WORLD TRADE  
ORGANIZATION  WT/DS267/ARB/2 
31 August 2009 
 (09-4015) 
 Original:   English 
 
 
 
 
  
 
 
UNITED STATES – SUBSIDIE S ON UPLAND COTTON 
 
Recourse to Arbitratio n by the United States 
under Article 22.6 of the DSU 
and Article 7.10 of the SCM Agreement  
  
DECISION BY THE ARBITRATOR  
  WT/DS267/ARB/2 
 Page i 
 
 
  TABLE OF CONTENTS 
Page  
I. INTRODUCTION ................................................................................................................... ....................1  
A. INITIAL PROCEEDINGS ............................................................................................................................1  
B. REQUEST FOR ARBITRATION AND ARBITRATION PROCEEDINGS ..............................................................3  
C. ORGANIZATION OF THE PROCEEDINGS AND PRESENTATION OF THE DECISION .......................................5  
II. OVERALL APPROACH OF  THE ARBITRATOR ................................................................................6  
III. PRELIMINARY ISSUE: DO CHANGES IN THE LEGAL BASIS OF THE MARKETING LOAN 
AND COUNTERCYCLICAL PAYMENTS AFFE CT BRAZIL'S ENTITLEMENT TO TAKE 
COUNTERMEASURES? ............................................................................................................... ............6  
A. ARGUMENTS OF THE PARTIES .................................................................................................................7  
B. ASSESSMENT BY THE ARBITRATOR ........................................................................................................8  
IV. ASSESSMENT OF BRAZIL'S PROPOS ED LEVEL OF COUN TERMEASURES ..........................12  
A. MAIN ARGUMENTS OF THE PARTIES .....................................................................................................12  
B. MANDATE OF THE ARBITRATOR AND BURDEN OF PROOF .....................................................................13  
C. COUNTERMEASURES "COMMENSURATE WITH THE DEGREE AND NATURE OF THE ADVERSE 
EFFECTS DETERMINED TO EXIST " (ARTICLE  7.9  AND 7.10  OF THE SCM A GREEMENT )..........................14  
1. The terms of Article 7.9 of the SCM Agreement ..................................................................15  
(a) "countermeas ures".............................................................................................................. ............15  
(b) "commensurate with the degree and nature of the adverse effects determined to exist".................17  
(i) "commensurate" ................................................................................................................. 17 
(ii) The "degree and nature" of  the adverse effects ..................................................................18  
(iii) The "adverse effects de termined to exist" ...........................................................................19  
2. Context ........................................................................................................................ ............20  
3. Object and purpose............................................................................................................. ...20 
D. ASSESSMENT OF BRAZIL 'S PROPOSED COUNTERMEASURES ..................................................................22  
1. Should the level of countermeasures be limit ed to the adverse effects suffered by 
Brazil? ........................................................................................................................ .............22  
(a) Arguments of the parties....................................................................................................... ..........22  
(b) Analysis by th e Arbitr ator ..................................................................................................... .........23  
2. Should the level of countermeasures be adjusted to account for a threshold of 
"significant" price suppression?...........................................................................................28  
(a) Arguments of the parties....................................................................................................... ..........28  
(b) Analysis by th e Arbitr ator ..................................................................................................... .........28  
3. Choice of refe rence p eriod ..................................................................................................... 30 
(a) Arguments of the parties....................................................................................................... ..........31  
(b) Analysis by th e Arbitr ator ..................................................................................................... .........32  
4. Calculations ................................................................................................................... .........33  
(a) Introduc tion ................................................................................................................... .................33  
(b) Brazil's methodolo gy and model ................................................................................................. ...34 
(i) Arguments of the United States...........................................................................................34  
(ii) Analysis by th e Arbitrator...................................................................................................35  
(c) Elasticities used in the model ................................................................................................. ........36  
(i) Long-run vs. shor t-run anal ysis..........................................................................................36  
Arguments of the United States ..........................................................................................36  
Arguments of  Brazil............................................................................................................ 37 
Analysis by the Arbitrator...................................................................................................38  
(ii) Values of the elasticities ..................................................................................................... 39 
US supply el asticity ........................................................................................................... .39 
ROW supply el asticity ........................................................................................................40  
Demand elasticities ............................................................................................................ .40 
Analysis by the Arbitrator...................................................................................................41  
(d) Coupling factor................................................................................................................ ...............43  
(i) Arguments of the United States...........................................................................................44  
(ii) Arguments of  Brazil............................................................................................................ 46 
(iii) Analysis by th e Arbitrator...................................................................................................47  WT/DS267/ARB/2 
Page ii 
 
