on production and exports?  Please comment in particular on  paras. 7.1291, 7.1295, 7.1302, 7.1349, 
7.1353 of the Panel Report. 
 101. The question decided by the original panel was what effect the marketing loan, counter-
cyclical payment, and Step 2 payments made in MY 1999-2002 were having in that period (and 
whether that effect amounted to "significant" price suppression with the meaning of Article 5(c) and 6.3(c) of the SCM Agreement ).  The question Brazil presses before this Panel is a different one;  it 
is whether the marketing loan and counter-cyclical  payments are causing "present" serious prejudice 
(i.e., under the marketing conditions prevailing in the current marketing year in the absence of the 
Step 2 program).    102. Under Article 11 of the DSU, the Panel is tasked with, inter alia , making "an objective 
assessment of the matter before it, including an obj ective assessment of the facts of the case."  The 
Appellate Body has explained before that the task  of a compliance panel is to examine the evidence 
and arguments presented to it in the compliance pr oceeding, even in situations where the factual 
situation is precisely the same one that had examin ed in the original proceeding (e.g. the assessment 
by an administering authority of the effects of the same exports in the same period on the same 
industry).
115  The obligation is, clearly, all the more impo rtant where the factual situation presented is 
a different one ( i.e., where the measures, the time period, a nd the market conditions are all different 
from those examined in the original proceeding).  This  – and the fact that Brazil is obligated to prove 
                                                      
113 See e.g. , U.S. Further Rebuttal Submission in th e Original Proceedin g, paras. 117-122 
(18 November 2003);  Cecil Davison and Brad Crowder, "Northeast Soybean Acreage Response Using 
Expected Net Returns" Northeastern Journal of Agriculture and Resource Economics , April 1991, pp. 33-41 
(Exhibit US-137) and Duncan M. Chembezi and Abner W. Womack, "Regional Acreage Response for 
U.S. Corn and Wheat:  The Eff ects of Government Programs", Southern Journal of Agricultural Economics , 
July 1992, pp 187-198 (Exhibit US-138). 
114 US – Upland Cotton (AB) , para. 453 ("We agree with the general proposition of the United States 
that variable costs may play a role in farmers' decision-making as to whether to plant upland cotton or some 
alternative crop, and how much of each crop to plant .  From a short-term perspective, variable costs may be 
particularly important .") (emphasis added). 
115 U.S. – Softwood Lumber (21.5) , para. 101 (Noting that Canada's arguments "seem to assume that a 
panel is required  to evaluate the facts in an Ar ticle 21.5 proceeding in exactly th e same way as it evaluated those 
facts in the original panel proceedings, and to hold an investigating authority making a redetermination to the 
inferences that it drew from the same evidence in the orig inal determination. . . . [W]e do not see why the Panel 
would be bound by the findings of the original panel.") (emphasis in original). WT/DS267/RW  
Page D-390  
 
its claims in this proceeding – means that there is  no basis to automatically adopt for purposes of this 
proceeding the same factual conclusions drawn by  the original panel about the effects of the 
marketing loan, counter-cyclical payment, and St ep 2 payments in a different period.  Those 
conclusions are appropriate here only if Brazil pr oves that the same reasoning is valid and supported 
by the arguments and evidence before this Panel.  For the reasons set out in the U.S. submissions and 
presentations to date, the United States submits that Brazil has not so proven. 
 103. With this in mind, the United States addresses the particular conclusions in the paragraphs 
identified by the Panel above: 
104. Paragraphs 7.1291 and 7.1295:  Paragraphs 7.1291 and 7.1295 of  the original panel report 
speak about marketing loan payments.  The origin al panel states in both these paragraphs that it 
considers that payments under the marketing lo an program "stimulate production and exports and 
result in lower world market prices than would prev ail in their absence."  However, the discussion of 
the reasoning underpinning the panel's conclu sion to this effect is very limited. 
 
105. The original panel states, in support of its conclusion, that "[w]e concur with Brazil, who 
cited certain USDA economists in support, that th e structure, design and operation of the marketing 
loan programme has enhanced production and trade-distorting effects."
116  The USDA economists 
cited by the original panel, however, simply ac knowledge that payments under the marketing loan 
program may have effects on production based on farmers' expectations about revenues from the 
market and the market loan program.117  Moreover, the footnote to this statement by the original panel 
notes that "[t]he fact that the United States notif ies the marketing loan programme as 'amber box' 
support under the Agreement on Agriculture may not necessarily be determinative for the purpose of 
our 'adverse effects' analysis under Part III of the SCM Agreement."118  Read together, the United 
States understands the original panel to be noting that the particular design and operation of the 
marketing loan program is such that it may have mo re than non- or minimally-trade distorting effects 
given the particular market conditions that pr evail.  The United States does not disagree.  
 106. Whether – under the particular market conditions  in any particular year – payments under the 
marketing loan program do in fact have such effect s and whether the effects give rise to such a degree 
of overproduction and export of excess production th at "significant" price suppression result is a 
question of fact.  That question requires an examination of the expectations of the upland cotton 
farmer about prices, payments, variable costs, yiel ds, weather and other such factors.  The evidence 
and arguments before this Panel that examine these expectations and the reactions of U.S. farmers to 
those expectations do not support a finding that ma rketing loan payments are having substantial 
effects on production, exports, and prices under th e prevailing market conditions.  Rather, the 
evidence shows that shifts in U.S.  planted acreage are consistent with the shifts one would expect if 
U.S. farmers were basing their planting decision s solely on market price signals and other 
considerations relevant to planting and production. 
 107. Paragraphs 7.1302:  Paragraphs 7.1302 of the original  panel report address counter-cyclical 
payments.  The original panel makes two main observa tions here.  The first is that "[w]e agree with 
the view of USDA economists that, due to their market-price contingency, CCPs may influence 
production decisions indirectly by reducing total and per unit revenue risk associated with price 
variability in some situations" and the second is that  there is an allegedly "strong positive relationship 
between upland cotton (base acre) producers recei ving annual payments and upland cotton 
production."  The United States does not disagree with  the former observation.  However, the very 
USDA economists whose views the original panel has noted have conducted further analysis and 
                                                     
 
116 Upland Cotton (Panel) , para. 7.1295. 
117 See e.g.,  "Analysis of the U.S. Commodity Loan Program with Marketing Loan Provisions," USDA, 
AER 801 (BRA-222). 
118 Upland Cotton (Panel) , para. 7.1295, n. 1401.  WT/DS267/RW 
 Page D-391 
 
 
explained that the degree of any such production eff ects is likely to be minimal and mitigated by a 
number of factors.  For example, Westcott notes in this regard that:  
(a) where prices are expected to be ab ove maximum threshold – counter-cyclical 
payments behave just like the fixed direct payments
119; 
 
(b) "cross-commodity effect[s] suggest[] that CCPs may provide a general reduction in 
revenue risks rather than a crop-specific effect. Net returns among alternative crops 
would remain the primary consider ation underlying production choices;"120 
 
(c) "while a number of studies indicate that  farmers are risk averse (Chavas and Holt, 
1990, 1996, for example), other risk reduction instruments already exist to manage risks. Thus, with revenue risk reducti on now provided by CCPs as part of farm 
programs, farmers may adjust their use of these other farm and nonfarm risk 
management strategies;"
121 and  
 
(d) "a large portion of output in  the U.S. agricultural sector is  produced by a small share 
of large producers. . . . Evidence that risk  aversion decreases as income rises (Chavas 
and Holt, 1990, 1996) suggests that risk av ersion may also tend to decline as the size 
of farms increases.  Thus, with larger farms that account for most production being less averse to facing risk, this lowers potential production effects of CCPs due to risk 
reduction.  And while smaller farms may be mo re risk averse in their farm enterprise, 
off-farm income may reduce the overall level of household income risk."
122 
 108. On the basis of these and other factors, West cott concludes that "there are several mitigating 
factors which suggest that overall production effect s of CCPs through revenue risk reduction are 
likely to be limited."
123  The United States agrees with that assessment.  Other studies submitted by 
the United States – for example, a 2007 study by Lin & Dismukes in which the authors found that "[t]he effect of CCPs on producers' planting decisions . . . appears to be very negligible – an increase 
in the acreage of major field crops of less than 1% . . . ."
124 – confirm that the effects of the counter-
cyclical payments are, in fact, likely to very limited.  These studies are important because – as discussed below – the counter-cyclical payment program had just come into effect at the time of the 
original panel proceeding.  Accordingly, the studi es available to the original panel were necessarily 
forward-looking and did not have much or any actual experience with the operation of program itself.  
The more recent studies incorporate deeper expe rience with, and understanding of, how the program 
operates in practice.  
109. Regarding the second observation, as the Un ited States has explained in response to 
Question 29 of the first set of questions from the Panel
125, the United States does not disagree that 
                                                      
119 Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act:  Production Effects 
Likely to be Limited" at 203 (Exhibit US-35). 
120 Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act:  Production Effects 
Likely to be Limited" at 204 (Exhibit US-35). 
121 Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act:  Production Effects 
Likely to be Limited" at 204 (Exhibit US-35). 
122 Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act:  Production Effects 
Likely to be Limited" at 204 (Exhibit US-35). 
123 Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act:  Production Effects 
Likely to be Limited" at 205 (Exhibit US-35). 
124 Lin, William and Dismukes, Robert.  "Supply Resp onse Under Risk:  Implications for Counter- 
cyclical Payments' Production Impacts ," Review of Agricultural Economic s–Volume 29, Number 1–Pages 64-
86, forthcoming, p. 83  (Exhibit US-85) (emphasis added). 
125 U.S. Answers to Parts D-E of First Set of Panel Questions, paras. 14-23. WT/DS267/RW  
Page D-392  
 
many holders of upland cotton base acres produce some amount of upland cotton.  However, the United States submits that this does not support the conclusion that payments under the 
counter-cyclical payment program cause  U.S. farmers to produce upland cotton.  To the contrary, the 
data show that:  
• On farms that have upland cotton base acr es (and thus may receive cotton counter-
cyclical payments), the ratio of cotton planted acres to total upland cotton base acres 
was only 60 percent in MY 2002-2005.  In other words, U.S. upland cotton farmers were planting only approximately 60 percent of the cotton acres that they planted in the historical period used to calculate base acres.   
 
• Second, a significant portion of U.S. upland cotton planted acreage (over MY 2002-
2005, an average of about 17 percent) is on farms with cotton planted acreage that exceeds cotton base acres, or, indeed, on farms with no cotton base acres at all. 
 
110. In the view of the United States, these facts confirm that U.S. farmers do, in fact, use the 
planting flexibility afforded by the direct and counte r-cyclical payment programs.  This is consistent 
with the fact that U.S. farmers base their produc tion decisions on market signals and are not somehow 
induced to plant upland cotton simply because they  hold upland cotton base acreage.  Moreover, the 
data above show that a significant – and growing pe rcentage – of cotton is grown on farms that do not 
hold any upland cotton base acreage or on planted acreage that is in excess of the upland cotton base 
acreage held by a farm.  That is, for these cotton farmers, there can be no link – even alleged – 
between cotton base counter-cyclical payments and current production because these farmers are growing cotton on acreage beyond their cotton base acreage, if any.   These are the facts that the 
United States considers to be the most relevant  because they focus on the level of upland cotton 
planting and production  and the relationship that these bear – if any – to payments.  Brazil's claim 
focuses on precisely this same relationship. 
 111. By contrast, the fact that many holders of upland cotton base acres produce some amount of upland cotton is hardly remarkable.  This just show s that upland cotton is of ten still produced on land 
that was historically planted to upland cotton ( i.e., at the time base acres were established).  Upland 
cotton is grown in a limited number of areas in th e United States, primarily in a few southern and 
western states, where the weather and other conditions  are ideal for upland cotton production.  Upland 
cotton was grown in these areas well before the c ounter-cyclical payment program came into effect 
and continues to be grown there now.  Continued pl anting of upland cotton on this farmland is not the 
effect of any government payment;  it is a function of  the fact that upland cotton can be grown easily 
in these areas but cannot be grown in others.  As th e United States has shown, cotton is grown in the 
same states and – in large part – the same counties in 2005 as it was in 1992, well before the counter-
cyclical payments came into effect.  The same woul d be true if one were to go back even decades 
earlier in time. Many of the same farms produce some upland cotton today for the same reasons that 
they did so at the time that base acres were enro lled and even in years before that – for example, 
farmers may have experience and expertise growin g upland cotton in those areas and know they can 
grow upland cotton with good results given the par ticular growing conditions in the region.  The 
continuity noted by the original panel does not s upport any finding that counter-cyclical payments are 
inducing  U.S. farmers to plant upland cotton to any significant degree. 
 112. Paragraphs 7.1349 and 7.1353:  These two paragraphs deal with the collective effects of the 
Step 2, marketing loan, and counter-cyclical paymen ts made in MY 1999-2002.  As that question is 
not before this Panel, the analysis therein is not  directly applicable here.  Nonetheless, the United 
States addresses the general reasoning in those paragr aphs.  In paragraph 7.1349, the original panel 
explains that "[w]e agree with the United States that 'the question is one of the nature of the subsidy 
examined and the degree of any predicted effect, wh ich could range from significant to negligible.'  
These price-contingent subsidies were, in our view, sufficient to cause the significant price 
suppression that we have found to exist in the same world market."  By contrast, here, Brazil has not  WT/DS267/RW 
 Page D-393 
 
 
even provided empirical substantiation that ther e is presently any significant price suppression let 
alone that marketing loan and counter-cyclical payments are the cause thereof.  Moreover, the 
evidence discussed above regardi ng how the marketing loan and counter-cyclical payments are 
actually operating at present and under the prevailing market conditions indicates that, contrary to 
Brazil's assertions, these payments are not having substantial effects on production, exports, or 
significant price suppressive effects on prices. 
 113. In paragraph 7.1353, the original panel expl ains that it considers "the divergence between 
United States producers' total costs of production a nd revenue from sales of upland cotton" to be a 
relevant consideration as to whether there are e ffects on production in the medium- to long-term."  
The original panel explains that " [f]ixed and variable costs  are the total amount which the producer 
incurs in order to produce the product and the total amount it must recoup, in the long-term, to avoid 
making losses.  To the extent that the producer ch arges prices that do not recoup the total cost of 
production, over time, it sustains a loss which must  be financed from some other source, or else the 
producer simply has to close down his business."
126   
 
114. The United States does not disagree that total costs of production are a relevant consideration 
and that over the long-term, farmers must recoup both fixed and variable costs.  As discussed below, 
in response to Question 59, however, the data indica te that the vast majority  of U.S. upland cotton 
production is economically viable in both the short- and the long-term without the marketing loan and 
counter-cyclical payments programs.  The vast majo rity of U.S. farmers met or exceeded their total 
fixed plus variable cash costs in almost each year  since the FSRI Act came into effect.  Moreover, 
cumulatively, over the long term, the U.S. fa rmers generated a cash surplus, not a deficit.127  T h e  
cumulative returns over the period 2000-2005 were a positive return of $161 per acre.  Moreover, for 
MY 2000-2006, the cumulative net returns are an (estimated) positive $133 per acre.128  These farmers 
were not, therefore, "sustain[ing] a loss" that they would have had to finance using marketing loan and 
counter-cyclical payments or other sources of inco me "or else . . . close down [their] business[es]."129   
 115. Indeed, while Brazil again asserts the kind of "d ivergence" that the original panel noted, the 
fact is that this "divergence" has been created by Brazil  by using the "total cost" data published by 
USDA.  As discussed below in response to Question 59,  these "total" costs were never intended to be 
used as an indicator of the long-term viability of upland cotton producers.  The data simply provide a 
stylized snapshot of one crop on a hypothetical fa rm to which USDA attributes not only average 
actual operating/variable costs of production but al so an allocated value for fixed cash costs and – 
even beyond that – an allocated value for economic  opportunity costs that, for the large part, do not 
ever have to be paid out.  Therefore, it is simply  inaccurate to suggest that a farmer would – in the 
absence of marketing loan and counter-cyclical payments – be forced to "close down [their] 
business[es]"
130 if they were not able to meet the "total" co sts reflected in the USDA data.  This is not 
only because of the nature of the data but because of  the fact that whether or not farmers will "close 
down [their] business[es]"131 depends on the overall cost-revenue  balance of the farm, not one 
enterprise of that farm.  116. Nonetheless, even despite the conceptual flaws in conducting an single-crop-specific 
assessment of "total costs"for purposes of assessing th e financial viability of an entire farm – let alone 
an entire sector of the agricultural economy ( i.e. upland cotton farmers) – the data indicate that the 
vast majority of U.S. upland cotton farmers are meeting not only their variable costs of producing 
                                                     
 
126 Upland Cotton (Panel) , para. 7.1353, n.1465. 
127 This analysis considers those items in the pu blished USDA figures that are true cash costs ( i.e. fixed 
and variable). 
128 See U.S. Comments on Brazil's "O ral" Statement, para. 77. 
129 Upland Cotton (Panel) , para. 7.1353. 
130 Upland Cotton (Panel) , para. 7.1353. 
131 Upland Cotton (Panel) , para. 7.1353. WT/DS267/RW  
Page D-394  
 
upland cotton, but they are generating e nough additional market revenue to cover both fixed cash 
costs and enough excess that they could – if they had to do so ( quad non ) – cover the kind of imputed 
economic costs that Brazil has attempted to include in its calculations.  These issues are addressed in 
further detail below in response to Question 59.  
55. Can the United States confirm that the figures "$868 million" and "$838 million" 
Brazil cited in para. 40 of its Opening Statement are correct figures if one uses the "Brazil's methodology" and the "Cotton-to-Cotton methodology"?  (Please note that the Panel is not asking whether the US agrees with these methodologies.)  
 117. These figures appear consistent with the so -called "Brazil methodolog y" and the "Cotton-to-
Cotton" methodology, respectively. 
 
56. The United States has cited new empirical research on the production effects of 
counter-cyclical payments.  How does th e United States address Brazil's criticism 
that none of this research has dealt specifi cally with the effects of countercyclical 
payments under the FSRI Act of 2002 on up land cotton?  (Rebuttal Submission of 
Brazil, para. 120)    
 
118. The United States believes the recent research regarding counter-cyclical payments is highly 
relevant to an assessment of the economic effects of such payments.  Recall th at when the panel made 
its original findings, the counter-cyclical payment program had just come into effect.  Thus, few 
studies were available based on empirical analysis or practical experience with the program to help the original panel in assessing the effects of payments therenunder.  119. Since that time, there have been a number of studies conducted regarding the effects of the 
program.  Much of research has, not surprisingly, been focused on those crops that account for most 
of the U.S. planted area – corn, soybeans, and wh eat.  But there is no reason to believe that the 
payments under the counter-cyclical program in re spect of upland cotton base acres would affect 
planting incentives in any materially differently way than would counter-cyclical payments in respect 
of other base acres.  To the contrary, studies such  as the 2005 Westcott analysis – which Brazil asserts 
"largely reaffirms his earlier qualitative findings" that  the original panel considered relevant – agree 
that any possible effect is likely to be "indirect " and only through "reduci ng revenue risk associated 
with price variability in some situations."
132  Westcott has explained that "cross-commodity effect[s] 
suggest[] that CCPs may provide a general reducti on in revenue risks rather than a crop-specific 
effect."133  This indicates that counter-cyclical paymen ts may have general revenue risk effects 
regardless of the base acres in respect of which the payments are made and regardless of the crop that 
is ultimately selected for planting.  Notably, while  Brazil has criticized other aspects of the Westcott 
analysis – despite citing his earlier analysis itself in its first written submission134 – it has not 
challenged this aspect of the Westcott reasoning.135  Nor has Brazil submitted any other evidence or 
studies to show that the counter-cyclical payments in respect of upland cotton base acreage  would 
necessarily have different effects with respect to upland cotton production than counter-cyclical 
payments in respect of base acreage for any other crop.  
 
120. In any event, the United States has submitted this research to provide a more robust basis – 
deriving from  tested and reviewed economic me thods – for understanding the operation of the 
counter-cyclical payment program and what the eco nomic effects on planting/production might be as 
a result of payments thereunder.  Especially in th e absence of any specific an alysis on counter-cyclical 
                                                      
132 Brazil Rebuttal Submission, para. 129. 
133 Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act:  Production Effects 
Likely to be Limited" at 204 (Exhibit US-35). 
134 Brazil First Written Submission, para. 128 (citing Upland Cotton (Panel) , para. 7.1302.)  
135 Brazil Rebuttal Submission, paras. 128-133.  WT/DS267/RW 
 Page D-395 
 
 
payments made with respect to upland cotton base acr es and upland cotton production, this research is 
important in providing context and guidance for ass essing the effects of counter-cyclical payments.  
As Brazil has provided no upland cotton-specific studies itself, it has no basis to criticize the United States in this regard.  The research  that has become available since the original panel, whatever its 
limits, fills an important gap in the understa nding and assessment of the counter-cyclical payment 
program and supports a conclusion that the effects on cotton production of counter-cyclical payments 
are likely to be minimal. 
57. The United States has offered the Lin and Dismukes (Exhibit US-34) and Westcott 
(US-35) studies as examples of new empirical research on the production effects of counter-cyclical payments. 
 
(a) Is it not more accurate to charact erize the Lin and Dismukes study as a 
simulation of the possible effect of countercyclical payments on production rather than a study on the actual impact of the payments since it does not statistically estimate the effect of th e actual payments (which began only 
in 2002) on crop production?  (Please refer to pages 9-12 of the paper 
which describe the data, covering the period 1991-2001, used for the study). 
 
121. The United States agrees that the Lin and Dismukes study aims to estimate the likely effects of the counter-cyclical payments.  As the United St ates recognized in its rebuttal submission, "Lin & 
Dismukes (2007) addressed the possible production impacts of counter-cyclical payments for 
the 2005 crop."
136 
 122. With respect to the data used by the Li n and Dismukes study, however, the United States 
submits one clarification.  Specifically, while the Lin and Dismukes study uses "state-level data for 
the North Central during 1991-2001 . . . cover[ing] ma jor field crops in this region" – corn, soybeans, 
and wheat – to estimate the "acreage response equations,"
137 the authors note that they "accurately 
reflect major characteristics of CCPs in analyzing the payments' potential production impact in the 
simulation analysis."138  Thus, the study takes into account the actual operation of the counter-cyclical 
payment program in assessing effects.  For ex ample, the authors use 2003 base acres and program 
yields for Illinois corn, soybeans, and wheat to determine a possible per-acre or per-unit counter-
cyclical payment (based on actual data).  Moreov er, the study takes into account recent market 
conditions (for example, "new crop futures prices in  mid February 2005 after adjusting for basis to 
arrive at the farm price equivalents") in assessing production effects.139   
 123. Indeed, the authors state that their "[a]nalysi s . . . seeks to answer the following question:  
'Given the market price scenario  for major field crops perceived by producers at planting decision 
times, how would CCPs have affected the plantings of 2005 major field crops in the North Central 
region?"
140  They submit that the use of input data from 1991-2001 – rather than more recent years – 
                                                      
136 U.S. Rebuttal Submission, para. 232. 
137 Lin, William and Dismukes, Robert.  "Supply Response Under Risk:  Implications for 
Counter-cyclical Paymen ts' Production Impacts ," Review of Agricultural Ec onomics–Volume 29, Number 1– 
Pages 64-86 , forthcoming, p. 68 (Exhibit US-85). 
138 Lin, William and Dismukes, Robert.  "Supply Response Under Risk:  Implications for 
Counter-cyclical Paymen ts' Production Impacts ," Review of Agricultural Ec onomics–Volume 29, Number 1– 
Pages 64-86 , forthcoming, p. 68  (Exhibit US-85) (emphasis added). 
139 Lin, William and Dismukes, Robert.  "Supply Response Under Risk:  Implications for 
Counter-cyclical Paymen ts' Production Impacts ," Review of Agricultural Ec onomics–Volume 29, Number 1– 
Pages 64-86 , forthcoming, p. 83  (Exhibit US-85). 
140 Lin, William and Dismukes, Robert.  "Supply Response Under Risk:  Implications for 
Counter-cyclical Paymen ts' Production Impacts ," Review of Agricultural Ec onomics–Volume 29, Number 1– 
Pages 64-86 , forthcoming, p. 81  (Exhibit US-85).  WT/DS267/RW  
Page D-396  
 
is reasonable because, inter alia , more recent input data to estimate the acreage response equations 
would likely not have "yield[ed] different results from those in the simulation analysis for the 2005 
crop."
141 
 
(b) How does the United States deal with Br azil's characterization of the Westcott study 
as offering no new empirical evidence, and instead, being a qualitative discussion, 
much like that presented to the original panel (see para 128 of Brazil's rebuttal)? 
 
124. The United States agrees that  the Westcott study does not present a quantitative assessment.  
It may be said to examine from a qualitative sta ndpoint how counter-cyclical payments operate and 
what effects they might have at different expected price levels.  While that study is similar to the 
Westcott analysis presented to the original panel,  it benefits from having had experience with the 
actual operation of the counter-cyclical payment program.    125. The United States recalls that the first Westcott study, which provided only a hypothetical 
assessment of the effects of the counter-cyclical payments, in the absence of any studies reflecting 
experience with the program itself, was the only evidence about the economic effects of counter-
cyclical payments presented by Brazil before the original panel.
142  The United States has now 
submitted a range of studies and re views, quantitative as well as qualita tive, to assist the Panel in 
assessing the effects of payments under the program.  As these studies and reviews show, the consensus view that is forming about the effects of  counter-cyclical payments is that the payments 
have no effects on crop-specific production decisions  and minimal effects on overall production.  The 
United States submits that this is  a highly relevant consideration in  assessing the present effects of the 
counter-cyclical payments on upland cotton production.  
58. The Unites States stated that the key co nsideration in assessing a farmer's decision 
to grow upland cotton is whether the farmer  has been covering his variable costs of 
production. In this connection, it presen ted upland cotton costs and returns 
estimates for marketing years 1999-2005 (Exhibit US-47).  Brazil has disputed the absence of certain items – land, labour and capital recovery costs - in the US 
calculations of variable costs.  In res ponse, the United States has referred to the 
Commodity Costs and Returns Estimation Handbook (Exhibit US-88) prepared by 
a Task Force of the American Agricultural  Economics Association as the basis for 
leaving out these items in its calcula tions.  However, the Task Force which 
authored the Handbook does not use the categories "fixed" or "variable" costs and in fact recommends that the microeconomi c concepts of fixed and variable costs 
not be used in preparing and reporting cost  and return estimates.  Page 2-67 of the 
Handbook states: 
 
The Task Force therefore recomm ends that costs should be 
categorized only as to whether they  are associated with expendable 
factors or the services of capital a ssets. The division of costs into 
categories such as fixed and vari able should generally be avoided 
in preparing CAR estimates. For the purpose of preparing CAR 
estimates for specific enterprises, the Task Force recommends that 
all the costs of all expendables be allocated to the generic group OPERATING COSTS and that all other costs be allocated to the group ALLOCATED OVERHEAD. 
                                                     
 
141 Lin, William and Dismukes, Robert.  "Supply Response Under Risk:  Implications for 
Counter-cyclical Paymen ts' Production Impacts ," Review of Agricultural Ec onomics–Volume 29, Number 1–
Pages 64-86 , forthcoming, p. 69  (Exhibit US-85). 
142 See e.g., Upland Cotton (Panel) , para. 7.1302  WT/DS267/RW 
 Page D-397 
 
 
Would the United States clarify whether the categories "operating costs" and 
"allocated overhead" correspond to the eco nomic concepts of fixed and variable 
costs?  In particular, are "operating cost s" variable costs or not?  Would the 
United States please indicate whether, an d if so, where, the Handbook makes these 
clarifications or distinctions.   
 
126. In presenting their analyses of costs, both the United States and Brazil have used the cost of 
production data published by the U.S. Department  of Agriculture's Economic Research Service 
("ERS").  As ERS states on its website, "[t]he co sts and returns estimation program uses surveys 
conducted about every 4-8 years for each commod ity as part of the annual Agricultural Resource 
Management Survey (ARMS), and methods that conf orm to standards recommended by the American 
Agricultural Economics Association (AAEA)."143 
 
(A) "Operating Costs" or "Variable Costs" 
 
127. ERS uses the term "operating costs" to describe those costs that are "expendable."  
 
"Expendable factors of production are raw materials, or produced factors that are 
completely used up or consumed during a single production period. Common examples of these factors that lose their id entity with a single use are seed, fuel, 
lubrication, some pesticides and fertilizer, feed, and feeder animals."
144 
128. The United States has used the ERS operating cost  data, but has at times referred to this data 
interchangeably as "variable cost" data, another comm only-used term.  To be clear the United States 
has not used this term to denote "variable costs, " as that terms is defined by the AAEA Handbook.  
Rather, it has used the term to simply refer to the operating cost data published by ERS. 
 
129. As explained in the U.S. rebuttal submission,  however, there are two items with respect to 
which the U.S. categorization of "operating" (or "variable") costs has differed from that used by 
ERS.145  First, the United States has included hired labor  as an operating cost.  This item raises several 
conceptual issues and even the ERS data have not  treated the item consistently over the years.  
Therefore, to be conservative, the United States included hired labor as an operating cost, not as an 
item of allocated overhead.  And, second, to isol ate the costs and revenues for the "subsidized 
product" that is the subject of Brazil's claims under Articles 5 and 6 ( i.e., upland cotton lint), the 
United States has adjusted both ginning costs and cottonseed revenue.  As the latter are ordinarily 
simply covered by proceeds gained by the gin fro m sales of cottonseed, the United States adjusted 
ginning costs to account for costs not covered by the revenue from cottonseed.146 
 
130. Despite having relied on the ERS data and cat egorization throughout this dispute, Brazil 
attempts in its rebuttal submission to bring in a new definition of "variable cost" that differs from the 
one used by ERS (and therefore also differs from "ope rating costs" within the terminology used in the 
AAEA handbook).147  Specifically, Brazil has attempted to include as "variable" or "operating" costs, 
costs that are not in fact "expendable in a single defined period" including land, unpaid labor, and capital recovery costs.  There is no support in the ER S approach to cost of production data nor in the 
AAEA Handbook nor in the agricultural economics lite rature for Brazil's argument that these are 
                                                     
 
143 Economic Research Service, Commodi ty Costs and Returns available at 
http://www.ers.usda.gov/data/CostsandReturns/  (Exhibit US-144). 
144 Commodity Costs and Returns Estimation Handbook , updated 09/30/2005, A Report of the AAEA 
Task Force on Commodity Costs and Returns, pp. 2-7 (Exhibit US-88). 
145 See U.S. Rebuttal Submission, paras. 326-343. 
146 See U.S. Rebuttal Submission, paras. 338-343 
147 Brazil Rebuttal Submission, paras. 254-283. WT/DS267/RW  
Page D-398  
 
"variable" or "operating" costs.  Nor is there an y support for Brazil's suggestion that farmers actually 
consider those costs in making year-to-year planting decisions regarding whether and what to plant.  
 (B) "Fixed Costs" and "Allocated Overhead" 
 
131. The concept of "allocated overhead" is more co mplicated than the concept of operating costs.  
As a review of the AAEA Handbook makes clear, it is mu ch broader than the con cept of fixed costs.  
Allocated overhead includes both allocated (fixed) cash  costs and imputed costs.  The latter are not 
actually expenditures that must be made but rath er are costs imputed b ased on the concept of 
economic opportunity cost.  It is this data regard ing "allocated overhead" (plus "operating"/"variable" 
costs)  that Brazil has referred to as "total costs" a nd that Brazil has used to a ttempt to show an alleged 
gap between U.S. farmers costs and revenue.
148 
 132. Neither "fixed costs" nor "allocated overhead" affect farmers' decisions regarding what to 
plant in each year.  As Brazil has acknowledged, if a "farmer would not be able to cover even variable 
costs, he or she would not plant an ything at all to minimize losses."
149  Conversely, where the farmer 
is covering his variable costs, it is economically rational for him to plant something .  The question is 
then what  to plant.  And that decision is made taking into account which crop will get the highest 
return after netting out variable/operating costs.  
59. In discussing the impact of long-term costs of production (and hence long-term 
profitability) of upland cotton production on farmers' decisions to exit cotton 
farming, the United States argues that income from other crops and off-farm income must be into account.   Why do es the United States consider these issues 
relevant given the original Panel's decision  that "off farm income" is not a legally 
relevant consideration.  (Panel Report, para. 7.1354, footnote 1470)  Please 
respond to Brazil's arguments on this ma tter in paragraphs 249-253 of its Rebuttal 
Submission. 
 
133. The United States considers that the questi on of "off-farm income" is important because it 
goes to Brazil's ability to prove one of the key facts that it asserts in this proceeding;  namely, that 
without marketing loan and counter-cyclical pa yments, U.S. producers would exit the business of 
upland cotton farming altogether or, in the original  panel's words, be forced to "close down [their] 
business[es]."
150   
 134. The United States recalls that it is a "generally  and consistently accepted and applied . . . rule 
that the party who asserts a fact . . . is  responsible for providing proof thereof."
151  To "prove" that 
U.S. upland cotton farmers would be forced to "close down [their] business[es]"152 in the absence of 
marketing loan and counter-cyclical payments, Brazil has presented a simple comparison of "total costs of production" for upland cotton – which comprise all operating costs, fixed cash costs, and imputed economic opportunity costs for capital, labor  and land – to market revenue.  Brazil asserts 
that there is a gap between these two figures which,  allegedly, proves the "economic irrationality" of 
producing upland cotton in the United States without marketing loan and counter-cyclical payments.  
Citing to the original panel report, Brazil asserts th at this shows that "upland cotton producers would 
have lost money over the longer term if they were involved in upland cotton production alone."
153   
 
                                                      
148 Brazil Rebuttal Submission, para. 249. 
149 Brazil Oral Statement, para. 67. 
150 Upland Cotton (Panel) , para. 7.1353. 
151 U.S. – Shirts and Blouses (AB) , p. 14. 
152 Upland Cotton (Panel) , para. 7.1353. 
153 Brazil Rebuttal Submission, para. 251 (citing Upland Cotton (Panel) , para. 7.1354, n. 1470).  WT/DS267/RW 
 Page D-399 
 
 
135. This evidence does not, however, prove the point s asserted.  The flaw is both in the nature, 
type, and amount of the costs that Brazil includes in its  total cost analysis but also in Brazil's analysis 
on the basis of those costs;  in particular, its flawed assumptions about how farmers make decisions 
about whether to stay in or go out of business.  The issue of off-farm income and income from other 
commodities is relevant to the latter.   
 
136. The United States will discuss the factual a nd conceptual problems in Brazil's arguments 
momentarily.  As a threshold matter however – and in response to the question from the Panel – the 
United States notes that whether or not a party proves the facts it asserts is always a "legally relevant" consideration.  It is no less true here.  Moreove r, as discussed above in response to Question 51, 
Brazil's claim in this case is under, inter alia , Article 6.3(c) of the SCM Agreement  which, by it terms, 
requires an examination of the actual  effects that the challenged subsidies have on the world market 
price of the allegedly subsidized product.  Since Brazil has alleged that the challenged measures cause 
significant world market price suppression by, inter alia , keeping U.S. upland cotton farmers in 
business who otherwise would have closed down their operations, it is imperative for Brazil to show 
that U.S. upland cotton farmers would actually ha ve done so absent marketing loan and counter-
cyclical payments.  The fact that U.S. upland co tton farmers actually make their decisions about 
whether or not to close their operations  based on the total costs and revenues for the farm  as a whole – 
including revenue from all crops as well as from off-farm sourc es – is necessarily a relevant and 
important consideration.  
137. The original panel's suggestion to the contra ry – and Brazil reiteration of that suggestion in 
this proceeding – appears to be based on the mist aken premise that there is some inconsistency 
between (a) the reference to "subsidized product"  and "like product" in Article 6.3(c) of the 
SCM Agreement and (b) and examination of the total cos t/revenue balance for a farm in assessing 
whether farmers would in fact cease their operati ons if they did not receive marketing loan and 
counter-cyclical payments.  There is no such inconsiste ncy.  The fact is that the effect that Brazil is 
attempting to attribute to marketing loan and c ounter-cyclical payments – permitting the farmer to 
avoid exit or bankruptcy – is itself a farm-wide, not an crop-specific, effect.  138. To the extent that marketing loan and counter-cyclical payments do have this kind of effect of 
keeping the farm in business, there is a conseque nt effect on the "subsidized product" only because 
upland cotton farming is one of the enterprises on the farm that continues on.  Any such effect with 
respect to the "subsidized product" – if proven – may be a valid consideration for purposes of the 
analysis under Article 6.3(c) of the SCM Agreement .  However, by using a proper analysis that 
focuses on whole farm revenue versus costs, the analysis tracks the actual  decision matrix of farmers, 
rather than assuming incorrectly that all upland cotton farms are single-crop farms that are devoted 
full-time to upland cotton production. 
 139. This brings us to the flaws in Brazil's approach .  Brazil attempts to paint a striking picture in 
which U.S. upland cotton farmers would have suffere d billions of dollars in losses – and widespread 
bankruptcies – if it had not been for marketing lo an and counter-cyclical payments under the FSRI 
Act.  To make this dramatic point Brazil, howev er, ignores fundamental facts about cotton farming in 
the United States and puts "total" cost data pub lished by USDA to a use for which it was never 
intended and is inappropriate.  As discussed above, Brazil's flawed approach based on "total costs" 
would show that U.S. farmers of most – if not a ll – fields crops were losing money year and after 
year.  Brazil's reasoning would have the Panel accept that almost 500 million acres of U.S. cropland – 
over 10 percent of the entire U.S. land mass – is be ing kept in production solely by marketing loan 
and counter-cyclical payments (even where a number of the crops do not even receive those 
payments).  The United States submits that these are absurd conclusions and ones that underscore 
perfectly the conceptual weakness in Brazil's appr oach – using the "total" costs published by USDA 
are simply not an appropriate means of assessing the financial viability of farms let alone of an entire 
agricultural sector. 
 WT/DS267/RW  
Page D-400  
 
140. For one, the "total" cost data is an averag e across all U.S. farms, ranging from very small 
retirement and residential farms to large non-family owed farms with sales in the millions of dollars.  
By presenting a single average for all such farms, the data obscures the fact that the vast majority of 
U.S. production  occurs on farms that are highly profitable.   As the United States has explained, the 
USDA survey data show that, in MY 2003, fully 92 percent  of U.S. production was on farms on 
which total revenue exceeded  not only all variable costs actually reported in response to the survey 
but also the cash costs allocated  to upland cotton by USDA and – indeed – even the items of 
economic opportunity cost included in "total" costs published by USDA.  The latter are, for the most part, not even actual expenditures that must be paid out.
154 
 
141. Not surprisingly, Brazil asks the Panel to simp ly ignore this data on the basis that it reflects 
costs/revenue for a marketing year – MY 2003 – in which U.S. upland cotton prices were high.  While 
it is true that prices in MY 2003 were high, however, that does nothing to undermine either the 
validity or the usefulness of this data.  Importantly, there is a substantial spread between the total cost 
figures and the market revenue figures for the lo w- and mid-cost producers that made up the 
92 percent figure.  In the case of the former , U.S. producers' market revenue was almost double  (or 
29 cents/lb more than) the "total" costs reflected in  the USDA data.  For the mid-cost producers, the 
difference is almost 10 cents/lb.  While prices di d fall in MY 2004 and MY 2005 this would simply 
have had the effect of lowering or eliminating the excess  above the "total" costs reflected in the 
USDA data.  It does not mean that substantially less production would be shown to be meeting all 
possible costs.  Moreover, Brazil fails to take into  account that with yields increasing in later years, 
costs also were likely to have fallen for these produ cers in those years.  Thus, there is no basis to 
assume that the results would have been substantially different in later years. 
 
Costs of Production for Cotton, by Cost Group, 2003  
Item Low-cost Mid-cost 
Operating costs 1/ ($/acre) 197.07 256.23 
Total costs ($/acre) 356.29 446.24 
  Operating costs ($/lb.) 0.20 0.33 
  Total costs ($/lb.) 0.35 0.57 
  Harvest month price ($/lb.) 0.64 0.67 
  Actual yield (lb per acre) 1,009 781 
 Share of production (%) 39 53 
1/ Includes hired labor.  Data on cottonseed value are no t available.  Using the average 2003 cottonseed revenue 
as a share of total value (13 percent), cottonseed value is  assumed to account for 13 percent of total value of 
production.  Ginning costs are then adjusted as described below. 
Source:  USDA155 
 
142. What this means is that, even if Brazil's arguments about "total cost" were true, they would 
only relate to a small fraction of U.S. production.  Nonetheless, Brazil's arguments – even about this 
small percentage of U.S. production – ar e actually not conceptually sound.   
 143. First, by using the crop-specific cost data published by USDA to reach conclusions about the 
financial viability of upland cotton fa rmers generally, Brazil's analysis assumes in effect that all U.S. 
upland cotton farmers produce nothing but upland cotton.  The fact is, however, that for agronomic 
and risk management reasons farmers in the United States would rarely, if ever, rely solely on the 
production of one crop, year after year.  A farmer  manages his farm in a manner to maximize net 
                                                     
 
154 See U.S. Oral Statement, paras. 72-74. 
155 Exhibit US-93 (WTO-CONFIDENTIAL).  WT/DS267/RW 
 Page D-401 
 
 
revenue from the entire operation, which could in clude producing various crops and livestock, and 
providing other agricultural services (such as custom  harvesting) to other producers.  A producer 
manages his or her farm in a manner to maximize net revenue from the entire operation, which could 
include producing various crops and livestock, a nd providing other agricultural services (such as 
custom harvesting) to other producers.156  The USDA cost of production data – and other similar cost 
data – do not purport to show the financial viability of a farm growing upland cotton that also relies 
on many other sources of income and incurs other costs.  Rather, it provides a stylized, abstract view of one single crop or livestock enterprise that an individual producer of upland cotton can look at as a kind of general benchmark to compare against his ow n costs and revenues.  The use of this data to 
extrapolate about the financial viability of upland cotton farmers generally or the entire U.S. upland 
cotton sector is simply not appropriate. 
 144. For example, the "total" cost figures used by Brazil include all the items under "allocated 
overhead," which are either not specific to upland cotton (in which case they are allocated expenses 
over all the crops and enterprises on a farm) or are not actual cash outlays (in which case they are 
economic costs arrived at through imputed values).
157  The AAEA Handbook explains at length the 
difficulties in concepts and methods of measuring a llocated costs such as general farm overhead.  For 
example:    
The third category [general farm overhead] is  usually referred to as general farm or 
business overhead and typically includes items for which it is difficult or impossible 
to determine the impact of the input on eith er output or cost for a specific enterprise .  
For example, it is difficult to determine the impact of buying a new set of Allen 
wrenches on the average corn yield per acr e or the impact of attending pesticide 
applicator training on cucumber gross returns.
158 
145. And further: 
 
"General overhead costs associated with operating a business are usually incurred at 
the total farm level, across all enterprise s, although in some instances these costs can 
be assigned to groups of products. Examples include liability insurance, subscriptions 
and dues, accounting and legal fees, shop tools,  equipment storage, road maintenance, 
and so forth. Allocation of these shared costs to individual enterprises is often 
difficult or impossible in anything but an arbitrary manner ."159 
146. While the USDA makes such allocations fo r purposes of presenting the published costs and 
returns data, there is no "allocation" of actual co sts on farms.  These costs are simply incurred and 
aggregated;  and they and must be paid in th e long-term using whatever net aggregate revenue 
remains after variable/operating costs are paid.  The assumption that U.S. farmers would "close down 
[their] businesses" based on a narrow crop-by-crop or enterprise-by-enterprise assessment of allocated 
overhead is unrealistic.160 
 147. The conceptual flaw in using the total cost data published by USDA to assess financial 
viability of farms and – more generally an entire secto r – are magnified by the fact that they include 
imputed opportunity costs.  For the most part, th ese are costs that have been calculated by USDA to 
                                                     
 
156 See e.g.,  U.S. Answers to Parts A-C of First Set of Panel Questions, para. 12 showing that only on 
average 47% of total farm revenue on upland cotton farms was from cotton. 
157 See U.S. First Written Submission, paras. 293-295 (December 15, 2006). 
158 Commodity Costs and Returns Estimation Handbook , updated 09/30/2005, A Report of the AAEA 
Task Force on Commodity Costs and Returns, p. 9-1 (Exhibit US-88). 
159 Commodity Costs and Returns Estimation Handbook , updated 09/30/2005, A Report of the AAEA 
Task Force on Commodity Costs and Returns, p. 9-1 (Exhibit US-88). 
160 Upland Cotton (Panel) , para. 7.1353. WT/DS267/RW  
Page D-402  
 
attribute some value to unpaid labor and owned land .  For example, if a farmer-operator has the skill 
to serve as a manager in a bank, the prevailing wage for that job might be attributed as the "opportunity cost" of working on the farm.  Similarl y, if a farmer owns his own land, the "opportunity 
cost" of using the land may be the value of rentin g it to some other operator.  There are inherent 
difficulties in valuing such items for which th ere is no market transaction or cash outlay.
161 
148. More importantly, however, these are not necessaril y costs that must be paid off in order for 
farmers to avoid having to "close down [their] business[es]."162  A farmer who owns his land does not 
have to pay anybody an imputed economic cost to acc ount for that fact.  According to available data 
from USDA's Agricultural Resource Management Survey, an estimated 66 percent of all farmland operated in 2003 was on owned land.
163  This means that – for this percentage of farmland – the 
attribution of an imputed economic cost (and the trea tment thereof as a kind of cash cost that must be 
paid on pains of closing down one's business) is simply not accurate.    149. Nor is it reasonable to suggest that farmers are behaving in an economically irrational way if 
they do not choose to close down their businesses simp ly because the total revenues – while sufficient 
to meet all the operating/variable and fixed cash  costs – do not meet these hypothetical imputed 
economic costs.  This ignores important factors, in cluding that farm owners may reasonably anticipate 
that their equity investment will gain in value and provide long-term returns.  That equity investment, 
therefore, has a value in addition to the annual returns of the commodities planted on the farm.  
Moreover, 98 percent of all farms in the United States are family farms and, in many cases, the farm is also home to the operators.
164  Given all of these realities, there is simply no reason to believe that a 
farmer will "close down [his] business" if he were m eeting his variable costs and even his total cash 
costs over the long-run but nonetheless could  – theoretically – make more money by renting or selling his land and taking some other job (e.g., as a teller in a nearby town).
165  Nor is reasonable to 
extrapolate such reasoning out to suggest that an entire agricultural sector is not economically viable 
without marketing loan and counter-cyclical payments. 
 