 
  (e) Price expe ctations............................................................................................................. ..............48  
(i) Arguments of the United States...........................................................................................48  
(ii) Arguments of  Brazil............................................................................................................ 49 
(iii) Analysis by th e Arbitrator...................................................................................................50  
(f) Conclu sions .................................................................................................................... ................51  
V. BRAZIL'S REQUEST TO APPLY COUNTERMEASURES UNDER THE TRIPS AGREEMENT 
AND THE GATS ................................................................................................................... ....................52  
A. DO THE PRINCIPLES AND PROCEDURES OF ARTICLE  22.3  OF THE DSU  APPLY TO BRAZIL 'S 
REQUEST ? .............................................................................................................................. ..............53  
1. Arguments of the parties ....................................................................................................... 53 
2. Assessment by the Arbitrator................................................................................................55  
B. MANDATE OF THE ARBITRATOR AND BURDEN OF PROOF .....................................................................59  
1. Main arguments of the parties ..............................................................................................59  
2. Approach of the Arbitrator...................................................................................................60  
C. BRAZIL 'S DETERMINATION THAT IT IS NOT PRACTICABLE OR EFFECTIVE TO TAKE 
COUNTERMEASURES WHOLLY IN TRADE IN GOODS ...............................................................................64  
1. The principles and procedures of  Article 22.3 of the DSU .................................................64  
(a) First requirement under subparagra ph (c):  a determination that it is "not practicable or 
effective" to suspend concessions or other obl igations with respect to other sectors under 
the same ag reement ............................................................................................................. ...........65  
(i) "practicable" .................................................................................................................. ....65 
(ii) "effective" .................................................................................................................... .......66  
(b) The second element under subparagraph (c):  a determination that "the circumstances are 
serious enough" ................................................................................................................ ..............68  
(c) The elements under subparagr aph (d) of Ar ticle 22.3.....................................................................68  
2. Factual assu mptions............................................................................................................ ...69 
(a) Whether it is appropriate to consider the cumulated amount of co untermeasures arising 
from both pr oceedi ngs.......................................................................................................... ..........70  
(b) Implications of the difference between the level of countermeasures  requested by Brazil 
and the level determined  to be pe rmissible..................................................................................... 71 
3. Whether it is practicable or effective for Brazil to suspend concessions in trade in 
goods.......................................................................................................................... ..............72  
(a) Main arguments of  the parties .................................................................................................. ......73  
(b) Analysis by th e Arbitr ator ..................................................................................................... .........76  
(i) Initial obser vations........................................................................................................... ..76 
(ii) Overall profile of US impor ts of goods to  Brazil ................................................................77  
(iii) Detailed profile of US impor ts to Brazil and availability of suspension in relation 
to various categori es of im ports .........................................................................................79  
Capital goods, intermediate goods and other goods constituting inputs into Brazil's 
economy........................................................................................................................ ......79  
Consumer  goods ................................................................................................................. 81 
Conclu sion ..................................................................................................................... .....85 
(iv) General consid erati ons.......................................................................................................88  
General economic and welfare co sts...................................................................................88  
Inflationary  pressure .......................................................................................................... .89 
Development objectives, imbalance in tr ade relations and pol itical influence....................89  
(v) Overall c onclusion............................................................................................................. .90 
4. Whether "the circumstances  are serious enough" ..............................................................91  
(a) Main arguments of  the parties .................................................................................................. ......91  
(b) Analysis by th e Arbitr ator ..................................................................................................... .........93  
5. Brazil's consideration of th e elements under subparagraph  (d) of Article 22.3 ...............97  
6. Conclu sion..................................................................................................................... ..........98  
VI. CONCLUSIONS AND AWARD .......................................................................................................... ..100 
ANNEX 1........................................................................................................................ ...................................103 
ANNEX 2........................................................................................................................ ...................................106 
  WT/DS267/ARB/2 
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  WTO CASES CITED IN THIS DECISION 
 