150. In sum, the use of the "total cost" data to extrapolate about the financial viability of an upland cotton farms generally or the entire U.S. upland co tton sector does not itself withstand scrutiny.  Nor 
does the reasoning underpinning that analysis;  in particular, the assumption that farmers make decisions about their farm based on narrow crop-by-crop or enterprise-by-enterprise analyses of the "total" costs published by USDA (variable costs plus  some allocation of fixed cash costs plus some 
hypothetical imputed economic costs). 
 151. The flaw in Brazil's reasoning is not only in its use of the crop-specific "total costs" as reflected in the USDA data in assessing the financial viability of upland cotton farmers but in its 
disregard of off-farm income – and income from ot her crops – that are an important part of his 
revenue.  For example, the United States has provi ded data showing that in MY 2002-2005, on 
average, only 47% of total farm revenue on upland cotton farms was from cotton.  That is, the majority of farm revenue (not even taking o ff-farm revenue into account) was coming from other 
production.  Off-farm revenue  adds substantially to that.  As  the United States explained in its 
                                                     
 
161 For example, the AAEA Handbook notes that "[w]he n a market transaction is not available to value 
a given expendable factor or capital service, methods th at will approximate the opport unity cost of the service 
are used. These methods are not as reliable as direct market valuation ." Commodity Costs and Returns 
Estimation Handbook , updated 09/30/2005, A Report of the AAEA Task Force on Commodity Costs and 
Returns, p. 2-11 (Exhibit US-88). 
162 Upland Cotton (Panel) , para. 7.1353. 
163 Hoppe, Robert and David Banker.  "Structure and Finances of US Farms:  2005 Family Farm 
Report."  Economic Research Service Economic Information Bulletin No.12, May 2006. (Exhibit US-67) 
164 Hoppe, Robert and David Banker.  "Structure and Finances of US Farms:  2005 Family Farm 
Report."  Economic Research Service Economic Information Bulletin No.12, May 2006. (Exhibit US-67) 
165 Upland Cotton (Panel) , para. 7.1353.  WT/DS267/RW 
 Page D-403 
 
 
first written submission166, in a study of changes in U.S. farm structure over the 20th century, Dmitry 
et. al.  (2005) noted that: 
 
[A]bout a third of farm operators worked off the farm for at least 100 days in 1930. . .  
By 1970, more than half of farms had o ff-farm income, and by 2000, 93 percent of 
farms earned off-farm income. Off-farm work has played a key role in increased farm 
household income;  while farm household income was once below the national average, in 2002 it exceeded the natio nal average by nearly $8,000.
167 
152. Examining specifically the role of off-farm  income in farm exits, Hoppe & Korb (2006) 
explained that: 
 
Off-farm work has become important to farm  operators.  About on e-third of farmers 
have worked off the farm at least 200 days per year —essentially full-time—since 
1978.  Off-farm work could hypothetically a ffect exits in two ways.  First, off-farm 
work may be the first step in an exit from farming, which would be  reflected in higher 
exits for farms the operators of  which work off-farm.  Second, off-farm work might 
lower the probability of exit by providi ng farm operator households with another 
source of income .168 
153. To date, Brazil has not submitted any literatu re, study, report, or empirical evidence to 
contradicts the evidence submitted by the United St ates regarding the consideration of whole-farm 
costs and revenues.  Nor has Brazil provided any evidence taking into account whole-farm costs and 
revenues that show that, absent the marketing lo an and counter-cyclical payment program, U.S. 
upland cotton producers would have  exited upland cotton farming.  
 154. When use of USDA's published "total" costs is matched with disregard of an important source 
of income for the farm
169, the picture that emerges of the financial viability of U.S. farmers is 
completely and thoroughly distorted.  It results in the attribution to marketing loan and counter-
cyclical payment "effects" that they are not in fact  having.  Such improper at tribution is inconsistent 
with Article 6.3(c) of the SCM Agreement  and cannot support a finding under that provision. 
 
60. In its Rebuttal Submission, the United States argues that Prof. Sumner's 
description of the model that appeared in a recent CATO publication is not 
"appropriate" for use in a WTO dispute involving claims of serious prejudice.  
Professor Sumner has since introduced "more empirical and institutional detail" to 
the model used in this dispute.  These changes are described in paragraphs 111-117 of Brazil's Opening Statement.  Does the United States view these changes as being 
sufficient to make the model appropriate for use in a WTO dispute involving claims 
of serious prejudice?  If not, what modifications does the United States think 
should have been made to the model? 
 
                                                     
 
166 U.S. First Written Submission, paras. 295-297. 
167 Dimitri, Carolyn et. al., The 20th Century Transformation of U.S. Agriculture 
and Farm Policy.  Economic Information Bulletin Number 3.  June 2005, pg. 2-3 (Exhibit US-45). 
168 Hoppe, Robert A. and Korb, Penni.  Understanding U.S. Farm Exits.  Economic Research 
Report 21.  June 2006, p. 20 (Exhibit US-46). 
169 Dimitri, Carolyn et. al., The 20th Century Transformation of U.S. Agriculture 
and Farm Policy.  Economic Information Bulletin Number 3.  June 2005, pg. 2-3 (Exhibit US-45) ("[A]bout a 
third of farm operators worked off the farm for at least 100 days in 1930. . . .  By 1970, more than half of farms had off-farm income, and by 2000, 93 percent of farms ear ned off-farm income. Off-farm work has played a key 
role in increased farm household income;  while farm household income was once below the national average, 
in 2002 it exceeded the national average by near ly $8,000"). WT/DS267/RW  
Page D-404  
 
155. The United States clarifies that it is Dr. Sumn er who has argued in his CATO publication that 
his model presented therein – which is virtually iden tical to the one Brazil presents here – "abstract[s] 
from many complexities that would be important to ge t more precise estimates" and that "[t]he simple 
model laid out here does not represent the depth of analysis that would be appropriate to support a 
trade remedy proceeding or a serious prejudice claim before a WTO panel."
170  The United States has 
simply agreed with Dr. Sumner. 
156. Although Brazil now alleges that Dr. Sumner  has made substantive improvements to the 
original CATO model, the model itself continues to "abstract from the many complexities" that 
exaggerate substantially the estimates obtained.  Th ese are factors that Brazil considered sufficiently 
important to include and tout in the FAPRI-based model used in the original proceeding.  For 
example, Dr. Sumner's model does not explicitl y address the acreage decision with appropriate 
modeling of the incentives to plant cotton relative to competing crops.  While the model analyzes a 
range of years, it does not incorporate any year-to-year market dynamics in its reported impacts.  The United States has addressed these and other fund amental problems with the model in its prior 
submissions as well as in its oral presentati on to the Panel, including that the model: 
 
• lacks cross-commodity impacts and cross- price elasticities, potentially leading to 
biased price effects; 
 
• is static with no explicit re lationships for changes in cott on stock levels and no stocks 
equation; 
 
• contains foreign supply elasticities that are different from FAPRI that underestimate 
the response of foreign producer s to changes in world prices; 
 
• treats production flexibility payments and direct payments differently even though 
they operate in the same way; 
 
• incorporates Step 2 payments directly into the producer revenue function as fully 
coupled payment;  and  
 
• appears to ignore statutory parameters, for example by including counter-cyclical 
payment rates in each of the various pri ce expectations that sometimes exceed the 
statutory maximum. 
 157. These structural and operational flaws are further compounded by the flawed econometric 
parameters used by the Sumner II model, resultin g in even greater exaggeration of any possible 
effects on prices.  As the United States demonstrat ed, between the original panel proceeding and this 
Article 21.5 panel proceeding, Brazil's economist changed every single elasticity estimate in the 
modeling exercise, except one (U.S. mill demand elasticity) to subs tituted an elasticity that would 
produce even greater impacts on production and pr ices than would even the elasticities used for 
purposes of the original modeling exercise.
171 
 
                                                      
170 Daniel A. Sumner.  "Boxed In:  Conflicts Be tween U.S. Farm Policies and WTO Obligations." 
Center for Trade Policy Studie s, The Cato Institute, Decem ber 2005.  (Exhibit US-108) 
171 Of course, many of the elasticities in the model us ed for purposes of the original proceeding were 
already overstated.  WT/DS267/RW 
 Page D-405 
 
 
Supply and Demand Elasticities Used in Sumner I and II 
 
Parameter Effects of change to Sumner II 
elasticity (impact on world 
price due to removal of 
marketing loans and counter-
cyclical payments) Sumner I (FAPRI) Sumner 
II(CATO) 
U.S. cotton supply elasticity INCREASED IMPACT  0.361 - 0.466 0.80 
ROW cotton supply elasticity INCREASED IMPACT  0.30 0.20 
US mill demand elasticity no change -0.20 -0.20 
US stocks demand elasticity INCREASED IMPACT  -1.40* no 
ROW mill demand elasticity INCREASED IMPACT  -0.25 -0.20 
ROW stocks demand elasticity INCREASED IMPACT  -0.463* no 
*Parameter estimate not presented in original Sumner model;  estimates drawn from FAPRI model 
documentation discussed in Annex I to the US Rebuttal Submission, paras 23-25. (Exhibit US-56, 
Exhibit US-109, Exhibit US-65) 
 
158. United States has also explained that Brazil applies a long-run elasticity for U.S. supply response while imposing very conservative short-r un elasticities for international supply and demand 
response.  If the analysis is to be performed in the long run – and the United States considers that it 
must for the reasons explained at the meeting with the Panel and in response to the panel's questions – 
then long-run elasticities must be assumed throughout the model.  There is no basis for the kind of 
mix-and-match approach that Brazil has adopted in an  effort to exaggerate any possible effects of the 
marketing loan and counter-cyclical payments.  
159. Another key source of bias in Dr. Sumner's analysis is the fact that it does not incorporate, 
either explicitly or implicitly, any stock behavior.
172  Yet, stock adjustments may have important 
effects on overall price movements in the short-run.   As future prices increase relative to current 
prices, warehouses will tend to carry more inventory,  choosing to sell their cotton in future periods 
when prices are higher.  Likewise, if current prices are high relative to futures prices, sellers find it 
more attractive to market their cotto n rather than holding it for sale in the future.  In this way, stocks 
act to buffer prices.  If prices fall, potential sellers will sell less and hold more in stock, thus potentially bolstering prices. If prices rise, inve ntory holders will sell st ocks, thus potentially 
dampening the increase.  Ignoring stockholding behavior in the kind of predominantly short-run assessment that Brazil attempts to conduct exacerbat es any possible effects of removal of marketing 
loans and counter-cyclical payments on world price. 
 160. In sum, the evidence and arguments before th e Panel show that the Sumner II model lacks the 
rigor or detail to address the complexities of the global fiber market.  Brazil's claims that Dr. Sumner has introduced "more empirical and institutional deta il" to the model used in this dispute does not 
alter the fact that it continues to "abstract from many complexities that would be important to get 
more precise estimates" and "does not represent the de pth of analysis that w ould be appropriate to 
support a trade remedy proceeding or a serious prejudice claim before a WTO panel."
173 
 
                                                      
172 The absence of such an analysis is especially remarkable given Brazil's new theory that it is stocks – 
not exports – that are suppressing world market prices. 
173 Daniel A. Sumner.  "Boxed In:  Conflicts Be tween U.S. Farm Policies and WTO Obligations." 
Center for Trade Policy Studie s, The Cato Institute, Decem ber 2005.  (Exhibit US-108) WT/DS267/RW  
Page D-406  
 
61. With respect to marketing year 2006, the United States has provided some data on 
upland cotton exports (Exhibit US-113),  planted and harvested area and cotton 
production (Exhibit US-114), as well as a copy of the National Cotton Council's 
survey of planting intensions (Exhibit US-115).   The data, all of which have been collected through the first half of mark eting year 2006, are variously qualified as 
"estimates" or "projections" or "projected." 
 
(a) Please clarify, as completely as possi ble, what these various terms mean as 
they apply to US upland cotton ex ports, acreage and production. 
 161. The data presented in Exhibit US-113, the Weekly Export Sales Reporting Data constitute 
neither a forecast nor a projection.  They are best  described as monitoring data.  Specifically, U.S. 
exporters are required to provide information to USDA's Foreign Agricultural Service ("FAS") on the 
quantity of their sales transactions, the type and class of commodity, the marketing year of the shipment and the ultimate destination.  They also report any changes in previously reported 
information, such as cancellations or changes in d estinations.  FAS compiles the data and publishes a 
weekly report. These reports provide a snapshot, on a continuing basis, of the level of U.S. export 
sales and commitments and allow interested partie s to assess export performance, compared to USDA 
or other export projections.  162. The data provided in Exhibit US-114 is from the USDA's World Agricultural Supply and 
Demand Estimates (WASDE) report, which provid es USDA's comprehensive forecasts of supply and 
demand for major U.S. and global crops and U.S. li vestock.  The report gathers information from a 
number of statistical reports published by USDA and other government agencies, and provides a 
framework for additional USDA reports.  Data for U.S. area and production are provided by USDA's 
National Agricultural Statistical Service, and are based on periodic surveys.  The WASDE typically 
provides data for 3 marketing years, including production and exports.  
 163. The terms "projections and projected" – both of  which mean the same thing – reflect a lower 
degree of certainty inasmuch as most numbers in the balance sheet are not yet "estimates.'  In May of 
each year, when the WASDE switches to the new marke ting year, the term "estimate" is then applied 
to the previous year's projections even though these numbers, for most crops, are not yet "final."  This 
is because the previous marketing year is not yet ove r.  For example, in May the wheat marketing year 
is nearly over while the marketing years for cotton and other spring planted crops have three to five 
months remaining.  For simplicity, and to avoid a crop by crop explanation, the numbers in the balance sheet are referred to as "estimates."  
164. The term "estimate" reflects a higher degree of certainty.  However, "estimates" and even 
"final estimates" are subject to change pending better or more complete information. Some estimates may be changed many years after the initial "final estimate" is published.  165. Data for the current marketing year (MY 2006)  are labeled as projections because final data 
for most variables covered are not yet available.  Data for the previous marketing year (MY 2005) are 
mostly final (for example, beginning stocks, acreag e, and production) but some data may not be 
complete (for example, exports and ending stocks).  Therefore, these data are still labeled estimates.  
Data for the prior year (MY 2004) are not labeled est imates or projections a nd are considered final, 
but they could still be revised.  Because the data  in the WASDE come from a variety of sources and 
could a multitude of products and variables, they ar e always subject to change and revision.  In May 
of this year (MY 2006), the figures for MY 2005 will become "final," the figures for MY 2006 will 
become "estimates," and new figures for MY 2007 w ill be "projected" (or deemed "projections"). 
 166. The National Cotton Council's (NCC) planting intentions is a projection for the upcoming 
season based on a survey sent to approximately 40 per cent of U.S. cotton farmers.  In mid-December  WT/DS267/RW 
 Page D-407 
 
 
through early January, farmers are surveyed regard ing their acreage for cotton and primary competing 
crops in the previous year and their intended plantings in the upcoming year. 
(b) Would the United States be able to provid e the Panel with some information, based 
on the average of the past six marketing years or so, of how final marketing year 
data on these variables, would differ from preliminary estimates, projections and 
the like, taken at the end of February of the relevant marketing year? 
 
167. The requested data, showing the February projections for the current marketing year 
compared to the final numbers, are provided in Exhibit US-145.  
168. The United States notes that each monthly version of the WASDE provides a reliability 
assessment of projections for that month compared to the final estimate, based on 25 years of data.  For example, for U.S. cotton exports for February 2007, the difference between the February projection and the final estimate has averaged 500,000 bales, or 7.1 percent.  The February projection 
has been below the final estimate 13 times and above the final 11 times.
174   
 
169. For the NCC survey, percent differences from the final acreage numbered have ranged 
between a low of 1.1 percent and a high of 8.5 percen t. The average error over the past six years in 1.7 
percent.175 
 
(c) Finally, would the United States be able to update that part of Exhibit US-83 
dealing with futures prices so as to provide the panel with as complete as possible 
average January to March 2007 New York  futures prices for upland cotton? 
 
170. A spreadsheet containing the most recent futures data for the December 2007 upland cotton 
contract is provided in Exhibit US-147.  Corn a nd soybean futures data are also provided in this 
exhibit. 
 Questions to Brazil
  
 
62. How does Brazil rebut the argument of the United States that the fact that 
marketing loan and counter-cyclical pay ment programmes provide income support 
when prices are low is not the key question before this Panel and that while, like 
any other payments to producers, marketing loan and counter-cyclical payments could affect production, Brazil has not pr ovided any evidence of actual production-
inducing effects?  (Rebuttal Submission of the United States, paras. 222, 287-291;  Opening Statement of the United States at the meeting of the Panel with the parties, 
paras. 62-75;  Comments of the United States on Brazil's 'Oral' Presentation in the 
meeting with the Panel, paras. 42-57) 
 63. Could Brazil explain whether or not it considers that whether marketing loan and 
counter-cyclical payments increase acreage is not relevant to the inquiry of whether these payments cause significant price suppression within the meaning of 
Article 6.3 (c) of the SCM Agreement?  (p ara. 56 of the Opening Statement of 
Brazil)  Could Brazil comment on the points made by the United States in 
footnote 72 of the Comments of the United States on Brazil's "Oral" Presentation in the meeting with the Panel?  
 
64. Given that Brazil has criticized th e new empirical research cited by the 
United States because it does not deal specifically with the effects of countercyclical 
                                                     
 
174 See February 9, 2007 WASDE (Exhibit US-114) 
175 See Exhibit US-146. WT/DS267/RW  
Page D-408  
 
payments on upland cotton production,  why does Brazil consider that the 
McIntosh, Shogren & Dohlam study (Rebuttal Submission of Brazil, para. 140) is particularly relevant to this case?  Coul d Brazil comment on the arguments of the 
United States in paragraphs 248-249 of the Rebuttal Submission of the United States? 
 
65. The United States has cited new empirical research on the production effects of 
counter-cyclical payments.  Could Brazil explain why the fact that these studies do not deal specifically with upland cotton should preclude the Panel from considering 
the studies as being highly probative? 
 
66. Can Brazil explain the differences between the figures for the amount of counter-
cyclical payments allocated to upland cotto n provided by Brazil at the meeting of 
the Panel with the parties (Opening Statement of Brazil, para. 40 and Exhibit Bra 625) and the figures in Table 5 of Brazil's Rebuttal Submission? 
 
67. Please confirm whether or not the Panel's understanding is correct: 
 
"Table 6" in Brazil's First Written Submi ssion was produced using the so-called 
"Brazil's method" using USDA data. 
 
"Table 5" in Brazil's Rebuttal Submission was produced using the so-called 
"cotton-to-cotton" methodology using USDA data. 
 
The figures cited in para. 40 of Brazil's opening statement (i.e. "$868 million and 
$838 million) are produced with the "Braz il's method" as well as the "cotton-to-
cotton" methodology, using the data provided by the United States in 
exhibit US-64. 
 
68. Please comment on the following statement by the US: 
 
"The United States understands that Brazil intends the counter-
cyclical payment figures shown in 'Table 5' of Brazil's rebuttal 
submission to supersede the counter-cyclical payment figures shown in 'Table 6' of its first written submission."  (US response to question 4 at para. 15)    
69. How does Brazil address the argument of the United States that "the only evidence 
that Brazil has submitted purporting to exam ine the price effects of marketing loan 
and counter-cyclical payments specifically are the results of the modelling exercise that it has conducted for purposes of this proceeding"?  (Opening Statement of the United States, para. 76)   
 70. How does Brazil respond to the United States' rebuttal that Brazil has not even 
established a temporal correlation between payment of subsidies and significantly 
suppressed prices during the life of the FSRI, that is from marketing year 2002 to 2005?  More specifically, please address th e United States' claim of the stability 
of US plantings, US share of world production, US share of world exports and the world price of cotton during this period. 
 
71. In the original case, the Panel conclude d that the analysis covering "the six-year 
period from 1997-2002 ... lends itself to an assessment of the medium- to longer-term examination of developments in the United States upland cotton industry" (see para. 7.1354 of the original panel report) .  Thus, total costs of production were  WT/DS267/RW 
 Page D-409 
 
 
the costs considered appropriate by the Pa nel.  Would total costs of production 
continue to be relevant should the complia nce Panel decide to use only marketing 
year 2005 as the reference period for analysis?   Or would variable costs of upland 
cotton farming in marketing year 2005 now be the relevant information to consider? 
 
72. Brazil has argued that the adjustment in co tton stocks should not be included in the 
simulation of a large and permanent reduc tion in subsidies to cotton. Please 
respond to the following argument: 
 
If the simulation were a comparative static analysis in which a 
baseline is compared to a counterfac tual outcome in some long-run 
state, modelling such adjustments would be unnecessary. But such adjustments should be taken into account given that the model is used to simulate the average impact on the world price of cotton 
(among other variables) on specific periods of time (MY 2002-05 or 
MY 2006-08) and not in the long run.   
73. How does Brazil respond to the argument made by the United States in 
paragraph 79 of its Opening Statement that: 
 
"to the extent a counterfactual assessment is undertaken, it is only 
to assess what the price equilibrium would be at present if 
marketing loan and counter-cyclic al payments had been lower, 
different or did not exist.  Article 6.3(c) does not ask what prices will look like in the short-run adjustment period if the marketing loan and counter-cyclical payments are suddenly eliminated... 
Brazil's argument that it is n ecessary to look at the short-run 
effects of total elimination of the programs cannot be accurate as a textual matter." 
More specifically: 
 
(a) Why did Brazil not consider it appropr iate to include simulations that 
involve reductions rather than elimin ation of the subsidy programmes?  
 
(b) If simulations of such scenarios a re performed, would the current values of 
the elasticities chosen (particularly the supply elasticities) to simulate the elimination of marketing loan and counter-cyclical programmes continue 
to be appropriate?   Please kindly provide an explanation for the chosen 
answer. 
 74. Brazil's view is that the data that th e Panel must consider for its claim of present 
serious prejudice should be that covering  the latest marketing year for which 
complete information is available, MY  2005, and where credible, evidence after 
31 July 2006.  Since in MY 2005, payments under Step 2 continued to be made by 
the United States (payments which the original Panel found to have contributed to adverse effects) how shall the Panel ascertai n that any adverse effects observed in 
marketing year 2005 are due solely to th e two subsidy measures which are the 
subject of the present serious prejudice claim – marketing loan and counter-
cyclical payments? 
 WT/DS267/RW  
Page D-410  
 
2. Increase in world market share - Article 6.3(d) of the SCM Agreement   
 
Questions to the United States
 
 
75. Could the United States explain further the textual basis of its argument that 
"Article 6.3(d) is not concerned with absolute market share and whether or not in 
any given year a member's market share wo uld have been lower if subsidies were 
removed"?  (Rebuttal Submission of the United States, para. 401) 
 
171. As the United States noted in its paragraph 401 of its rebuttal submission, the question under Article 6.3(d) is whether "the effect of the subsidy is an increase  in the world market share of the 
subsidizing Member . . . as compared to the averag e share it had during the previous period of three 
years and this increase follows a consistent trend over a period when subsidies have been granted."  
The first part of Article 6.3(d) requires a showing of an increase  – i.e., "the action, process, or fact of 
making or becoming greater."
176  This makes clear that what it at issue is movement, not something 
static like the absolute level of market share in a pa rticular year.  The concern of Article 6.3(d) is the 
movement from one thing – specifically, "the aver age share [the allegedly subsidizing Member] had 
during the previous period of three years" – to anothe r, the level in the year that is the subject of the 
claim.  If upward movement – i.e., "increase" or "growth" – is involved in getting from the former to 
the latter, and the upward movement is itself proven to be "the effect" of a challenged subsidy – the 
first element of Article 6.3(d) is satisfied.  The qu estion then is whether such an "increase" – again, 
that is shown to be caused by the subsidy – "follo ws a consistent trend ove r a period when subsidies 
have been granted."  172. By its terms, Article 6.3(d) does not address situations where a Members' market share is 
merely alleged be higher than it would be "but fo r" subsidies, as Brazil assumes in some of its 
arguments.
177  That is not "the effect" with which Article 6.3(d) is concerned. 
 Questions to Brazil
 
 
76. What is the view of Brazil on the argument of the United States that an inquiry 
under Article 6.3(d) of the SCM Agreement requires two distinct elements:  first, a 
demonstration of an increase in the world market share of a Member as compared 
to the average share it had during the p revious period of three years, and, second, a 
demonstration that this increase in world market share compa red to the average 
share the Member had during the previous period of three years is part of a consistent trend over a period when subsidies have been granted?  (Rebuttal 
Submission of the United States, para. 399) 
 77. In this connection, could Brazil respond to the argument of the United States that 
Brazil has not shown that either of these elements are met with respect to the marketing loan and counter-cyclical payme nt programs"?  (Rebuttal Submission of 
the United States, paras. 399-403) 
                                                     
 
176 The New Shorter Oxford English Dictionary  at 1350, Volume 1, (2002 Edition) (Exhibit US-148). 
177 See U.S. Rebuttal Submission, para. 401 (responding to Brazil's argument that, according to its 
model, removal of the marketing loan and counter-cyclical payment programs  would have resulted in lower 
U.S. market shar e in MY 2005).  WT/DS267/RW 
 Page D-411 
 
 
C. C LAIM OF BRAZIL REGARDING THREAT OF SERIOUS PREJUDICE  
 
Questions to both parties  
 
78. Could both parties comment on the statements of Canada that "(a)t issue is 
whether these programmes....threaten to cau se serious prejudice simply by virtue of 
their existence" and that "(c)ertain subsidy programs, by their very nature, give rise to a constant likelihood of support th at results in a permanent threat of serious 
prejudice"?  (Third Party Submission of Canada, paras. 9-10) 
 173. The United States does not consider Canada's as sertion of "the issue" to be accurate.  Brazil 
has asserted that "the appropriate standard of threat in Part III [of the SCM Agreement ] is one in which 
there is a significant likelihood, based on the nature of subsidies and particular conditions of 
competition , that serious prejudice will occur in the future."
178  While the United States disagrees that 
the "significant likelihood" is the appropriate sta ndard for assessing "threat" for the reasons set out in 
the U.S. rebuttal submission179, the United States has understood Brazil to be arguing that the question 
of threat must be determined on the basis of whether there is a significant likelihood of actual serious prejudice coming about given the particular market conditions and other factors in the future.  The 
United States has not understood Br azil to be arguing that marketing loan and counter-cyclical 
payment programs "by their very nature, give rise to  a constant likelihood of support that results in a 
permanent threat of serious prejudice," as Canada now argues. 
 
174. To the extent that Brazil now asserts that  such a question is "at issue," however, the 
United States notes the remarkable nature of the claim.  In effect, Brazil would be asserting that certain programs are "by their very nature" inconsistent with Article 6.3(c) of the SCM Agreement .  
The United States notes that the SCM Agreement  does not establish any such a category of measures.  
If drafters had agreed that there were such measur es, they could certainly provided for them, in much 
the same way that they did in Article 3.1(a) (m easures that are contingent upon export performance) 
and Article 3.1(b) (measures that are contingent on use of domestic over imported goods).  The fact 
that they did not do so in the case of measures that a llegedly "by their very nature" give rise to threat 
of significant price suppression indicates that they did not consider – and did not agree – that such measures exist. 
 
175. In any event, the question is one of fact.  If a Member considers that another Member's 
measures "by their very nature" give rise to threat of significant price suppression, the burden is on the complaining Member to prove it.  And – give n the remarkable nature of the assertion ( i.e., that certain 
measures are "by their very nature" WTO-inconsiste nt – the bar is high.  The complaining Member 
must prove that, even if no subsidies are likely to  be provided under the program and regardless of the 
amount if any that are provided – and regardless of what the market conditions are likely to be like in 
the future – the responding Member's program necessar ily "give[s] rise to a constant likelihood of 
support that results in a permanent threat of" signi ficant price suppression.  Even if Brazil were to 
have made such an claim, it has offered no empiri cal basis for such an ex traordinary finding here. 
 
79. Could the parties state their views on the analysis of the ordinary meaning of the 
term "threat" in paras. 15-28 of the Third Party Submission of Canada? 
 
176. Before responding to the Panel's question, the United States notes that Canada's arguments are 
in support of the assertion that "'threat' may be anal yzed both as a temporal concept as in Article 15.7, 
and as a probability of occurrence."
180  However, it appears from a plain reading of Article 15.7 of the 
SCM Agreement  that the meaning of "threat" therein incorporates not only a temporal concept 
                                                      
178 Brazil First Submission, para. 253 (emphasis added). 
179 U.S. Rebuttal Submission, paras. 406-413. 
180 Third Party Submission of Canada, para. 10. WT/DS267/RW  
Page D-412  
 
("imminent") but also a concept of the probability of occurre nce ("clearly foreseen").  Indeed, the 
United States has submitted that this simply reflect s the ordinary meaning of "threat," which includes 
"an indication of the approach of something unwelcome or undesireable"
181 and "a person or thing 
regarded as a likely cause of harm."182  The meaning of "approach," in turn, is, inter alia , "a drawing 
near in time or circumstances" "be nearly equal to ""[b]e so situated or arranged that the parts lie 
successively nearer to"183 and, as such, reflects a similar no tion of close proximity as the term 
"imminent."  The United States has, therefore, argued that the both concepts are important in 
assessing "threat of serious prejudice" under Article 5 of the SCM Agreement . 
 177. Canada appears to argue that in the case of "threat of serious prejudice" under Article 6.3(c), 
one must ignore the temporal aspect of "threat" alt ogether and – instead – consider some concept of 
probability alone.  Yet Canada offers  no explanation for why this key aspect of the term must ignored.  
Indeed, even its own articulation of the ordi nary meaning of "threat" – "an indication of something 
coming " – includes the same notion of "drawing near in time or circumstances"and "be[ing] nearly 
equal to""[b]e[ing] so situated or arranged that the parts lie successively nearer to"
184 that is reflected 
in the use of the term "immin ent" in Articles 15.7 of the SCM Agreement , Article 3.7 of the 
Agreement on Implementation of Article VI of  the General Agreement on Tariffs and Trade 
("AD Agreement "), and Article 4.1(b) of the Agreement on Safeguards  in describing the meaning of 
the term "threat."  178. To support its argument that there is no temporal aspect to the term "threat of serious 
prejudice" in Article 6.3(c), Canada asserts that such a concept would be inconsistent with the 
"opening phrase of Article XVI:1 of the GATT 1994."
185  According to Canada, that article "makes 
clear, it is not only the actual grant of a subsidy that allows for serious prejudice to be found.  Merely maintaining a program  that mandates payments deemed to be a subsidy causing adverse effects may 
therefore cause serious prejudice . . . ."
186  Canada appears to be confusing two distinct issues.  The 
first issue is whether a program itself ( i.e., the legislation/regulations providing for payments) may be 
deemed to constitute a subsidy  for purposes of the SCM Agreement  such that the "grant" or 
"maintenance" of it may be found to cause or threaten serious prejudice.  The second issue is whether or not the definition of "threat" of serious prejudi ce in Article 5(c)/footnote 13 requires a showing that 
the serious prejudice being "threatened" is not only like ly but also is soon to come.  The latter is the 
question that is at issue here in the interpretati on of the legal standard in Articles 5 and 6 of the 
SCM Agreement . 
 179. Canada also argues that "standard for thr eat of serious prejudice should [not] be imported 
from Article 15.7" of the SCM Agreement  because "[w]here a standard from another article or other 
agreement is to be used, the SCM Agreement  identifies that standard."  Canada incorrectly assumes 
that the United States has asked the Panel to "i mport" the standard from Article 15.7 of the 
SCM Agreement .  The United States has not done so and, in  fact, has expressly clarified this in its 
rebuttal submission.
187  Rather, the United States has argued that the ordinary meaning of "threat" of 
certain injurious effects – as reflected in Article 15.7 of the SCM Agreement , Article 3.7 of the 
AD Agreement , and Article 4.1(b) of the Agreement on Safeguards  – provides important contextual 
                                                      
181 The New Shorter Oxford English Dictionary  at 3290, Volume 2, (1993 Edition) (Exhibit US-104).  
Brazil appears to agree that this is ordinary meaning of "threat."  Brazil First Submission, para. 247 ("The term 
'threat' can refer to 'an indication of the approach of something unwelcome or undesireable' . . . ."). 
182 The New Shorter Oxford English Dictionary  at 3291, Volume 2, (1993 Edition) (Exhibit US-105) 
(emphasis added). 
183 The New Shorter Oxford English Dictionary  at 102, Volume 1, (1993 Edition) (Exhibit US-106). 
184 The New Shorter Oxford English Dictionary  at 102, Volume 1, (1993 Edition) (Exhibit US-106). 
185 Third Party Submission of Canada, para. 18. 
186 Third Party Submission of Canada, para. 18. 
187 U.S. Rebuttal Submission, para. 411.  WT/DS267/RW 
 Page D-413 
 
 
guidance in interpreting "threat" of serious prejudice in Article 5(c)/footnote 13 of the SCM Agreement . 
 180. As the United States has explained, interpreti ng the meaning of "threat" in this way is not 
only the proper approach under customary rules of treaty interpretation
188, but it makes sense given 
that all three provisions serve a similar function – they identify the same narrow circumstance in 
which it may be appropriate to discipline a Member's measures notwithstanding that the measures are 
not prohibited per se  and are not necessarily causing any injurious effects or prejudice.  Under all of 
these provisions, the Member's measure can be subj ected to discipline only if there nonetheless a 
proper showing of "threat" of injurious effects or se rious prejudice sufficient to justify the application 
of a remedy (whether it is multilateral, in the case of a WTO claim based on Article 5(c)/footnote 13, 
or unilateral, in the case of an antidumping or coun tervailing duty or safeguard investigation).  The 
elaboration of "threat" in the latter three contexts  – specifically, underscoring the sense of probability 
and proximity in time, consistent with its or dinary meaning – is undoubtedly important in 
understanding the use of the same term in the former context. 
 
181. Canada has not explained why – in the context of this proceeding – the customary rules of 
treaty interpretation should not apply.  Nor has Ca nada explained why a panel must wait for an 
express cross-reference in order to consult, as contex t, the meaning of the same term as it is reflected 
in other provisions of the same  agreement as well as in provisions of other agreements, all of which 
deal with analogous questions involving the "threat of material injury" and "threat of serious injury."  
To the contrary, what Canada's own arguments make clear is that a cross-reference is used in the 
SCM Agreement  where a term is given a special meaning in one place – for example, "injury to the 
domestic industry" in Part V of the SCM Agreement , "nullification or impairment" in the GATT 1994, 
and "serious prejudice to the interests of anot her Member" in Article XVI:1 of that GATT 1994 – 
such that it is necessary to cl arify when the term is used "in the same sense" elsewhere. 
 
182. By contrast, a panel may consider the ordinary meaning of a term as reflected in one provision to interpret the same term in another pr ovision (especially of the same agreement) without 
the need for an express cross-refere nce.  Indeed, if a panel could not do so, this Panel would err (as 
the original panel also would have done) by co nsidering the definition and requirements for an 
"export subsidy" finding in the SCM Agreement  as contextual guidance in interpreting the term 
"export subsidy" in the Agreement on Agriculture .  There is certainly no "cross-reference" in either 
agreement that expressly authorizes a panel to cons ider the former as contextual guidance for the 
latter, yet no Member has argued that this prevents the Panel from doing so. 
 183. Indeed, it is curious that while Canada asserts  that "one must look to the specific language 
and context of an agreement to determine the standard to be applied to a given analysis," it asserts that 
the appropriate analog for "threat" in Article 5(c)/footnote 13 is in Article 10.1 of the Agreement on 
Agriculture , a provision that deals with circumvention of bound export subsidy commitments, not any 
sort of injurious or adverse effect.
189  Unlike the circumvention provisions in Article 10.1 of the 
Agreement on Agriculture , all four of the provisions mentioned above – threat of serious prejudice in 
Article 5/footnote 13 of the SCM Agreement , threat of material injury in Article 15.7 of the 
SCM Agreement , threat of material injury in Article 3.7 of the AD Agreement , and threat of serious 
                                                      
188 For example, that treaty terms are to be interpre ted "in accordance with the ordinary meaning to be 
given to the terms of the treaty in their contex t and in the light of its object and purpose."  See United States – 
Gasoline (AB) , p. 17 (noting that "[this] general rule of interpretation [codified in Article 31 of the Vienna 
Convention on the Law of Treaties ] has attained the status of a rule of customary or general international law.  
As such, it forms part of the 'customary rules of interp retation of public internationa l law' which the Appellate 
Body has been directed, by Article 3(2) of the DSU, to apply in seeking to clarify the provisions of the General Agreement and the other 'covered agreements' of the Marrakesh Agreement Establishing the World Trade 
Organization. . . .) 
189 Third Party Submission of Canada, para. 23. WT/DS267/RW  
Page D-414  
 
injury Article 4.1(b) of the Agreement on Safeguards  – deal with threat of adverse or injurious effects.  
Given Canada's own assertion that  it is important to consider the language and context of the 
provision in ascertaining the meaning, it is not clear why the analysis of "threat of circumvention" under the Agreement on Agriculture  should be more important contextual guidance than these closely 
analogous provisions of the SCM Agreement itself , the AD Agreement , and the Agreement on 
Safeguards .
190 
 184. Finally, the United States notes Canada 's assertion that two GATT reports from 1979 
and 1980 support the finding that the "meaning of threat  is flexible" such that a "permanent source of 
uncertainty in world sugar markets . . . gave rise  to a threat of serious prejudice in the sense of 
Article XVI:1."
191  The United States does not agree.  There is no discussion whatsoever of the legal 
standard for "threat" of serious prejudice in e ither of the two GATT reports cited by Canada ( EC – 
Sugar (Australia)  and EC – Sugar (Brazil) )192, let alone any assessment of whether there is a temporal 
aspect of that term (as clearly indicated by its ordinary meaning).  Nor – obviously193 – is there any 
assessment of the meaning of the term given the particular context ( i.e., looking to the use of that term 
in Article 5/footnote 13 of the SCM Agreement  in the light of the term threat of material injury in 
Article 15.7 of the SCM Agreement , threat of material injury in Article 3.7 of the AD Agreement , and 
threat of serious injury in Article 4.1(b) of the Agreement on Safeguards ).  Indeed, the analysis in 
those reports appears to depend on certain assumptions about Members' obligations to prevent  the 
sanctioned thing from occurring194, obligations that the Appellate Body has since clarified are not an 
intrinsic part of "threat."195  The analysis in those reports – what little of it there is – provides little to 
no guidance in assessing the questions of threat imp licated by Brazil's claims in this proceeding. 
 
                                                      
190 Canada's further assertion that "very object and purpose" of the SCM Agreement  "demonstrates that 
the standard for threat of serious prejudice may be distinct from that of threat in the cas e of material injury" does 
not appear logical.  Third Party Submission of Canada, para. 25.  The United States is not arguing, of course, that "the standard for threat of seriou s prejudice" is the same as "that of th reat in the case of material injury." 
Nonetheless, even leaving that as ide, one would assume that the sa me "object and purpose" of the 
SCM Agreement  applies to all of its parts.  Therefore, if – as Canada asserts – "the object and purpose of the 
SCM Agreement  is the establishment of multilateral disciplines 'on the premise that some forms of government 
intervention distort international trade, [or] have the potential to distort [international trade]," one would expect 
that this would apply to both Part III and Part V of the SCM Agreement .  It is, therefore, unclear how the same  
object and purpose establishes a different  "standard" for threat in the two contexts. 
191 Third Party Submission of Canada, para. 24. 
192 Third Party Submission of Canada, para. 24 (citing to  EC – Sugar (Australia) , BISD 26S/290, 
para. (h) of conclusion and EC – Sugar (Brazil) , BISD 27S/69, at para. (g) of conclusion.  
193 Those reports predate these agreements. 
194 For example, emphasizing the absence of "pre-established effective limitations on in respect of 
either production, price, or the amounts of export refunds," the panel in EC – Sugar (Brazil)  found that 
"[n]either the system not its application would prevent  the European Communities from having more than an 
equitable share of world export trade in sugar.  The Panel, therefore , concluded that the Community system and 
its application constituted a permanent source of uncertainty in world sugar markets and therefore  constituted a 
threat of serious prejudice in terms of Article XVI:1."   EC – Sugar (Brazil) , BISD 27S/69, at para. (g) of 
conclusion (emphasis added).  
195 Rejecting Brazil's arguments that a program that allegedly provided "unlimited" subsidies 
necessarily posed a "threat" within Article 10.1 of the Agreement on Agriculture , the Appellate Body explained 
that  
[W]e are [not] prepared to accept Brazil's sugges tion that the concept of 'threat' in Article 10.1 
should be read in a manner that requires WTO Members to take 'antic ipatory or precautionary' 
action.  The obligation not to apply exports subsidies in a manner that 'threatens to lead to' 
circumvention of their export subsidy commitments does not extend that far.  There is no basis in Article 10.1 for requiring WTO Members to ta ke affirmative, precauti onary steps to ensure 
that circumvention of their export subsidy reduction commitments does not occur" 
Upland Cotton (AB) , para. 707.  WT/DS267/RW 
 Page D-415 
 
 
Questions to the United States   
 
80. How does the United States address the argument of Japan that in view of the 
different purposes of Parts III and V of the SCM Agreement the standard for determining threat of material injury in Article 15.7 of the SCM Agreement is an 
inappropriate standard for determining the existence of a threat of serious 
prejudice under Part III of the SCM Agreem ent?  (Third Party Submission of 
Japan, paras. 8-12.)  
 
185. The United States understands Japan's argument to  be that there are allegedly different objects 
and purposes of Parts III and V of the SCM Agreement  and that these preclude the Panel from 
considering the ordinary meaning of "threat" of certain  injurious effects, as reflected in Article 15.7 of 
the SCM Agreement , Article 3.7 of the AD Agreement , and Article 4.1(b) of the Agreement on 
Safeguards  as important contextual guidance in interpreting "threat" of serious prejudice in 
Article 5(c)/footnote 13 of the SCM Agreement .  The United States does not agree. 
 
186. First, the obligation to interpret treaty term s "in accordance with the ordinary meaning to be 
given to the terms of the treaty in their context and in the light of its object and purpose" as codified in 
Article 31(1) of the Vienna Convention "forms part of the 'customary rules of interpretation of public 
international law' which the Appellate Body [and pane ls] ha[ve] been directed, by Article 3(2) of the 
DSU, to apply in seeking to clarify the provisions  of the General Agreement and the other 'covered 
agreements' of the Marrakesh Agreement Esta blishing the World Trade Organization. . . ."
196  T h e  
Appellate Body has explained that:    
[i]t is well accepted that the use of the si ngular word 'its' preceding the term 'object 
and purpose' in Article 31(1) of the Vienna  Convention indicates that the term refers 
to the treaty as a whole;  had the term ' object and purpose' been preceded by the word 
'their', the use of the plural would have indicated a reference to particular 'treaty 
terms'.  Thus, the term 'its object and purpo se' makes it clear that the starting point for 
ascertaining 'object and purpose' is the treaty itself, in its entirety."
197   
187. Japan's analysis does not attempt to interp ret "threat" in Article 5/footnote 13 of the 
SCM Agreement  "in accordance with the ordinary meaning to  be given to the terms of the treaty in 
their context and in the light of [the] object and purpose" of the treat itself, in its entirety .  Rather, 
Japan appears to ascribe a different "object and purpose" to different parts of the treaty.  In this case, it 
asserts that the object and purpose of Part V, in general – and Article 15, in particular – is to "limit the 
discretion of national authorities and guarantee agai nst misuse."  Japan does not specify what the 
object and purpose of Part III is, but indicates that it is different from that of Part V.  According to 
Japan, "Part III issues are completely devoid of conc erns relating to limiting the discretion of national 
authorities to prevent misuse thereof in the conduct of domestic CVD investigations [as] no national 
authority is involved."  Japan asserts that this a lleged difference in the object and purpose of these 
parts of the treaty requires the Panel to disregard the "ordinary meaning" of the term threat as 
reflected in Article 15.7 of the SCM Agreement , Article 3.7 of the AD Agreement , and Article 4.1(b) 
of the Agreement on Safeguards  and the contextual guidance provided by those provisions in 
interpreting "threat" of serious prejudice in Article 5(c)/footnote 13 of the SCM Agreement .  The 
                                                      
196 United States – Gasoline (AB) , p. 17. 
197 EC – Chicken Classification (AB) , para. 238.  The Appellate Body has explained that it may be 
possible to consider the "the object and purpose of particular treaty terms" but only "if doing so assists the 
interpreter in determining the treaty's object and purpose on the whole" and the focus is on "ascertaining the 
common intentions of the parties."  EC – Chicken Classification (AB) , para. 238-239.  As noted above, Japan 
does not even discuss "the treaty's object and purpose of the whole," let alone how the different purposes it 
ascribes to the parts of the SCM Agreement  relate to that "object and pu rpose of the whole" or how the 
interpretation of "threat" in Article s 5(c)/footnote 13 and 15.7 of the SCM Agreement  follow from there. WT/DS267/RW  
Page D-416  
 
United States submits that this constitutes a serious  misapplication of the customary rules of treaty 
interpretation.  188. Second, Japan has provided no basis for its assertion that the object and purpose of Article 15.7 is to "limit the discretion of nationa l authorities and guarantee against misuse" and that, 
as a result, the meaning of "threat" in that context is necessarily different from the meaning of "theat" 
in Article 6.3(c).  The United States sees nothing in Article 15.7 that suggests that Members assumed 
that national authorities would necessarily "misuse" thei r discretion and that they therefore infused the 
language in Article 15.7 with special meaning that is  not relevant elsewhere.  To the contrary, both 
Article 5/footnote 13 and Article 15.7 of the SCM Agreement  appear, to the United States, to be 
consistent with the Appellate Body's explanation of the "object and purpose of the SCM Agreement, 
which is to strengthen and improve GATT discip lines relating to the use of both subsidies and 
countervailing measures, while, recognizing at the sa me time, the right of Members to impose such 
measures under certain conditions."
198  This recognizes the fact that SCM Agreement  strikes a balance 
between the right to maintain subsidies in some circumstances and the right to discipline them in 
others.  Article 5/footnote 13 and Article 15.7 of the SCM Agreement  both function to establish such a 
balance.  There is no basis for understanding the sam e terms in the two provisions to have different 
meanings based on an assumption that national authorities are necessarily prone to "misusing" their discretion whereas WTO panels are not.  189. Third, Japan asserts in support of its argument that "[t]he original Panel in this proceeding 
properly recognized that ASCM Part V, for a va riety of reasons, may not be proper context for 
interpreting and applying Part III."
199  However, the paragraph of the original panel report to which 
Japan cites provides exactly the opposite.  It states e xpressly that "[o]n the basis of the text of Part III, 
and for the reasons that follow, we are of the view that, while they may provide contextual – and 
general conceptual – guidance , the more precise quantitative concepts and methodologies found in 
Part V of the SCM Agreement  are not directly applicable in our examination of Brazil's actionable 
subsidy claims under Part III of the SCM Agreement ."200  This is precisely what the United States has 
argued – that the ordinary meaning of the term "threat" as reflected in Article 15.7 of the 
SCM Agreement , Article 3.7 of the AD Agreement , and Article 4.1(b) of the Agreement on Safeguards  
is important contextual guidance in interp reting "threat" of serious prejudice in 
Article 5(c)/footnote 13 of the SCM Agreement .   
 
190. The fact that it is appropriate to consult that  ordinary meaning has not only been confirmed by 
the original panel but even by Japan itself.  I ndeed, shortly following the paragraph noted above in 
Japan's third party submission, Japan argues that Br azil's preferred "significant likelihood" standard – 
found nowhere in the text of the SCM Agreement  – "is incomplete as it does not include an explicit 
evidentiary requirement.  An explicit evidentiary requirement such as that set forth in the first 
sentence of ASCM Article 15.7 is a crucia l component of any 'threat' standard."201  It is unclear why – 
if Article 15.7 cannot provide contextual guidance in interpreting "threat" under Article 5/footnote 13 
– Japan would note the fact that there is an "e xplicit evidentiary requirement" included in that 
provision.  Japan's reasoning appears to recognize th at an evidentiary requirement is an important 
aspect of any claim of threat, and that the requirements set out in Article 15.7 provide important 
contextual guidance in determining the evidentiary  requirements that must apply in the case of 
"threat" claims under Article 5/footnote 13.  The ap proach is virtually the same for understanding the 
ordinary meaning of "threat" in those provisions. 
 
                                                      
198 U.S. – Lumber CVDs Final (AB) , para. 95. 
199 Third Party Submission of Japan, para. 10 and n. 12(citing Upland Cotton (Panel) , para. 7.1167). 
200 Upland Cotton (Panel) , para. 7.1167 (emphasis added).  
201 Third Party Submission of Japan, para. 13.  WT/DS267/RW 
 Page D-417 
 
 
81. How does the United States respond to the argument of Australia that "it is beside 
the point for the United States to argue that the programmes under consideration 
are due to expire in late 2007"?  (Third Participant Oral Statement of Australia, 
para. 13) 
 191. The United States strongly disagrees with Australia's argument that, in assessing threat of 
serious prejudice, "it is beside the point for the United States to argue that the programmes under consideration are due to expire in  late 2007. The programmes have not expired.  There is no guarantee 
that they will not be rolled over or maintain ed in another form with adverse effect."
202 
 
192. First, Australia's observation that "the progr ammes have not expired" misses the point.  If 
they had already expired, Brazil would simply have no basis for any claim with respect to those 
measures in the present compliance proceeding;  those programs would already been withdrawn.  193. Second, the Panel's mandate is to address th e "matter" before it – namely, to address Brazil's 
claims with respect to any measures that are m easures taken to comply and properly identified in 
Brazil's request for panel establishment.  To the ex tent that the marketing loan and counter-cyclical 
payments can be deemed "measures taken to comp ly" with the recommendations and rulings of the 
DSB
203, the question for the Panel is whether Brazil has proved its claims of "threat of serious 
prejudice" with respect to the measures as identified in Brazil's request for panel establishment.  The 
Panel's mandate does not extend to speculating about whether there may or may not be new measures 
in place after the marketing loan program and counter-cyclical payment programs in the FSRI Act 
expire, what the form of those new measures may or  may not be, or whether any such other measures 
may or may not cause adverse effects under market cond itions that may or may not exist in the future.  
Indeed, the original panel explained that where a measur e is not in existence at the time that a panel is 
established, there is no basis for a complaining party to include it in its request for panel establishment 
and, therefore, it cannot form part of a Panel's terms of reference: 
 
The 'matter' referred to the DSB by Braz il in document WT/DS267/7 consisted of the 
measures and claims set out in that documen t which was dated 6 February 2003.  On 
that date, the Agricultural Assistance Act of  2003 did not exist, had never existed and 
might not subsequently have ever come into  existence.  Brazil anticipated adoption of 
that Act in its panel request and its claim in respect of that Act was entirely 
speculative.  Therefore, Brazil could not refer it to the DSB at that time and it does not form part of the Panel's terms of reference.
204 
194. Third, the original panel explained that "[w]e consider it axiomatic that the nature of a given 
subsidy may play an important ro le in determining its effects."205  The fact that no subsidies may be 
granted because the program authorizing them is itself due to expire as of a date certain is 
undoubtedly important in assessing whether "the eff ect" of the challenged subsidies is threat of 
serious prejudice as claimed by Brazil.  Indeed, to the extent that Brazil's challenge extends to the 
programs and payments in the future, that fact goes to an even more fundamental question of whether 
there will even be a "subsidy" in the time period at issue.  
195. For the reasons above, Australia's assertion that 'it is beside the point for the United States to 
argue that the programmes under consideration are due to expire in late 2007" is without merit.
206 
 
                                                      
202 Oral Statement of Australia, para. 13. 
203 And for the reasons set out in the U.S. submissions the United States does not consider that they can 
be so defined. 
204 Upland Cotton (Panel) , para. 7.158. 
205 Upland Cotton (Panel) , para. 7.1191. 
206 Oral Statement of Australia, para. 13. WT/DS267/RW  
Page D-418  
 
82. Could the United States comment on the projections of marketing loan and 
counter-cyclical payments in Table 26 of Brazil's First Written Submission and on the projections of prices and subsidy paymen ts in Table 27 of Brazil's First Written 
Submission?  Could the United States explain how the data in these Tables support its argument that producers are likely to expect low or no marketing loan payments 
in MY 2007?  (Rebuttal Submission of the United States, para. 418)  
 
196. As the United States explained in its para graph 419 of its rebuttal submission, an ICAC 
market report released on February 1, 2007, projects the A-index at 59 cents/lb in MY 2006 
and 66 cents/lb in MY 2007.  This would be almost  the same level achieve d in MY 2003, and higher 
than the 20-year average for upland cotton.
207  At these price levels, any marketing loan payments – if 
any – are likely to be small.  The United States noted that new Congressional Budget Office projections estimate that "there will be no more  than a 2 cents/lb marketing loan payment [in 
MY 2007] (and by MY 2008, the projection is  of no marketing loan payment at all)."
208   
 
197. The projections of prices and payments by  FAPRI – shown in Table 27 of Brazil's First 
Written Submission – are entirely consistent with  the figures cited by the United States and its 
analysis on the basis thereof.  In fact, FAPR I projects an adjusted world price ("AWP") of 
51.4 cents/lb, which would result in a marketing loan  payment of only 0.6 cents/lb.  However, because 
it provides stochastic projections, FAPRI reports proj ected marketing loan payments of 1.9 cents/lb – 
figures virtually identical to the CBO pr ojections used by the United States. 
 
198. Table 26 provides aggregate projections for all marketing loan payments;  it does not show how much of a payment per acre U.S. farmers might receive.  Although the aggregate figures shown for MY2007 are higher than those projected by FAPR I and CBO, it is not clear why this is – whether 
it is because of differences in projected prices, differences in projected plantings, differences in 
projected yields or some other factor.  It is, therefore, difficult to fit these projections in with the 
others noted above in discussing the expectations of  farmers (whose expectati ons are developed with 
respect to their own crops, not an aggregate national figure).  199. To put the CBO and FAPRI projections of at most a 2 cents/lb marketing loan payment in perspective, it is useful to consider what marketing loan payments were in the period considered in the 
original proceeding (MY 1999-2002).  There, the orig inal panel considered si gnificant the fact that 
marketing loan payments had been made that – in  some periods – accounted for close to 30 cents per 
pound, or almost the same amount as revenue receive d from the market.  The situation here – with 
marketing loan payments projected at, at most, 2 cents/lb for MY 2007 against a backdrop of prices that are expected to be at very hi gh levels – is substantially different. 
 
Questions to Brazil
 
 
83. How does Brazil address the argument of the United States that footnote 13 of the 
SCM Agreement "does not indicate that where a panel finds that a Member is causing present serious prejudice through the use of a subsidy, the panel 
automatically also finds that the Member is threatening to cause serious prejudice 
in the future through the use of the same subsidy"?  (Rebuttal Submission of the United States, footnote 624) 
 84. Could Brazil confirm that its claim of threat of serious prejudice is submitted on a 
contingent basis i.e., that it does not request the Panel to make a finding on this 
claim if the Panel make a finding of present serious prejudice?  How is the 
                                                     
 
207 Cotton This Month, ICAC, p. 4 (February 1, 2007) (Exhibit US-107). 
208 CBO January 2007 Baseline for CCC & FCIC (January 22, 2007) (Exhibit US-91).  WT/DS267/RW 
 Page D-419 
 
 
contingent character of this "threat of seri ous prejudice" claim reflected in Brazil's 
request for the establishment of a panel? 
 85. Could Brazil explain its request that the Panel "make factual findings with respect 
to its 'threat of serious prejudice' claim to allow the Appellate Body to complete the 
analysis, in case it were to disagree with the compliance panel's interpretation"?  
(First Written Submission of Brazil, para. 241) What are the precise "factual findings" which Brazil requests the Panel to make in this regard? 
86. How does Brazil address the argument of the United States that the definition of 
"threat" of injurious effects in Article 15.7 of the SCM Agreement and 
Article 4.1(b) of the Agreement on Safeguar ds "in terms of their close proximity in 
time and their high probability of occurring" reflects the ordinary meaning of the word "threat" and that, as such, Article 15.7 of the SCM Agreement and 
Article 4.1(b) of the Agreement on Safeguards provide "useful contextual guidance" for the interpretation of  "threat" of serious prejudice? 
 
87. Could Brazil comment on the argument of the United States that the standard of 
"significant likelihood" is without support in  the text of the SCM Agreement or in 
the GATT/WTO dispute settlement reports cite d by Brazil?  (Rebuttal Submission of 
the United States, paras. 406, 410,413)  
 
88. Does Brazil agree or disagree with the proposition advanced by the United States 
that "[a] panel may consider the ordinary meaning of a term as reflected in a 
particular provision to interpret the same term in another provision (especially of 
the same agreement) without the need fo r an express cross-reference."  (Rebuttal 
Submission of the United States, para. 411, footnote 635) 
 
89. Brazil argues that marketing loan and counter-cyclical payments for upland cotton 
are designed "in such a manner that paymen ts would be made in consistently large 
amounts".  (First Written Submission of Brazil, para. 270)   
 90. Could Brazil in this regard discuss th e data in Table 27 of Brazil's First Written 
Submission that show an increase in the projected farm price and AWP over the 
period MY 2006 - 2010 and a decline in projected marketing loan payments?   
 91. How does Brazil respond to the argument of the United States that "by MY 2008, 
the projection is of no marketing loan pay ment at all"?  (Rebuttal Submission of 
the United States, para. 419).  
 
D. 
EXPORT CREDIT GUARANTEES  
 
1. Outstanding export credit guarantees 
 
Questions to the United States  
 
92. The United States states, in para. 50 of its Opening Statement, that: 
 
... nothing in the SCM Agreement provides that "withdrawing" a 
"subsidy" allegedly "taking the form of a program" "includes an 
obligation to abstain from performing on commitments outstanding under that program as of the deadline for implementation."  That argument improperly equates "performing on commitments under the program" with the "subsidy" itself.  Such an equation was WT/DS267/RW  
Page D-420  
 
appropriate in Brazil – Aircraft (21.5), where Brazil continued to 
issue new WTO-inconsistent bonds even after the period of implementation on the basis that it had pre-existing contractual obligations to do so.  However, it is not accurate here, where the 
guarantees are not themselves prohibited subsidies . 
Would the United States please clarify what it meant in the underlined sentence?  
 
200. In the underlined sentence, the United States is  referring to the fact that providing an export 
credit guarantee does not per se  equate to providing an export subsidy.  Rather, a "subsidy" is only 
"deemed to exist" under Article 1 of the SCM Agreement  if there is (a) a financial contribution and 
(b) a benefit is thereby conferred.  Moreover, th e subsidy is an "export" subsidy only where it is 
contingent on export performance within the meaning of Article 3.1(a).  Item (j) of the Illustrative List 
clarifies how this definition applies in the case of  export credit guarantees.  Specifically, with respect 
to those measures, an export subsidy exists wh ere the premiums charged under the guarantee program 
are inadequate to cover the long-term costs and losses of the program. 
 
201. Where, as here, steps are taken so that export credit guarantees are provided at premium rates that are more than adequate to cover the l ong-term costs and losses of the program, no export subsidy 
is being provided, even though export cr edit guarantees may still be being provided. 
 
91. In paragraph 342 of its First Written Submission, Brazil indicates that the total 
amount of guarantees under the GSM 102, GSM 103 and SCGP programs 
outstanding on 1 July 2005 amounted to $8.5 billion. 
 
(a) Does the United States agree with the figure provided by Brazil? 
 
202. Yes. 
 
(b) Please indicate what proportion of that amount concerns exports of 
unscheduled products? (please distinguish between principal and interests) 
 
203. The United States does not maintain data rela ted to rescheduled amounts, claims outstanding, 
or interest arrears by commodity.  Based on figur es for contingent liability,  and estimating from the 
experience of the administrators of the programs, the United States estimates that approximately 56 
percent of the outstanding $8.5 billion was associated with unscheduled products.  The United States 
does not maintain and, therefore, is unable to provide a break-down of principal and interest. 
 
(c) Please indicate what proportion of that amount concerns exports of 
scheduled products, and in particular rice (please distinguish, in each case, between principal and interest). 
 
204. As noted above, the United States does not maintain data related to rescheduled amounts, claims outstanding, or interest arrears by commod ity.  Based on figures for co ntingent liability, and 
estimating from the experience of the administrators of the programs, the United States estimates that 
approximately 44 percent of the outstanding $8.5 bill ion was associated with scheduled products.  The 
United States does not maintain and, therefore, is  unable to provide a break-down of principal and 
interest.  
Questions to Brazil
 
 
92. Is it of any relevance to the Panel's a ssessment of Brazil's claims concerning 
"outstanding" export credit guarantees that what was at issue in Brazil – Aircraft (21.5) was the issuance, after the implementation date, of new bonds, and that  WT/DS267/RW 
 Page D-421 
 
 
bonds which had been issued prior to the implementation date could be redeemed 
for a number of years thereafter (see para. 46 of the US' Opening Statement at the panel meeting). 
93. The Panel notes that Exhibit Bra-516 in dicates outstanding amounts for GSM 5 as 
of 30 June 2006 rather than as of 30 June  2005 as indicated in footnote 523 of 
Brazil's First Written Submission.  Please explain.  
 
2. Legal Bases for Brazil's export subsidies claims  
 
Question to the United States
 
 
94. The United States has noted that the original Panel's findings (that the export 
credit guarantees at issue constituted prohibited export subsidies) were based on item (j).  The United States has also asserted that it has based itself on item (j) in implementing the DSB recommendations with  respect to export credit guarantees.  
Please clarify whether the Panel should understand the United States' argument in 
this respect as an argument concerning the scope of the present proceeding. 
 
205. The U.S. argument does not relate to the sc ope of the present proceeding except in the sense 
that the scope of an Article 21.5 proceeding is a ffected by the nature of the recommendations and 
rulings by the DSB. 
 
3. "Benefit" under Articles 1.1 and 3.1(a) of the SCM Agreement  
 
Questions to both parties
 
 
95. Brazil has taken the position that "diff erent parties to a transaction involving a 
GSM 102 ECG derive different benefits fr om the GSM 102 ECG, each of which is 
potentially subject to assessment under Artic le 1.1(b) of the SCM Agreement" and 
has indicated that it is, in this proceedin g, "primarily concerned" with the benefit 
received by the US exporter in the form of  below-market fees (para. 404, Brazil's 
Rebuttal).  The United States has challenged  Brazil's approach of focusing on fees 
to the exclusion of other elements of the total cost of the loan.   Please explain, 
referring to the provisions of the SCM Agreement and WTO jurisprudence (if any applicable), your position as to whether:   (1) export credit guarantees and other 
types of subsidies may involve more than one type of benefit and/or recipient;  (2) whether it is up to the complaining Member to decide which benefit it chooses to 
challenge. 
 
206. The United States notes, as a threshold matter, that there is a provision in the SCM Agreement  
that deals with the precise issue of when – in  the judgment of Members – export credit guarantees 
would constitute export subsidies within the meaning of Articles 1.1 and 3.1(a) of the 
SCM Agreement .  This is item (j) of the Illustrative List.  Moreover, there is a provision in the 
SCM Agreement  that describes precisely what – in the j udgment of Members – constitutes a "benefit" 
within the meaning of Article 1 of the SCM Agreement .  That is Article 14(c) of the 
SCM Agreement .
209 
                                                      
209 The latter – while expressly provided for countervailing duty investigations – has been relied upon 
in virtually every subsidy dispute involving guarantees (even where they have not been loan guarantees) and has 
been recognized as important context in interpreting "benefit."  See e.g.,  Canada – Aircraft (Panel) , para. 7.397 
("In considering precisely what Brazil must show in orde r to demonstrate the existen ce of a 'benefit,' we note the 
findings of the panel and Appellate Body in Canada – Aircraft. We therefore consider that IQ loan guarantees WT/DS267/RW  
Page D-422  
 
207. The Panel's question necessarily turns on what  significance these provisions have.  Can these 
provisions simply be ignored by a complaining party?   Can the complaining party decide to challenge 
an export credit guarantee on the basis of an alleged "benefit" that is not provided in either provision and that – in fact – would undermine the logic of tr eating loan guarantees as distinct types of subsidies 
in Article 14?
210  The United States submits that there is no b asis to do so.  The fact that the drafters 
went to the trouble of specifically setting out wh at constitutes an "export subsidy" in the case of 
export credit guarantees and what constitutes a "benef it" in the case of loan  guarantees must have 
some meaning.  They cannot have drafted these precise provisions simply so complaining parties could overlook them at will.  
208. Indeed, the questions of what constitutes a "benefit," "subsidy," or "export subsidy" are not 
abstract questions that may be answered by a complaining party however it chooses.  These are 
questions that the Members agreed must be asked to identify particular measures about which they 
shared certain concerns of trade distortion.  In the case of export subsidies, the concern – as reflected 
in the focus on export contingency in Article 3.1(a) – is of providing inducements to export because of 
the structural characteristic that subsidies are made conditional on expor t.  Members agreed that these 
measures had a structure and nature that trade dist orting effects could simply be presumed to exist 
(and therefore would not need to be proven by the complaining party).  When the Members set out how to examine a "benefit" for various types of me asures in Article 14, these considerations of trade 
distortion necessarily informed what they drafted.  
209. In the case of Article 14(c), they properly r ecognized that a loan guarantee is made for the 
sole purpose of supporting a loan transaction;  the guarantee becomes an integral part of that transaction and has no value beyond it.  The particular fee assessed for a guarantee is affected by the terms of the underlying loan transaction, who the pa rties are to the underlying loan transaction, the 
nature of the goods being purchased and sold, and any nu mber of other factors.  In turn, the terms of 
the underlying loan transaction and the costs and fees associated with that financing may be affected 
by the fees assessed.  Therefore, they expressly provide d that "a loan guarantee by a government shall 
not be considered as conferring a benefit, unless ther e is a difference between the amount that the firm 
receiving the guarantee pays on a loan guaranteed by  the government and the amount that the firm 
would pay on a comparable commercial loan abse nt the government guarantee.  In this case the 
benefit shall be the difference between these two am ounts adjusted for any differences in fees."  In 
                                                                                                                                                                    
 
will confer a "benefit" to the extent that they are ma de available to Bombardier customers on terms more 
favourable that those on which such Bombardier custom ers could obtain comparable loan guarantees in the 
market. In applying this standard, we are guided by Article 14(c) of the SCM Agreement, which provides 
contextual guidance for interpreting the term.");  EC-DRAMs , para. 7.190;  see also U.S. Lumber CVDs Final 
(Panel) , para. 7.49, n. 128 ("Articles 14 (b) and 14 (c) SCM Agreement concern the government's provision of a 
loan and a loan guarantee. In both cases, the benchmark to be used for the calculation of benefit is the 
'comparable commercial loan' and the 'comparable commercial loan absent the government guarantee'").  
Indeed, the article of which it is part – Article 14 – was one of the main bases for the Appellate Body's reasoning in Canada – Aircraft , that the term "benefit" in Article 1.1(a) generally refers to a benefit to a 
recipient, rather than a cost to the government. See Canada – Aircraft (AB) , para. 155. 
210 As the United States explained in its oral presen tation before the Panel, in the case of government 
services, Article 14(d) applies and provides that a "benefit" may be calculated only where "the provision [of the 
service] is made for less than adequate remuneration"  which "shall be determined in relation to prevailing 
market conditions for the . . . service in question in the country of provision (including price, quality, 
availability, marketability, transportation and other conditions  of purchase. . .)."  In that context, a comparison 
of fees for a government service against the fees charge d in the market for a compar able service is the proper 
approach.  However, Ar ticle 14(c) specifically precludes  such an approach for loan guarantees.  It provides that 
a government loan guarantee shall not be considered  as conferring a benefit, unless is a difference between the 
amount that the firm receiving the guarantee pays on a lo an guaranteed by the govern ment and the amount that 
the firm would pay on a comparable commercial loan absent the government guarantee."  Brazil argues that this 
provision deals solely with the measurement  of benefit.  However, by its terms, it also addresses the conditions 
under which a guarantee may be deemed to be "conferring" a benefit – mirroring the language in Article 1.1(a) 
of the SCM Agreement .  WT/DS267/RW 
 Page D-423 
 
 
other words, they expressly recognized that an ass essment of the total costs of the transaction is 
necessary to assess whether a "benefit" is actually conferred by the guarantee. 
 210. The approach of the drafters makes sense not only from a practical standpoint – i.e., considering how guarantees operate and why a comparison of the fee charged for the issuance of 
one loan guarantee to the fee charged for another may provide an incomplete and distorted picture – 
but also from the standpoint of the object and purpose of the SCM Agreement  itself.  In particular, one 
of the main aims of the SCM Agreement  is the discipline of trade distor tion caused by subsidies.  In 
the case of export credit guarantees, Members recogni zed that the potential for distortion occurs if a 
government-provided guarantee permits credit to be pr ovided on terms better than would be available 
on the market.  It is that which would have the poten tial to increase U.S. exports.  It is difficult to see 
how there could be concerns about similar trade distortion where the same  credit could be obtained on 
the market even without the government guarantee.
211  And, indeed, Article 14(c) reflects that very 
reasoning.  The United States submits that this reasoning must be respected.  
211. A separate example may help to put the issu e in perspective.  Suppose that a complaining 
party wishes to challenge the provision by the govern ment of a particular good that is of a higher 
quality than other goods offered by private actors but for which the government charges a premium that fully accounts for the higher quality.  Item (d) of the Illustrative List may apply if the claim is of 
an export subsidy.  And Article 14(d) of the SCM Agreement  may be relevant if the claim is 
otherwise.  Both indicate that a proper analysis in  determining whether a subs idy exists will examine 
the price at which the product is provided, taking  into account such other relevant factors as quality.
212  
For example Article 14(d) expressly recognizes that th is should take into consideration the "prevailing 
market conditions . . . (including price, quality)."  The United States submits that a complaining party could not, under these conditions, assert that the high er quality of the government-provided product is 
a "severable benefit" on the basis of which a subs idy should be found to exist.  The United States 
considers that the situation is analogous here. 
 
96. The parties differ as to whether different types of loans can be compared as long as 
they have the same "average life."  What support (economic literature, etc.) exists 
for your position on this issue?  
 212. The United States has explained that the averag e life of a loan is the average number of years 
that principal is outstanding.
213  In a GSM-102 transaction, CCC requires principal to be payable at 
least annually.  Consequently, on the first anniversary,  one-third of principal is paid.  After two years, 
two-thirds is paid.  The final payment occurs on the third anniversary.  Such a simple declining 
balance yields an average life of two years for this  loan.  To put it differently, this is the average 
amount of time in the loan that the obligor pays interest on a dollar of principal and the lender earns 
interest on a dollar of principal.  213. The United States does not understand Brazil to disagree either with th is definition of the 
average life of a loan or with the fact that a GSM- 102 guaranteed loan, to the extent it is a three-year 
amortizing loan with annual repayment of pr incipal, has an average life of two years.
214   T h e  
United States also does not understand Brazil to di sagree that a two-year bullet loan also has an 
average life of two years.215 
 
                                                      
211 Adjusting for the fees paid for the governmen t guarantee, of course , in the comparison. 
212 Item (d) talks about this in terms of the "terms or conditions" of sale and Article 14(d) talks about it 
in terms of "adequate remuneration." 
213 U.S. First Written Submission, para. 123. 
214 Oral Statement of Brazil, para. 213 
215 Oral Statement of Brazil, para. 214 WT/DS267/RW  
Page D-424  
 
214. Brazil contends, however, that a two-year bu llet loan and a GSM-102 guaranteed 3-year loan 
are not comparable because "the patterns of cred it risk to which the lender is exposed are very 
different in these two cases."
216  Brazil asks the compliance panel to "suppose" – without foundation – 
with respect to the particular examples offered by  the United States "that the borrowing bank's credit 
outlook is sufficiently positive in the short-term that  there is a very low default likelihood perceived in 
the first two years.  But suppose as well that there is more uncertainty about, and a greater likelihood 
of default in, the third year."217  In other words, Brazil asks the compliance panel to ignore the overall 
risk reduction arising from the first-year repaym ent of one-third of principal in the GSM-102 
guaranteed transaction218, adopt Brazil's "assumptions," and conclude that the credit risk on this 
transaction will be "much higher."219  Brazil's argument is devoid of logic.   
 
215. The concept of average life is  commonly used for price comparab ility of investments and debt 
instruments of varying terms.  "Average life is commonly used as the measure of investment life for 
[mortgage-backed securities (MBS)]  and the yield of an MBS is typically compared against a 
Treasury with maturity close to  the average life of the MBS."220   Similarly, "swap dealers routinely 
price the fixed rate side of an interest rate swap  as a spread over United States Treasuries of a similar 
average life."221 
 216. As a further example, an offer to invest in credit tenant lease loans extends to a portfolio of 
loans of "up to 25 years."
222  With loans of varying terms, the i nvestment is indexed to "U.S. Treasury 
or Swap Index correlating to the average life of the remaining lease term."223  This is without regard to 
the extended term of particular loans:  "15/15 deal  has 9 year average life;  use interpolated 9-year 
U.S. Treasury or interpolated 9-year Swap Rate i ndex.  20/20 deal has 12-year average life;  use 
interpolated -year U.S. Treasury or interpolated 12- year Swap Rate index.  25/25 deal has 15-year 
average life;  use interpolated 15-year U.S. Treasu ry or interpolated 15-year Swap Rate index."224 
 
217. Finally, the United States notes that Brazil asks the compliance panel to "assume" "much 
higher" risk in year 3 of the GSM-102 transaction.  Brazil offers no basis in fact for this assumption with respect to the examples offered by the United States.  Brazil's "assumption" is not even sound as 
a theoretical matter.  In a study of medium-ter m, U.S. government-guaranteed loans, the authors 
found that "as the medium-maturity loans season the likelihood of default increases initially, peaks in 
the second year after origination, and declines thereafter."
225  "[I]n general, the hazard curve is a 
concave function of time:  increasing initally, then  falling off toward zero as the loans season.  The 
                                                      
216 Rebuttal Submission of Brazil, para. 429;  see also , Oral Statement of Brazil, para. 219;  Brazil's 
Comments on U.S. Answers, para. 140 
217 Oral Statement of Brazil, para. 220 
218 Brazil asserts without basis that early repayment of one-third of principal shows that "the patterns of 
exposure in these two types of loans are different,"and therefore supports its position.  Brazil's Comments on 
U.S. Answers, p. 140.  To the contrary, it shows only that one-third of the principal is paid fully one year before any principal is paid in the bullet loan.  Solely from a risk perspective, more paid sooner can only be better. 
219 Oral Statement of Brazil, para. 221. 
220 The Handbook of Fixed Income Securities , 6th ed. (2001), Fabozzi, Fr ank J.  (McGraw-Hill 
Professional), p. 589 (Exhibit US-149). 
221 Marshall, John F.  "Futures Versus Swaps:  Some Considerations for the Thrift Industry," Review of 
Business ;  Winter 1990/1991;  12, 3, p. 17 (Exhibit US-150). 
222 BSC Bond Street Capital;  Credit Tenant Lease Loans - Minimum $10,000,000. 
http://www.bisonfinancial.com/loans/bsc_ctl.html  (Exhibit US-151). 
223 BSC Bond Street Capital;  Credit Tenant Lease Loans - Minimum $10,000,000. 
http://www.bisonfinancial.com/loans/bsc_ctl.html  (Exhibit US-151). 
224 BSC Bond Street Capital;  Credit Tenant Lease Loans - Minimum $10,000,000. 
http://www.bisonfinancial.com/loans/bsc_ctl.html  (Exhibit US-151). 
225 Glennon, Dennis and Nigro, Peter;  "Measuring the Default Risk of Small Business Loans:  
A Survival Analysis Approach," Journal of Money, Credit, and Banking , Vol. 37, No. 5 (October 2005), p. 945 
(Exhibit US-152).  WT/DS267/RW 
 Page D-425 
 
 
general shape of the hazard, and the time dependency of  default implied from this  result, is consistent 
with the expected effect of loan seasoning."226 
 218. The initial hazard of default early in the loan  belies Brazil's "assumption" of "very low default 
likelihood perceived in the first two years."
227  This study also contradicts Brazil's further 
"assumption" of "much higher risk" in the last year of the GSM guaranteed transaction.  Under 
Brazil's theory, risk would apparently increase over time .  This study examined 7-year loans.   As the 
study indicates, however, for these loans, with a tenor 4 years longer than the GSM-102 transactions, 
defaults "fell off toward zero" as the loans seasoned.  
Questions to the United States
 
 
97. Assuming that the Panel accepts the United States' argument that "benefit" is to be 
assessed on the basis of the "total costs of funds," what do you consider Brazil must establish in order to meet its burden of proof in that respect?  Must Brazil 
prove that a benefit is conferred in all instances (all transactions and all 
recipients)?  In most instances? 
 
219. Brazil bears the burden of proving its claims with respect to every one of the measures it 
challenges.  The United States notes that Brazil cont inues to equivocate on the question of whether or 
not it is challenging the GSM 102 export credit guarantee program itself or particular guarantees 
thereunder.
228  Whatever measure Brazil is challenging, it cannot escape its burden of proof in that 
regard.    220. If Brazil is challenging the GSM-102 program as such – whether it challenges the entire program or parts of it – it must prove that the program itself (or the challenged part) mandates a 
breach.  As the panel explained in Korea – Ships  in addressing an analogous challenge against the 
Advance Purchase Refund Guarantee (or "APRG") program under the SCM Agreement , the panel 
stated that  "[t]he issue before us . . . is whet her or not the APRG programme mandates the conferral 
of a benefit by requiring the provision of APRGs on terms more favourable than Korean shipyards could obtain on the market."
229  That panel found that "[n]either Article 18 of the KEXIM Act nor 
Article 23(1) of the KEXIM Operating Manual even  refer to the terms on which KEXIM shall offer 
APRGs, let alone require below-market guarantees."230  For this reason, the panel rejected the 
EC's claim that the APRG program mandated a breach of the export subsidy provisions of the 
SCM Agreement .  The same reasoning applies here.  Neith er the statutory nor regulatory provisions 
providing for export credit guarantees even mandate that guarantees be provided, let alone that they 
be provided under conditions in which they would confer export subsidies. 
 
221. If Brazil is challenging par ticular guarantees under the GSM-102 program – e.g., guarantees 
that the United States has provided in respect of exports of rice and unscheduled products – it bears 
                                                      
226 Glennon, Dennis and Nigro, Peter;  "Measuring the Default Risk of Small Business Loans:  A 
Survival Analysis Approach," Journal of Money, Credit, and Banking , Vol. 37, No. 5 (October 2005), p. 935 
(Exhibit US-152). 
227 Oral Statement of Brazil, para. 220. 
228 For example, in its rebuttal submission, Brazil claims that it does not "assert that the GSM 102 
program itself circumvents the United States' export subsidy commitments, within the meaning of Article 10.1 
of the Agreement on Agriculture" or, presumably, that the GSM 102 program as such provides prohibited export 
subsdiies under the SCM Agreement .  Brazil Rebuttal Submission, para. 378.  But, thereafter, Brazil has 
indicated that it does not even consider individual guarantees to constitute measures.  Brazil Answers to 
Sections A-C of First Set of Questions, para. 29.  Theref ore, it remains entirely unclear  what measures Brazil is 
even purporting to challenge. 
229 Korea – Ships (Panel) , para. 7.121. 
230 Korea – Ships (Panel) , para. 7.121. WT/DS267/RW  
Page D-426  
 
the burden of showing that each of the guarantees is an export subsidy.  In the U.S. view, the proper 
consideration in this regard is item (j) of the SCM Agreement  and there is no "other" standard for what 
constitutes an export subsidy in the case of export cr edit guarantees.  Nonetheless, even if there were 
some "other" such standard in Articles 1 and 3.1(a) of the SCM Agreement , as Brazil alleges, Brazil 
would bear the burden of proving that each guarant ee provides a (a) financial contribution that (b) 
confers a benefit, and the "subsidy" thereby provi ded is (c) contingent upo n export performance.  
Brazil has failed to make such a showing on the basis of a consideration of total costs for any guarantees, let alone for all the guarantees in respect  of exports of rice and unscheduled products.  
Therefore, even under its own theory of an "alte rnative" standard under Articles 1 and 3.1(a), its 
export subsidy-related claims fail. 
 
98. Does the United States dispute the accu racy of Brazil's comparison of GSM 102 
fees with Exim Bank fees?  Does the United States agree that ExIm Bank and GSM 102 guarantees are (at least in certain circumstances) similar or comparable? 
 222. The United States does not believe that guarantees of the Export-Import Bank of the 
United States and those of the GSM 102 program ar e similar or comparable.  Brazil has proposed a 
comparison with two particular products of Ex-Im  Bank.  These are (1) the Ex-Im Bank Letter of 
Credit Insurance for Banks ("LCI") and (2) the Ex-Im Bank Medium-Term Export Credit Insurance 
("MTI").
231 
 
223. The United States notes, as a threshold matter, th at MTI is available exclusively in respect of 
capital goods and services.232  As such, this product and its fee structure are subject to the 
Organization for Economic Co-ope ration and Development ("OECD") Arrangement on Officially 
Supported Export Credits ("OECD Arrangement").  As Japan has noted233and Brazil has 
acknowledged234, the OECD Arrangement does not apply to agricultural products.  As Japan has also 
noted, the minimum premium rates under the OECD Arrangement are for repayment terms of two 
years or more.235   Under the GSM-102 program, hundreds of GSM-102 transactions, totaling 
hundreds of millions of dollars are in fact for terms of less than 2 years.236  Therefore, there are 
important factual distinctions between the guarantees that render them not comparable. 
 224. These distinctions for relevant for purposes of the subsidy analysis.  Recall that – typically – 
the comparison that is made to determine whether or not there is a "benefit" is to what the recipient 
"could obtain on the market."
237  Here, an exporter who would obtain a GSM 102 guarantee simply 
could not obtain a MTI guarantee from Ex-Im Bank, because those guarantees are not made in respect 
of agricultural products and also because the transact ion at issue may have short (less than two-year) 
                                                      
231 Brazil First Written Submission, para. 381 
232 ExIm Bank export credit insurance product description, accessed October 2006 at 
http://www.exim.gov/product s/insurance/index.cfm  (Exhibit BRA-533) and ExIm Bank Medium-Term Export 
Credit Insurance, ExIm Bank online, accessed October 2006 at 
http://www.exim.gov/products/in surance/medium_term.html.  (Exhibit BRA-535). 
233 Third Party Submission of Japan, para. 25 
234 Brazil First Written Submission, para. 442 
235 Third Party Submission of Japan, para. 25 
236 Specifically: 
 FY 2003:  191 guarantees:  $185,296,721 
  FY 2004:  259 guarantees:  $222,967,376 
FY:2005:  230 guarantees:  $165,350,477 
FY:2006:  185 guarantees:  $176,414,190 
FY:2007 (as of 5 March 2007):  43 guarantees:  $46,584,911  
237 See e.g., Korea – Ships (Panel) , para. 7.121 ("The issue before us, therefore, is whether or not the 
APRG programme mandates the conferral of a benefit by requiring the provision of APRGs on terms more 
favourable than Korean shipyards could obtain on the market.")  WT/DS267/RW 
 Page D-427 
 
 
repayment terms.  Therefore, those guarantees are not  an appropriate benchmark of what an exporter 
of agricultural products "could obtain on the market."  225. Equally important, however, is what Brazil has omitted from its comparisons to the Ex-Im Bank products.  Brazil asserts that "Brazil's country-specific comparison methodology [] takes 
account of all of the variables that GSM 102 and ExIm Bank take into account in pricing their 
products."
238  In fact, Brazil has failed to address at  least two highly significant components. 
 226. The most significant of these is interest c over.  Under Ex-Im's MTI product the obligor is 
required to use a form of promissory note promul gated by Ex-Im, and Ex-Im covers "100 percent of 
the rate provided in the note."
239  Under Ex-Im's LCI product, "the in sured interest rate is generally 
prime rate minus 0.5% or the rate stated in the credit agreement, whichever is less.  Ex-Im Bank uses 
the prime rate published in the Wall Street  Journal, under the table 'Money Rates.'"240 
 227. In contrast, under the GSM-102 program, CCC cove rs eligible interest, which is calculated as 
follows:  "the per annum rate to be used to calculate eligible interest shall be the lesser of the interest 
rate specified between the U.S. bank (or exporter) a nd the foreign bank or 55 percent of the average 
investment rate of the most recent Treasury 26-week  bill auction as announced by the Department of 
Treasury prior to the date the eligible in terest rate is established or adjusted."
241 
 228. A comparison of the interest cover of the LCI product
242, which coverage is less than that of 
the MTI product, with the interest cover under th e GSM-102 guarantee shows that the LCI interest 
cover greatly exceeds that of the GSM-102 guarantee.  229. The United States provides in Exhibit US-155 a comparison of the CCC interest cover (55% of the applicable 26-week T-bill rate
243) with the LCI interest cover (Wall St. Journal prime 
minus 0.5%).  As of March 1, 2007, Ex-Im interest  coverage is 491 basis points higher than the CCC 
interest coverage (7.75% v. 2.839%).  This is an  enormous difference, which can be illustrated by a 
simple example.  Assume an export transaction in which ten million dollars  is financed at 
7.75 percent.  Upon default of payment on the anniversary of the credit, Ex-Im would cover the full interest amount of $775,000.  CCC,  however, would only c over $283,900 of interest.  This effect of 
course multiplies with each year of outstanding unpaid interest. 
 
230. Since July 1, 2005, using the rates in eff ect on the first business day of each month, the 
difference in cover has been as much as 499 basi s points (October 2, 2006) and never less than 
374 basis points (August 1, 2005).
244  As the MTI interest cover is 100 percent of the stated rate in the 
note, one can only infer that the disparity between CC C interest cover and that product is even greater. 
 
                                                      
238 Brazil Rebuttal Submission, para. 434 (emphasis in original). 
239 ExIm Bank Medium-Term Export Credit Insuran ce, ExIm Bank online, accessed October 2006 at 
http://www.exim.gov/products/in surance/medium_term.html.  (Exhibit BRA-535) 
240 ExIm Bank Letter of Credit Insurance for Banks,  ExIm Bank online, accessed October 2006 at 
http://www.exim.gov/product s/insurance/loc.html  (Exhibit BRA-531). 
241 Notice to GSM-102 Program Participants:  US DA Clarifies Method for Computing Interest 
Coverage Under GSM-102 Program (15 July 2005)  
http://www.fas.usda.gov/scriptsw/P ressRelease/pressrel_dout.asp?PrNum=0105-05 (Exhibit US-153). 
242 Exhibit US-154 provides the Wall St. Journal prime rates from February, 2000 to the present. 
http://www.hsh.com/indices/prime00s.html  (accessed 20 March 2007). 
243 Exhibit US-156 sets out 26-week T-bill rates as pr ovided by the U.S. Department of Treasury for 
the period 1 July 2005 - 20 March 2007 avai lable at http://treasurydirect.gov/RI/OFAuctions. 
244 Comparison of interest rate coverage of C CC GSM-102 export credit guar antees and Ex-Im Bank 
Letter of Credit Insurance for Banks (1 July 2005 - 1 March 2007) (Exhibit US-155). WT/DS267/RW  
Page D-428  
 
231. Interest cover is a very significant com ponent of a guarantee or insurance product and 
commensurately affects the fee such products can co mmand.  Brazil, however, has made no attempt to 
include this factor in its comparisons.  232. In addition, with respect to principal cove rage, MTI covers 100 percent of the financed 
portion.
245  The GSM-102 only covers 98 percent.  Ex -Im also allows, under the LCI product, that 
"the insured may arrange recourse or 'pass back' to a third party of all or an y part of any uninsured 
amount."246  This is not permitted under the GSM-102 pr ogram.  Upon default the claimant must 
subrogate to CCC the claim to the entire amount in default, not just the guaranteed portion.247  CCC 
then has the right to recover from the obligor all moneys in default.248  Unlike the LCI product, the 
holder of the GSM-102 guarantee is therefore unable to  sell the unguaranteed portion of the obligation 
to another party to insulate himself from any expos ure to principal default.  Under the MTI product, 
the holder is similarly insulated from any risk b ecause of the full 100 percent coverage.   Inferior 
coverage of principal relative to the Ex-Im produc ts renders the GSM-102 guarantee less desirable, 
which is reflected in the price parties are willi ng to pay.  Brazil has also not accounted for the 
difference in "pass back" policies of the programs in its comparisons. 
 
99. Please comment on Brazil's argument that the GSM 102 fees are not sufficiently 
scaled to take into account country risk (i.e. they vary only minimally according 
with country risk) (see, inter alia, paras. 410-412 Brazil's First Written 
Submission). 
 
233. The United States disagrees with Brazil's assertions as a matter of fact.  GSM 102 fees are scaled to take into account country risk and th e current GSM-102 fees vary greatly based on this 
factor.  Brazil has offered no basis in the text for its assertion that this scaling is "insufficient."  Indeed, the United States is not aware of any provision of the SCM Agreement  that establishes what 
constitutes "sufficient" scaling.  The only  express discussion of sufficiency in the SCM Agreement  
pertains to the adequacy of premia to cover th e long-term operating costs and losses of export credit 
guarantee programs under item (j) of the Illustrative List.  This is the standard that the original panel 
appropriately applied in assessi ng the consistency of the export credit guarantee programs with the 
export subsidy provisions in Ar ticles 3.1(a) and 3.2 of the SCM Agreement . 
 
234. It was in assessing that broader question that the original panel considered the issue of 
country risk to be relevant.  Specifically, the orig inal panel explained that "in order objectively to 
assess premiums in relation to long-term operating costs and losses, we believe it is also appropriate for us to take into account aspects of the structur e, design and operation of the measure before us."
249  
In so doing, however, the original panel was quite cl ear that it was not looking at individual fees or 
differences among fees, but rather whether "the tota l of all premiums would be likely to cover the 
total of all operating costs and losses under the program."250  Therefore, neither in the text of the 
SCM Agreement  nor in its application in the present pro ceeding, is there any independent issue of 
"sufficient scaling" to take into account country ri sk.  The only question is  whether the structure, 
design and operation of the program – including any sca ling – when taken as a whole indicate that the 
premia are inadequate to cover the long-term costs and losses of the program.  The evidence before 
this Panel clearly show the adequacy of the premia charged for GSM 102 guarantees.  
 
                                                      
245 Ex-Im Bank Medium-Term Export Credit Insuranc e, ExIm Bank online, accessed October 2006 at 
http://www.exim.gov/products/in surance/medium_term.html  (Exhibit BRA-535). 
246 ExIm Bank Letter of Credit Insurance for Banks,  ExIm Bank online, accessed October 2006 at 
http://www.exim.gov/product s/insurance/loc.html  (Exhibit BRA-531). 
247 7 CFR Section 1493.110(b)(4) (Exhibit US-142). 
248 7 CFR Section 1493.130(a) (Exhibit US-142). 
249 Upland Cotton (Panel) , para. 7.805.  
250 Upland Cotton (Panel) , para. 7.805.  WT/DS267/RW 
 Page D-429 
 
 
235. The changes to make fees responsive to count ry risk confirm the adequacy of the premia.  
Under the old fee structure, fees varied "only by the guaranteed dollar value of the transaction, the 
repayment period, and the principal repa yment interval (annual or semi-annual)."251  The premia were 
not risk-based at all, and the original panel noted in this regard that "a country's risk classification has 
no impact on the premiums payable under the United States export credit guarantee programs."252  By 
contrast, under the current fee schedule, the differe nce in premia for the same tenor between the least 
risky countries and the most risky countries is in  all cases between 81.5 percent and 100.6 percent.253  
Moreover, the 22 highest risk countries that were pr eviously eligible are now entirely ineligible and 
cannot receive a GSM 102 guarantee at any pri ce.  This, and other evidence submitted by the 
United States show that the "the total of all pr emiums" cover the "total of all operating costs and 
losses under the program."254 
 Questions to Brazil
 
 
100. Assuming the Panel were to agree with the United States that the proper 
benchmark to determine "benefit" is the "tot al cost of funds" of the transactions, 
what elements of evidence has Brazil provided  the Panel in this respect (other than 
evidence from the Regulations that the programme targets situations where no 
credit would be available on the market)?  In answering, please address the United States' argument at para. 133 of its First Written Submission that "Brazil has made no attempt to provide such specific information on individual loan costs 
and fees or to identify comparable commercial loans and their terms". 
 
101. Brazil argues that "[w]here guarantees are reserved for circumstances in which 
credit would not otherwise be available, there is no "comparable commercial loan absent the government guarantee," within the meaning of Article 14(c) of the 
SCM Agreement."  (Brazil First Written Submission, para. 375).  The Panel 
understands this argument of Brazil to focus on the foreign obligor.  Brazil elsewhere indicates that it is principally concerned, in this proceeding, with the benefit to the US exporter (fees).  Are these two arguments at tension? 
 
4. Item (j) of the Illustrative List 
 Questions to both parties
 
 
102. What, in your view, explains the di fferent results achieved by the two methods 
advocated, on the one side, by the United States in paragraphs 87-89 of its 
First Written Submission and by Brazil in Exhibit Bra-613 (other than the 
United States' criticism that Brazil has not taken recoveries corresponding to 
pre-1992 guarantees into account in its "cash basis" accounting calculations, of which the Panel is already aware)?  
 
236. As a threshold matter, it is important to  understand what Brazil's cash-basis methodology in 
Exhibit Bra-613 purports to show.  It attempts to depi ct on a strictly chronological basis, for a finite 
period of time (FY 1993-2005), cash flows in and out related to the export credit guarantee programs.  
                                                     
 
251 Upland Cotton (Panel) , para. 7.820 
252 Upland Cotton (Panel) , para. 7.861 
253 GSM-102 Guarantee Fee Rate Schedule, US DA FAS Online, accessed September 2006 at 
www.fas.usda.gov/excredits/gsm102fees.html  (Exhibit BRA-505).  Compare GSM 102 Premia, Annual 
Payment of Principal, 36 month tenor, risk category 0 ($0.561 per US$100 of coverage) and risk category 6 
($1 per US$100 of coverage) and 30 day tenor, risk category 0 ($0.161) and risk category 6($0.323). 
254 Upland Cotton (Panel) , para. 7.805. WT/DS267/RW  
Page D-430  
 
As Brazil – not the original panel – did in the original proceeding with respect to the finite 
period 1993-2002, it nets "program receipts against program disbursements on a fiscal year basis."
255  
 237. It is also important to note that the cred it reform approach was developed and imposed to 
avoid precisely the kind of anomalies that arise unde r the strict cash-basis ap proach that Brazil now 
advocates.  Indeed, as Brazil articulated before the or iginal panel:  "[p]rior to passage of the [Credit 
Reform Act of 1990], loan guarantees were recorded on a cash basis, which distorted their costs. 
[R]ecording guarantees on a 'cash basis distorted th e timing of when costs would actually be 
incurred .'"
256  Accordingly, Brazil championed credit reform accounting as: 
 
an ideal basis on which to determine whet her the CCC's export credit loan guarantee 
programs are offered at premium rates that are inadequate to cover the long-term operating costs and losses of the programs, within the meaning of item(j) of the Illustrative List of Export Subsidies.  It functions as a more sophisticated alternative 
to constructed cost formulas, and thoroughly accounts for all of the premium and 
operating cost and loss elements required by item(j).  Moreover, it has the virtue of 
serving as the actual, real-world calculation used by the U.S. Congress, the President 
of the United States, and federal agencies lik e the CCC to "measure more accurately 
the costs of Federal credit programs."
257 
238. Brazil never proposed to the original panel th at its cash-basis methodology supplant the credit 
reform approach.  To the contrary, "Brazil em phasizes that it does not intend for this revised 
constructed formula to replace the formula used by th e U.S. government itself to track the costs of the 
CCC guarantee programs pursuant to the U.S. Federal Credit Reform Act."258 
 239. The United States believes that the disparity between Brazil's approach and the United States approach is largely explained by the fact that  the United States' credit reform methodology fully 
accounts for the net present value of reschedulings, an d Brazil's approach only includes cash received.  
As explained below, the current total net present va lue of remaining cashflows for cohorts 1992-2005  
is $590 million.
259  Exhibit BRA-613 purports to show a cash  deficit (loss) of $689,144,000 through 
fiscal year 2005.  The U.S. first written submission (table at paragraph 87) shows a profit through 
cohort 2005 of $166,549,780.  The difference between those two figures is $855,693,780.  Although $590 million does not fully explain the disparity, it approaches the appropriate order of magnitude. 
 
240. The re-estimation process under credit reform  accounting projects cashflows to and from the 
government over the life of the cohort, including defaults and recoveries.  For the GSM 102, 
GSM 103 and SCGP programs, Table 1 below sets forth the net present value of the remaining cash flows for each of the cohorts 1992-2005. To the exte nt any remaining scheduled debt exists, the last 
fiscal year in which payment is projected for such  rescheduled debt is indicated.  The net present 
value of the cashflow is calculated as re quired under credit reform accounting.
260 
 241. The annual reestimate process takes into consid eration the estimated net present value of cash 
flows over the life of the cohort.  In contrast, th e Brazilian approach only takes into account the cash 
transactions that have actually transpired to date. 
 
                                                     
 
255 Brazil Rebuttal Submission, para. 485. 
256 Statement of Brazil - First (Original) Panel Meeting (22 July 2003), para. 128 (emphasis added). 
257 Statement of Brazil - First (Original) Panel Meeting (22 July 2003), para. 129. 
258 Brazil's Answers to Questions Posed by the Pane l Following the First Substantive Meeting of the 
Panel, para. 164 (Question 77) (11 August 2003) (emphasis in original) 
259 $589,947,000. 
260 The United States hastens to note that this does  not reflect or adopt th e cash-basis approach to 
rescheduling rejected by the original panel.  See, Upland Cotton (Panel) , paras. 7.846, 7.847, and 7.851.  WT/DS267/RW 
 Page D-431 
 
 
Cohort Debt Rescheduled Until  
FY NPV of Remaining 
Cashflows ($000) 
GSM 102   
1992 2012 $161,655 
1993 2012 205,798 
1996 2025 57,936 
1997 2025 105,664 
1998 2007 1,871 
1999 2007 1,035 
2000 2007 28 
2001 2014 110,901 
2002 2014 187 
2003 2007 -1,787 
2004 2008 -31,556 
2005 2009 -49,367 
   
 Total GSM 102  $562,365 
   
GSM 103   
1992 2012 $10,572 
1993 2012 15,885 
2000 2008 -122 
2001 2008 -241 
2003 2010 -155 
 Total GSM 103  $25,939 
   
 Supplier Credit   
2003 2010 $1,643 
Total:  $589,947  
 
242. For each of the past three fiscal years, actual repayments under rescheduled debt have 
outperformed the estimates by 226%, 180% and 363% for FY 2004, 2005 and 2006 respectively.  The 
amounts projected under rescheduled agreements and the actual amounts collected are shown in 
Table 2.  For each subsequent reestimate, sche duled payments under rescheduled agreements (from 
which the repayments are projected) are redu ced to reflect amounts already collected.   
 
Table 2 – Projected versus actual recoveries on rescheduled debt 
 
 Projected ($) Actual ($) Variance (%) 
2003 reestimate -- 2004 projected and actual 89,772,079 202,970,637 226% 
2004 reestimate -- 2005 projected and actual 133,267,525 240,208,256 180% 
2005 reestimate -- 2006 projected and actual 139,280,938 505,481,067 363% 
 
103. To what extent is evidence pertaini ng to guarantees issued under the three 
programmes (GSM 102, GSM 103 and SCGP) under the prior fee schedule relevant to the Panel's analysis of the revised GSM 102 programme under item (j)? 
 243. The evidence pertaining to guarantees issu ed under the prior fee schedule for the three 
programs (GSM 102, GSM 103, and SCGP) is useful because it helps to put in context the findings 
and recommendations of the original panel, the b ases for such findings and recommendations, and the 
measures the United States has taken to comply.  Mo reover, evidence of the adequacy of premiums 
charged under those programs is relevant in this proceeding becau se the United States has improved  
the ability of the single remaining program – GSM 102 program – to meet its long-term operating 
costs and losses.  To the extent that premia were charged that were adequate to cover the long-term WT/DS267/RW  
Page D-432  
 
costs and losses of the programs even before  the United States implemented changes to increase fees 
and lower possible long-term costs and losses, this is  a highly relevant fact.  It supports the U.S. 
argument that premia charged under the revised fe e schedule for GSM 102 guarantees are more than 
adequate to cover the long-term costs and losses of the program.  
244. While disaggregated figures for the three export credit guarantee programs before the 2005 
cohort are not available, the aggregated figures are still very helpful in an assessment of the GSM 102 
program alone.
261  Historically, the GSM 102 program has been by far the largest of the three export 
credit guarantee programs.  Brazil has noted th at export credit guarantees issued under GSM 103 
accounted for only 2.36 percent (by transaction valu e) of all CCC guarantees, and in FY 2004 and 
2005, no guarantees were issued under GSM 103.262  Indeed, no GSM 103 guarantees have been 
issued since FY 2003.263   
 245. Similarly, since the inception of SCGP in FY1996
264, total guarantees under SCGP were 
$2.777 billion.  In contrast, total GSM 102 guar antees issued in the same period were for $30.633 
billion.265 GSM-103 guarantees during that time totaled onl y $396.2 million.  As a result, looking at 
the period since the inception of SCGP, GSM-102 guarantees comprised 90.6 percent of the total value of all CCC export credit guarantees issued.  In li ght of this order of magnitude and the fact that 
the net lifetime reestimate for every GSM-102 cohort since 1992 is negative, it stands to reason that 
the relative profitability reflected in the budget data is, at a minimum,  proportionately allocable to 
GSM-102, and that the increase in fees can only enhance that position. 
 
104. Must a risk-based fee necessarily take into account foreign obligor risk? Please 
discuss and provide any relevant support for your position. Can foreign obligor risk 
be treated differently than country risk in this respect, and if so, why? 
 246. Item (j) of the Illustrative List is the only provision of the SCM Agreement  that deals 
specifically with export credit guarantees.  That provisions simply provides that export credit 
guarantees are subject to discipline where the premia  charged are inadequate to cover the long-term 
costs and losses of the program.  Other than this, neither that provision, an y other provision of the 
SCM Agreement , the Agreement on Agriculture , or any other covered agreement dictates how a 
provider of guarantees must calibrate particular fees according to particular risks. 
 
                                                     
 
261 Such disaggregation appeared for the first time in the President's 2007 budget, released in 
February, 2006.  See response to Question 110, below. 
262 Brazil First Written Submission, para. 339.  Nor were any GSM 103 guarantees issued in FY 2002.  
See, Summary of Export Credit Guarant ee Program Activity in FY 1991-1998 (Exhibit US-41 in the original 
proceedings) (Exhibit BRA-509).  Only $7.6 million were issued in FY 2003.  See Summary of FY 2003 Export 
Credit Guarantee Program Activity, USDA FAS Online, Septembe r 2003, accessed November 2006 at 
http://www.fas.usda.gov/excredits/Monthly/2003/03_09_30.pdf  (Exhibit BRA-518). 
263 Brazil First Written Submission , para. 339.  
264 Upland Cotton (Panel) , para. 7.833;  Summary of Export Credit Guarantee Program Activity in 
FY 1991-1998 (Exhibit US-41 in the orig inal proceedings) (Exhibit BRA-509). 
265 Summary of Export Credit Guarantee Program Ac tivity in FY 1991-1998 (Exhibit US-41 in the 
original proceedings) (Exhibit BRA-509);  Summary of FY 2004 Export Credit Guarantee Program Activity, 
USDA FAS Online, September 2004, accessed October 2006 at 
http://www.fas.usda.gov/excredits/Monthly/2004/04_09_30.pdf  (BRA-510);  Summary of FY 2005 Export 
Credit Guarantee Program  Activity, USDA FAS Online, Septembe r 2005, accessed October 2006 at 
http://www.fas.usda.gov/excredits/Monthly/2005/05_09_30.pdf  (BRA-511);  Summary of FY 2006 Export 
Credit Guarantee Program  Activity, USDA FAS Online, Septembe r 2006, accessed October 2006 at 
http://www.fas.usda.gov/excredits/Monthly/2006/06_09_30.pdf  (BRA-513);  and Summary of FY 2003 Export 
Credit Guarantee Program Activity, USDA FAS Online, Septembe r 2003, accessed November 2006 at 
http://www.fas.usda.gov/excredits/Monthly/2003/03_09_30.pdf  (Exhibit BRA-518).  WT/DS267/RW 
 Page D-433 
 
 
247. For GSM-102 guarantees, CCC imposes gra duated fees based on both tenor and the 
applicable country risk.  In addition, CCC imposes  strict limits on exposure to individual bank 
obligors.  Brazil dismisses this in arguing that the only way to achieve "prudent fiscal management" is to do it in the exact manner Brazil dictates, requiring not only the tight exposure limits that CCC employs, but also different fees for different bank s.  Brazil provides no basis in the text for the 
obligation it asserts.   
 248. Private sector creditors have individual methodologies for risk-rating and pricing of their 
products.  And there is no reason to assume that the discretion of Members has been eliminated in this 
regard, especially in the absence of express obligations  in the covered agreements to this effect.  
Indeed, to illustrate the myriad vehicles for risk management available to lenders, the United States 
provides in Exhibit US-157 the June 12, 2006 re marks of Ben Bernanke, the Chairman of the 
United States Federal Reserve Board on "Modern Ri sk Management and Banki ng Supervision."  CCC 
chooses to manage its risk by setting the fee base d on country risk and the relative repayment risk 
presented over time (tenor risk).  To address the pot ential risk of default from the obligor bank, CCC 
opts instead to constrain its total potential exposure by establishing rigid limits for each particular 
obligor.
266  Brazil has provided no basis to reject these choices by the United States. 
 
105. What considerations must guide the Pa nel's decision to accept or refuse new 
evidence or arguments on issues that were add ressed by the original Panel?  Please 
discuss in light of the following: 
 
(a) The original Panel found that original subsidy estimates, while not 
reflecting 'actual' figures, nevertheless provide a reliable measure of the United States government's own assessment of the profitability of the export credit guarantee programmes.  Is the United States asking the Panel 
to revisit that conclusion (see paras 108 ff. of the United States' First 
Written Submission).   
 
(b) The United States presents evidence which, it argues, demonstrates that the 
three programmes examined by the original panel were operated at no net cost to the US government.  Is there an y issue as to whether the Panel can 
or should accept the United States' evidence in this respect? 
 
249. The United States assumes that the Panel's question above relates to the arguments set out in paragraphs coming before – not af ter – paragraph 108.  The response that follows is based on this 
assumption. 
 
250. First, the United States does not find any limitation in the DSU on the evidence and arguments that parties may submit in a complian ce proceeding.  This makes sense given that 
"Article 21.5 proceedings involve, in principle, not the original measure, but rather a new and 
different measure which was not before the original panel."
267  The question is simply one of the 
weight to be given to the evidence and arguments that are presented to the compliance panel.  The 
United States has explained its views on that matter be fore in response to Question 2 in the first set of 
questions from the Panel and again under Questi on 54 above.  Specifically, under Article 11 of the 
DSU, the Panel is tasked with, inter alia , making "an objective assessment of the matter before it, 
including an objective assessment of the facts of th e case."  In doing so, the panel is not bound by the 
findings of the original panel.  Indeed, according to  the Appellate Body, "the relevant facts bearing 
upon the 'measure taken to comply' may be different from the relevant facts relating to the measure at 
                                                      
266 In this respect, CCC applies the CAMEL approach  to its financial analysis, discussed in the 
response to Question 112, below 
267 Canada – Aircraft (21.5 Brazil) (AB) , para. 41. WT/DS267/RW  
Page D-434  
 
issue in the original proceedings."
268  Moreover, "the claims, arguments and factual circumstances 
which are pertinent to the 'measure taken to co mply' will not, necessarily, be the same as those which 
were pertinent in the original dispute."269  The Appellate Body has, therefore, clarified that:   
 
the utility of the review envisaged under Article 21.5 of the DSU would be seriously 
undermined if a panel were restricted to examining the new measure from the 
perspective of the claims, arguments and factual circumstances that related to the original measure, because an Article 21.5 panel would then be unable to examine fully the 'consistency with a covered agreem ent of the measures taken to comply,' as 
required by Article 21.5 of the DSU.
270 
251. Nonetheless, the Panel may well consider that  the reasoning of the original panel to be 
persuasive on points that are apposite.271  This would be true, for exam ple, where the evidence before 
this Panel confirms that the same reason ing is appropriate in this proceeding. 
 252. In the case of export credit guarantees, however, it is especially important to consider the data 
that is becoming available regarding the actual perfo rmance of the programs.  Much of this evidence 
was simply not available at the time of the original panel proceeding.  And, in fact, the limited nature 
of the data available at that point constrained th e conclusions that could be reached.  There is no 
reason why this Panel should be similarly cons trained even though fuller and more accurate 
information about the performance of the programs is now available.  
253. Second, with respect to the original panel's findings regarding the original subsidy estimates, 
the United States notes that the original panel c onsidered the significance of "original subsidy 
estimates" principally in the context of assessing th e past performance of the programs.  The original 
panel recognized that these are "initial estimates," s ubject to "re-estimations over the lifetime of the 
guarantees involved."
272  The original panel then proceeded to  examine numerous other elements of 
the evidence on the record, all of wh ich, in the original panel's view, buttressed a determination that 
the programs in fact did result in a net cost to the Un ited States.  This included, in significant respect:  
(1) the arguments of the parties concerning re-scheduled debt273, (2) the cumulative re-estimates on a 
cohort-specific basis that then still showed a positive subsidy of a pproximately $230 million274, and 
(3) the credit guarantee liability figure in the CCC financial statements.275  Consideration of those 
factors together led the original pa nel to conclude that the three pr ograms before it were "run at a net 
cost to the United States government."276  In that context, the role of  the "original subsidy estimates" 
was but one factor among an array of factors that, in the aggregate, led the original panel to reach its 
final conclusion about the profitability of the programs.  254. The facts now before the compliance panel ar e different and show a clearer and different 
picture of profitability.  Two of the three programs th at were at issue before are no longer operational, 
and the fee schedule and eligibility conditions for the  GSM-102 program have been substantially 
modified.  More significantly, as the United States has demonstrated, the subsidy estimate net of 
                                                     
 
268 Canada – Aircraft (21.5 – Brazil) (AB) , para. 41. 
269 Canada – Aircraft (21.5 – Brazil) (AB) , para. 41. 
270 Canada – Aircraft (21.5 – Brazil) (AB) , para. 41. 
271 United States – Shrimp (21.5 – Malaysia) (AB) , para. 108 (citing Japan – Alcoholic Beverages (AB)  
at 108). 
272 Upland Cotton (Panel) , para. 7.843 
273 Upland Cotton (Panel) , paras. 7.847, 7.851. 
274 Upland Cotton (Panel) , para. 7.852. 
275 Upland Cotton (Panel) , para. 7.855. 
276 Upland Cotton (Panel) , para. 7.856.  WT/DS267/RW 
 Page D-435 
 
 
reestimate reflects a profit for the programs  for all cohorts 199 2-2006 of $403,714,701.277  T h e  
original panel did not have – indeed, could not ha ve had – this evidence before it as context in 
assessing whether not the original subsidy estimates provide a reliable measure of the United States 
government's assessment of the profitability of  the export credit guarantee programmes.  The 
United States has explained that they do not (and why they do not).278  The evidence now fully bears 
out the U.S. explanations. 
 255. In any event, in the original panel's conc lusions, the original subsidy estimates were not 
dispositive on the question of whether the three export credit guarantee programs met the test of 
item(j).  It was but one factor in the original pa nel's analysis.  The original panel, however, also 
recognized the significance and relevance of re- estimation and the resulting net subsidy figure, 
whether positive or negative.  An objective assessmen t of the facts before the compliance panel now 
indicates that premia under the GSM-102 program are adequate to cover the long-term operating costs 
and losses of the program.  
106. The parties disagree as to whether Brazil should include recoveries for pre- 1992 
guarantees in its cash basis accounting formula (Exhibit Bra-613).  Is the Panel correct in understanding that Brazil's formula does not includes amounts for 
(1) claims paid after 1992 under pre-1992 guarantees;  (2) fees paid on pre-1992 guarantees? If so, please explain the relevance or non-relevance of including 
recoveries under pre-1992 guarantees in light of the non-inclusion of costs and 
other revenues related to the same guarantees.  
 
256. The Panel is correct in understanding that  Brazil's formula does not include amounts for 
(1) claims paid after 1992 under pre-1992 guara ntees and (2) fees paid on pre-1992 guarantees. 
 
257. Regarding Brazil's cash basis approach, the United States recalls again what the methodology 
purports to do – namely, to depict on a strictly chronological basis, for a finite period of time (FY 1993-2005), cash flows in and out related to th e export credit guarantee programs.  As Brazil – 
not the original panel – did in the original dispute with respect to the finite period 1993-2002, the methodology nets "program receipts against program disbursements on a fiscal year basis."
279  To the 
extent Brazil's approach is abandoning the credit re form approach and reverting to a strict cash-in, 
cash-out approach, it would be internally consistent  and highly relevant to account for all of the cash 
in and all of the cash out during the specified finite  period.  To that end, in addition to the cash 
numbers presented by Brazil, the United States has noted the additional cash received and the additional cash out during the same time frame (FY1993-2005).
280 
 
258. The United States also recalls that the U.S.  credit reform approach was developed and 
imposed to avoid precisely the kind of anomalies th at arise under the strict cash-basis approach that 
Brazil now advocates.  Indeed, as Brazil articulated be fore the original panel:  "[p]rior to passage of 
the [Credit Reform Act of 1990], loan guarantees were recorded on a cash basis, which distorted their 
costs. [R]ecording guarantees on a 'cash basis distorted the timing of when costs would actually be 
incurred.'"281 
 
259. Brazil championed credit reform accounting, instead, as:    
                                                     
 
277 See Answer of the United States to Question 111 below, updating the table in paragraph 87 of the 
U.S. First Written Submission. 
278 See e.g.,  U.S. First Written Submission, paras. 100-1 04;  U.S. Oral Statement, paras.22-23. 
279 Brazil Rebuttal Submission, para. 485 
280 U.S. Rebuttal Submission, para. 98 and fn. 150. 
281 Statement of Brazil - First (Original) Panel Meeting (22 July 2003), para. 128 WT/DS267/RW  
Page D-436  
 
an ideal basis on which to determine whet her the CCC's export credit loan guarantee 
programs are offered at premium rates that are inadequate to cover the long-term operating costs and losses of the programs, within the meaning of item(j) of the Illustrative List of Export Subsidies.  It functions as a more sophisticated alternative 
to constructed cost formulas, and thoroughly accounts for all of the premium and 
operating cost and loss elements required by item(j).  Moreover, it has the virtue of 
serving as the actual, real-world calculation used by the U.S. Congress, the President 
of the United States, and federal agencies lik e the CCC to "measure more accurately 
the costs of Federal credit programs."
282 
260. Again, Brazil never proposed to the origin al panel that its cash-basis methodology supplant 
the credit reform approach.  To the contrary, "Brazil emphasize[d] that it does not intend for this 
revised constructed formula to replace the formula used by the U.S. government itself to track the 
costs of the CCC guarantee programs pursuant to the U.S. Federal Credit Reform Act."283 
 261. With respect to the cash-basis methodol ogy that Brazil advan ces, Brazil accuses the 
United States of presenting a "skewed picture of the CCC's performance," because it allegedly does 
not take into account "defaults, write-o ffs or other losses on the same ECGs."
284  However, as an 
initial matter, the United States notes that it has ne ver suggested that Brazil's methodology is an 
appropriate approach to examining the question at issue.  It is Brazil  that has championed the 
approach of examining cash flows from 1992 forwar d;  the United States has simply identified the 
flaws in Brazil's analysis.285  Therefore, it is inexplicable – and entirely disingenuous – that Brazil 
criticizes the United States for not including reco veries received before 1992 (indeed as far back 
as 1980 ).286  The methodology is Brazil's preferred approach.  The United States considers it to 
inappropriate in toto . 
 262. Second, Brazil's accusation that the United Stat es has not addressed "write-offs or unspecified 
'other adjustments'"
287 is simply without merit.  For example, in its oral statement, Brazil mentions 
specifically a $2 billion write-off in FY 2005 and s uggests that the United States has not addressed 
this.  Brazil is wrong.  As is clear from the c itation that Brazil provides, the cash-basis picture 
presented by the United States fully accounts for this figure.  Brazil cites to "the U.S. Budget, CCC 
ECG Liquidating Account, FY 2007, p. 118, line 2364."288  The $2 billion  figure is shown as a net 
downward adjustment in the "Status of Guaranteed Loans."   This item reflects a write-off of the 
outstanding receivable  in the amount of approximately $2 billion owed from Iraq.  This is not a cash 
expense.  Indeed, the corresponding cash expense ha d already been accounted for in the $2 billion in 
claims that CCC paid and which were previously re flected in the "default claims" line 00.01, referred 
to in Exhibit Bra-613.  The write-off of the receivable  pertains to the reduction in value of an asset on 
the balance sheet of CCC.  It has no bearing on th e cash accounting that Brazil advances.  The other 
two examples Brazil cites in footnote 290 of its Oral Statement are similar instances of a reduction in 
a receivable, not a cash outlay or expense.289 
 
                                                      
282 Statement of Brazil - First (Original) Panel Meeting (22 July 2003), para. 129 
283 Brazil's Answers to Questions Posed by the Pane l Following the First Substantive Meeting of the 
Panel, para. 164 (Question 77) (11 August 2003) (emphasis in original) 
284 Oral Statement of Brazil, para. 262. 
285 Brazil Rebuttal Submission, para. 133. 
286 Oral Statement of Brazil, para. 263 
287 Oral Statement of Brazil, para. 262. 
288 See Oral Statement of Braz il, para. 263, n.290. 
289 Line 2361 in the 1996 budget explicitly states that it shows "w rite offs of loans receivable"  WT/DS267/RW 
 Page D-437 
 
 
Questions to the United States  
 
107. What can explain the discrepancy between  the "credit guarantee liability" recorded 
in the CCC's financial statements (which suggest that the program is provided at a net cost to the US government) and the evidence presented by the US in para. 87 of 
its First Written Submission? 
 108. Please explain why the "liability" figure in the CCC's financial statements should 
not be considered by the panel to provide, if  not the amount of actual losses, at least 
a reliable estimate of the CCC's own perception of the cost to the government of the 
programmes since their inception. Is the Panel wrong in understanding that a 
"credit guarantee liability" in this context means that the CCC considers that the 
programmes will not cover their cost s and losses in the long term? 
 
263. As Questions 107 and 108 are closely relate d, the United States addresses both together.  
 
264. The "credit guarantee liability" figure record ed in the CCC's financial statements and the 
evidence presented by the United St ates in paragraph 87 of its first written submission represent two 
very different things:  
• The "negative subsidy estimate net of re-estimates" in paragraph 87 of the U.S. first 
written submission represents profit.290  Brazil has recognized that negative subsidy 
amounts reflect overall profitability of the program.291   
 
• The "credit guarantee liability" figure, on th e other hand, does not reflect either profit 
or loss.  It is a balance sheet entry of liability for which there is an offsetting balance 
sheet entry of an asset .  It does not reflect or suggest a "net cost" or "net profit" to the 
U.S. government.  Similarly, as a credit guara ntee liability is only on one side of a 
balance sheet, it does not purport to be an  estimate of the ability of CCC to have 
adequate revenue to cover the costs a nd losses of the program in the long-term. 
 265. The U.S. Standard General Ledger provid es a uniform chart of accounts and technical 
guidance to be used in standardizing federal agency accounting.
292  The U.S. Government Standard 
General Ledger sets forth instructions for all U.S.  Government account transactions, including those 
for the CCC.  The particular instruction applicab le to credit guarantee liability is instruction C428.293  
That instruction prescribes how "to record loans and interest receivable from non-Federal sources for 
defaulted guaranteed loans."  The instruction di rects that upon the occurrence of a default on a 
guaranteed loan, the government agency is to reco rd a credit for "loan guarantee liability" and an 
offsetting debit for loans receivable.294  Instructions for treatment of "loan guarantee liability" are 
peppered throughout the Standard Ge neral Ledger, but each instruction directs an offsetting entry on 
the opposite side of the ledger. 
                                                      
290 U.S. First Written Submission, para. 83, fn. 126, and citations therein. 
291 U.S. First Written Submission, para. 96, fn. 158, and citations therein. 
292 Overview:  US Standard General Ledge r http://www.fms.treas .gov/ussgl/about.html  
(Exhibit US-158). 
293 Exhibit US-159 reproduces the Standard General Ledger cover;  Treasury Financial Manual 
Transmittal Letter No. S2 06-02 (14 July 2006), which immediately follows the cover, and pages III-146 
and III-151 of the Ledger.  The Standard General Ledger its elf is 1354 pages in length and is available in full in 
pdf format at:  http://fms.treas.gov/us sgl/tfm_releases/06-02/ussgl_06-02.pdf  
Pages III-146 and III-151 correspond to pages 972 and 977, respectively, in that format. 
294 In addition, it directs the agency to record a credit for "allowance for subsidy" and a debit for 
interest receivable.  For each defaulted loan the total debits of interest receivabl e and loans receivable should 
equal the total credits of allowance for subsidy and loan guarantee liability. WT/DS267/RW  
Page D-438  
 
266. In addition, each agency of the United  States government, including CCC, has financial 
reporting requirements.  The Office of the Mana gement and Budget ("OMB") issues guidance and 
requirements in respect of financial reporting that  are applicable throughout the federal government.
295  
OMB Circular A-136 sets forth the required form and content of agency financial statements, 
including the CCC financial statements.296 
 
267. Section 9 of the Circular sets forth the para meters for "Notes to the Financial Statements."297  
Note 8 of Section 9 specifically addresses Note Di sclosures for "Direct Loans and Loan Guarantees, 
Non-Federal Borrowers" and the format of that note.298  This is the portion of the required financial 
reporting requirements directly applicable  to the "credit guarantee liability" figure.299 
 
268. Consistent with the approach reflected in th e Standard General Ledger, the instructions for 
Circular A-136 direct,"for each program with post- 1991 Loan Guarantees, report gross receivables 
from defaulted guaranteed loans assumed for direct  collection [] in column 2 [of Section I]."300  
Column 2 of Section I (Defaulted Guaranteed  Loans from Post-1991 Guarantees) is entitled 
"Defaulted Guaranteed Loans Receivable, Gross".301  The sum of the amounts reported in Section I 
"shall equal the amount reported on th e Balance Sheet as loans receivab les [sic] and related foreclosed 
property, net."302  These are receivables on the asset side of a balance sheet . 
 269. On the liability side of the balance sheet  is Section K:  "Liability for Loan Guarantees."
303  
The instructions for Section K state:  "For each program with post-1991 loan guarantees, report in 
column 3 [of Section K] the present value of the estim ated net cash flows (outflows less inflows) to be 
paid by the entity as a result of the loan guarantees."304  This figure is then reported in the "total 
liabilities for loan guarantees (column 4 [of Section K])."305   
 270. Consequently, every federal government agency, in cluding CCC, is required to reflect on its 
financial statements for each defaulted guaranteed  loan:  (1) an asset of a "gross receivable from 
defaulted guaranteed loan assumed for direct coll ection" and (2) an offsetting "credit guarantee 
liability."  
 
271. Turning to the Panel's question as to whether the liability figure may be considered a loss, the 
United States notes the original panel's explanation th at a "liability" is defined as "... a probable future 
outflow or other sacrifice of resources as a result of past transactions or events."
306  The United States 
considers that this is an accurate and proper defini tion of liability.  The or iginal panel specifically 
                                                      
295 Office of Management and Budget Circular A-136 (Exhibit US-160). 
296 Office of Management and Budget Circular A-136, Overview, pp. 1-2 (Exhibit US-160). 
297 Office of Management and Budget Circular A-136, pp.63-105 (Exhibit US-160). 
298 Office of Management and Budget Circular A-136, p. 70-84 (Exhibit US-160). 
299 Compare CCC Notes to Financial Statements, p. 26 (Exhibit BRA-585) with Office of Management 
and Budget Circular A-136, Schedule for Reco nciling Loan Guarantee Liability Balances, p.77 
(Exhibit US-160). 
300 Office of Management and Budget Circular A-136, pp. 82, 74 (Exhibit US-160).  Analogously, 
"when the reporting entity has made payments on beha lf of borrowers which should be collected from the 
borrowers, the resulting receivables sha ll be reported in the same column as loans receivable for either direct 
loans or defaulted guaranteed loans."  Office of Management and Budget Circular A-136, p. 79 
(Exhibit US-160). 
301 Office of Management and Budget Circular A-136, p. 74 (Exhibit US-160). 
302 Office of Management and Budget Circular A-136, p. 82 (Exhibit US-160). 
303 Office of Management and Budget Circular A-136, pp. 82, 75 (Exhibit US-160). 
304 Office of Management and Budget Circular A-136, p. 82 (Exhibit US-160). 
305 Office of Management and Budget Circular A-136, p. 82 (Exhibit US-160). 
306 Upland Cotton (Panel) , para. 7.855  WT/DS267/RW 
 Page D-439 
 
 
noted that such a "probable future ou tflow" does not equate with "loss."307  Citing the Federal 
Accounting Standards Advisory Board Statements of Federal Financial Accounting Concepts and 
Standards, the panel noted that the definition of "los s," in contrast, is "any expense or irrecoverable 
cost, often referred to as a nonrecurring charge, an expenditure from which no present or future 
benefit may be expected."308  CCC clearly has an expectation of recovery on the receivable it has 
obtained in exchange for its payment for a default on a guaranteed loan.  Therefore, the receivables 
are not properly considered to be "losses."  272. The United States notes in this regard that Brazil has attempted to characterize the credit 
guarantee liability figure as a "new cumulative lo ss figure of $220 million" for all export credit 
guarantees issued after fiscal year 1991.
309  This is simply inaccurate.  As discussed above, the credit 
guarantee liability figure does not in any way depict or  purport to depict a retrospective cumulation of 
loss.  273. On the question of whether or not to consider  the credit guarantee liability figure to be some 
indicator of the U.S. government's perception of th e cost of the programmes since their inception, the 
United States considers that it is not such an indi cator for the reasons just explained – namely, it 
represents only one side of the equation.  The orig inal panel appeared to ascribe such significance to 
it
310 on the understanding that the credit guarantee liability represented a prospective estimate of 
anticipated experience under the program.311  While it does provide such an estimate, it cannot be 
viewed alone without considering the offsetting entries on the asset side, arising from the expectation 
of recovery on loans receivable as a result of CCC's subrogated position to collect on such loans 
following default.  
109. Please indicate to the Panel whether th ere have been occurrences of reschedulings 
prior to the occurrence of defaults and the payment of claims by the CCC. 
 
274. To the best of the U.S. knowledge, the CCC has never rescheduled any obligations guaranteed 
under the export credit guarantee programs prior to the occurrence of default.  
110. Is it possible to calculate the "subsidy estimate net of reestimates" for GSM 102 
alone (similar to what the US has done for all three programmes in para. 87)?  
If so, please provide a table record ing the results of this exercise. 
 
275. The United States has only maintained a nd published disaggregated figures for each of 
GSM 102, GSM 103, and SCGP as of the budget for fiscal year 2007.  Before that time the three programs were grouped together for purposes of calcu lation of the subsidy estimate net of reestimate 
reflected in paragraph 87 of the U.S. first written s ubmission.  To calculate this figure specifically for 
each cohort of the GSM 102 guarantees would require an  original subsidy estimate for each such 
GSM 102 cohort.  Unfortunately, the United States do es not have such data for any cohorts before 
FY 2005.  The table below reflects the data for GSM-102 cohorts 2005 and 2006.  
                                                     
 
307 Upland Cotton (Panel) , para. 7.855 
308 Upland Cotton (Panel) , para. 7.855, fn. 1030 
309 Brazil Rebuttal Submission, para. 484. 
310 Upland Cotton (Panel) , para. 7.855. 
311 U.S. Answers to (Original) Panel's Question 227 Following Second Panel Meeting (22 December 
2003) WT/DS267/RW  
Page D-440  
 
GSM-102 Export Credit Guarantee Program 
Subsidy Estimates and Reestimates by Cohort 
FY 2005 and 2006 Cohorts 
(Dollars in Thousands) 
 
Cohort Original Subsidy 
Estimate  Total Lifetime 
Reestimates a / Subsidy Estimate Net of 
Reestimates 
2005  $142,000 b / -$92,209 $49,791 
2006 71,000 c /  -18,324  52,676 
a/ 2008 U.S. Government Budget Federal Credit Supplement:  Table 8 – Loan Guarantees:  Subsidy 
Reestimates;  p. 45  (Exhibit US-74) 
b/ 2007 U.S. Government Budget Appendix:  CCC Export Loans Program Account line 233001;  p.116  
(Exhibit BRA-544) 
c/ 2008 U.S. Government Budget Appendix:  CCC Export Loans Program Account line 233001;  p.105 
(Exhibit US-161) 
 
276. Although  the subsidy estimate net of reestimat es for these very recent cohorts is currently 
positive, it is important to note the precipitous dec line in the subsidy estimate for both cohorts in only 
the short time that has elapsed si nce the issuance of these cohorts.  The United States has explained 
why original subsidy estimates are routinely too high.312  The United States will not repeat its 
arguments here, but will simply note that the consid erations reflected in the U.S. submissions are 
equally applicable to the 2005 and 2006 cohorts of  GSM-102 guarantees.  In this context, the 
United States also refers the Panel to the r esponse of the United States to Question 102 above. 
 
111. In paragraph 7.853, the or iginal Panel stated that it "disagree(d) with the 
United States that we should 'eliminate' the data for certain, more recent, cohorts 
in our analysis."  Is the United States asking that this Panel eliminate such data for 
the most recent cohorts (the table at para. 87 of the United States' First Written Submission includes data up to 2005 only).  Why should this Panel do what the original refused to do?  What woul d be the result of the United States 
"re-estimates" exercise if the original subsidy estimate for the 2006 and 2007 cohorts were included?  
 
277. The United States has not asked this Panel to el iminate data for the most recent cohorts.  The 
data in the table at paragraph 87 of the U.S. First Written Submission includes data up to 2005 only 
because, as Brazil has noted, that was the most r ecent year for which full data was available.
313  
Enough time has elapsed now to include data for FY 2006.  This data is reflected in the table below.   
As FY 2007 is still on-going, reestimates for that year are not yet available. 
 
                                                      
312 U.S. First Written Submission, paras. 102-104;  U.S. Rebuttal Submission, paras. 108-126. 
313 Rebuttal Submission of Brazil, para. 486.  WT/DS267/RW 
 Page D-441 
 
 
GSM-102/GSM-103/Supplier Credit Guarantee Programs 
Subsidy Estimates and Reestimates by Cohort 
 
Cohort Original Subsidy 
Estimate  Total Reestimates  
a/ Subsidy Net of 
Reestimates 
1992 $267,426,000  -$783,477,474 -$516,051,474 
1993 171,786,000  -364,465,718 -192,679,718 
1994 122,921,000  -133,746,048 -10,825,048 
1995 113,000,000  -160,155,549 -47,155,549 
1996 328,000,000  -390,121,131 -62,121,131 
1997 289,000,000  -287,071,897 1,928,103 
1998 301,000,000  -290,034,778 10,965,222 
1999 158,000,000  -181,797,405 -23,797,405 
2000 195,000,000  -210,481,742 -15,481,742 
2001 103,000,000  -175,810,225 -72,810,225 
2002 97,000,000  -95,302,249 1,697,751 
Subtotal 
1992-2002  
2,146,133,000   
-3,072,464,216  
-926,331,216 
     
2003 170,000,000  -111,539,816 58,460,184 
2004 457,000,000  -199,652,868 257,347,132 
2005 152,000,000  2,133,680 154,133,680 
2006 71,000,000 b / -18,324,481 52,675,519 
Subtotal 
2003-2006  
850,000,000   
-327,383,485  
522,616,515 
     
Total 2,996,133,000  -3,399,847,701 -403,714,701 
a/  2008 U.S. Government Budget Credit Supplement:  Table 8 – Loan Guarantees:  Subsidy Reestimates; 
p. 45   Exhibit US-74 
b/  2008 U.S. Government Budget Appendix:  CCC Export Loans Program Account line 00.02;  p. 105. 
(Exhibit US-161) 
 
278. Indeed, the numbers are now even more favorab le than as set forth in the U.S. First Written 
Submission.  For cohorts 1992-2002, examined by th e original panel, the negative subsidy net of 
reestimates ( i.e., profit) is now $926,331,216 (up from $762,676,594).  For all cohorts 1992-2006, the 
negative subsidy net of reestimates has improve d from a profit of $166,549,780 to a profit of 
$403,714,701.  
112. Please explain whether and how the CCC limits risks or control costs of the 
GSM 102 programme as regards foreign  banks' individual credit ratings. 
 
279. Under the GSM-102 program, CCC limits its risk of exposure to default by obligor banks by 
establishing a particular credit limit for each bank.  CCC will not issue credit guarantees in respect of 
a particular bank beyond its applicable credit limit.  In conducting its analysis of individual banks to 
establish such credit limits, CCC maintains a ma trix indicating the correspondence of CCC's 
categorization of bank risk with that used by va rious external rating agencies such as Fitch Ratings, 
Moody's Investor Services, Standard  and Poors, and Capital Intelligence.  Such external ratings are 
used as a comparative tool in the establishment of  the CCC ratings.  Most of the banks for which CCC 
has established credit limits are not rated by all of th ese external rating agencies.  Some banks, in fact, 
may not be rated by any of these external rating agencies. 
 280. In addition, CCC takes the applicable country risk rating into account.  In general, the bank 
does not receive a more favorable rating than the country in which it is domiciled.   
 WT/DS267/RW  
Page D-442  
 
281. CCC also conducts an independe nt financial and risk analysis of each bank as part of the 
process to establish a risk rating for su ch bank.  To the extent they ex ist, external agency ratings are 
an important component of the overall analysis and assessment.  282. CCC uses the traditional CAMEL approach in its analysis.
314  This approach analyzes capital 
adequacy (C), asset quality (A), management (M), ear nings (E), and liquidity (L) of the particular 
bank.  Other factors, such as franchise value, mark et risk, and operational risk are also taken into 
consideration.  283. CCC further uses another matrix to assure th at credit limits as a percentage of net worth 
reflect the bank's risk rating - a bank with a bette r risk rating can have a higher credit limit as a 
percentage of net worth than a bank with a lower risk rating.  
113. Please explain whether and how CCC co untry risk categories correspond to ICRAS 
ratings.  
 
284. Eligible countries for CCC export credit gua rantees are graduated in seven CCC risk grades 
enumerated 0 through 6.
315  ICRAS provides two risk ratings for each country – a sovereign rating and 
a non-sovereign rating.  Each country is rated on an 11-category scale.316 ICRAS country risk grades 
are a significant component in the development of CCC country risk grades.  
Question to Brazil
  
 
114. Brazil argues that "(t)hat the United States has, on one view of the data, beaten the 
odds and met its costs and losses over a series of years does not mean that ECG 
programs are structured and designed to do so" (para. 503, Brazil's Rebuttal).  Is 
Brazil arguing that evidence regarding the actual operation and "profitability" of 
the programme (i.e. retrospective evidence) is irrelevant to the Panel's analysis under item (j)  
                                                     
 
314 See, e.g. , Federal Reserve Board Supervisory Letter SR 94-12 
http://www.federal reserve.gov/BOARDDOCS/SRLETTER S/1994/SR9412.HTM  (Exhibit US-162 );  "Applying 
the CAMEL Framework", Asian Development Bank h ttp://www.adb.org/Documents/Guidelines/Financial  
part060302.asp (Exhibit US-163). 
315 GSM-102 Guarantee Fee Rate Schedule, US DA FAS Online, accessed September 2006 at 
www.fas.usda.gov/excredits/gsm102fees.html  (Exhibit BRA-505). 
316 For further information see Government Accountability Office's report #GAO-04-531 
(Exhibit US-164).