Short Title Full Case Title and Citation 
Brazil – Aircraft  
(Article 22.6 – Brazil)  Decision by the Arbitrators, Brazil – Export Financing Programme for Aircraft  
– Recourse to Arbitration by Brazil under Article 22.6 of the DSU and 
Article 4.11 of the SCM Agreement , WT/DS46/ARB, 28 August 2000, 
DSR 2002:I, 19 
Canada – Aircraft Credits and Guarantees  (Article 22.6 – Canada)
  Decision by the Arbitrator, Canada – Export Credits and Loan Guarantees for 
Regional Aircraft – Recourse to Arbitrati on by Canada under Article 22.6 of the 
DSU and Article 4.11 of the SCM Agreement , WT/DS222/ARB, 17 February 
2003, DSR 2003:III, 1187 
EC – Bananas III (Ecuador) (Article 22.6 – EC)
  Decision by the Arbitrators, European Communities – Regime for the 
Importation, Sale and Distribution of Bananas – Recourse to Arbitration by the 
European Communities under Article 22.6 of the DSU , WT/DS27/ARB/ECU, 
24 March 2000, DSR 2000:V, 2237 
EC – Bananas III (US)  
(Article 22.6 – EC)  Decision by the Arbitrators, European Communities – Regime for the 
Importation, Sale and Distribution of Bananas – Recourse to Arbitration by the 
European Communities under Article 22.6 of the DSU , WT/DS27/ARB, 9 April 
1999, DSR 1999:II, 725 
Guatemala – Cement I  Appellate Body Report, Guatemala – Anti-Dumping Investigation Regarding 
Portland Cement from Mexico , WT/DS60/AB/R, adopted 25 November 1998, 
DSR 1998:IX, 3767 
Guatemala – Cement I  Panel Report, Guatemala – Anti-Dumping Investigation Regarding Portland 
Cement from Mexico , WT/DS60/R, adopted 25 November 1998, as modified by 
Appellate Body Report WT/DS60/AB/R, DSR 1998:IX, 3797 
US – Continued Suspension Appellate Body Report, United States – Continued Suspension of Obligations in 
the EC – Hormones Dispute , WT/DS320/AB/R, adopted 14 November 2008 
US – Continued Suspension Panel Report, United States – Continued Suspension of Obligations in the EC – 
Hormones Dispute , WT/DS320/R, adopted 14 November 2008, as modified by 
Appellate Body Report WT/DS320/AB/R 
US – FSC  (Article 22.6 – US)
  Decision by the Arbitrator, United States – Tax Treatment for "Foreign Sales 
Corporations" – Recourse to Arbitrati on by the United States under Article 22.6 
of the DSU and Article 4.11 of the SCM Agreement , WT/DS108/ARB, 30 August 
2002, DSR 2002:VI, 2517 
US – Gambling  (Article 22.6 – US) Decision by the Arbitrator, United States – Measures Affecting the Cross-Border 
Supply of Gambling and Betting Services – Recourse to Arbitration by the United States under Article 22.6 of the DSU , WT/DS285/ARB, 21 December 
2007, DSR 2007:X, 4163 
US – Upland Cotton Appellate Body Report, United States – Subsidies on Upland Cotton , 
WT/DS267/AB/R, adopted 21 March 2005, DSR 2005:I, 3 
US – Upland Cotton Panel Report, United States – Subsidies on Upland Cotton , WT/DS267/R, Corr.1, 
and Add.1 to Add.3, adopted 21 March 2005, as modified by Appellate Body 
Report WT/DS267/AB/R, DSR 2005:II, 299 
US – Upland Cotton 
(Article 21.5 – Brazil) Appellate Body Report, United States – Subsidies on Upland Cotton – Recourse 
to Article 21.5 of the DSU by Brazil , WT/DS267/AB/RW, adopted 20 June 2008 
US – Upland Cotton 
(Article 21.5 – Brazil) Panel Report, United States – Subsidies on Upland Cotton – Recourse to 
Article 21.5 of the DSU by Brazil , WT/DS267/RW and Corr.1, adopted 20 June 
2008, as modified by Appellate Body Report WT/DS267/AB/RW 
 WT/DS267/ARB/2 
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  LIST OF ABBREVIATIONS 
 
2002 Farm Bill Farm Security and Rural Investment Act of 2002 
Anti-Dumping Agreement Agreement on Implementation of Article VI of the General 
Agreement on Tariffs and Trade 1994 
ATPSM Agricultural Trade Policy Simulation Model 
CCC Commodity Credit Corporation 
CCPs Counter-cyclical payments CY Calendar year 
DSB Dispute Settlement Body 
DSU Dispute Settlement Understanding ECGs Export credit guarantees 
FAPRI Food and Agricultural Policy Research Institute  
FAS Foreign Agricultural Service FSRI Farm Security and Rural Investment 
FY Fiscal year 
GATS General Agreement on Trade in Services GATT 1994 General Agreement on Tariffs and Trade 1994 
GSM General Sales Manager 
ILC International Law Commission ML Marketing loans 
MY Marketing year 
ROW Rest of the World RMSE Root measure square error SCM Agreement Agreement on Subsidies and Countervailing Measures 
SCGP Supplier Credit Guarantee Program 
Step 2 User Marketing Step 2 
TRIPS Trade-Related Aspects of Intellectual Property Rights USDA United States Department of Agriculture 
US United States 
Vienna Convention Vienna Convention on the Law of Treaties  WT/DS267/ARB/2 
 Page 1 
 
 
  I. INTRODUCTION 
A. INITIAL PROCEEDINGS  
1.1 On 21 March 2005, the Dispute Settlement Body  ("DSB") adopted the Appellate Body report1 
and the report of the Panel in this case2, as modified by the Appellate Body. 
1.2 The Appellate Body upheld the conclusions of th e panel that the Step 2 payments made to 
domestic users and those made to e xporters were subsidies within the meaning of Article 3.1(b) of the 
SCM Agreement  (in the case of the former) and Article 3.1(a) of the same Agreement (in the case of 
the latter), and were prohibited by those provi sions respectively and granted and maintained 
inconsistently with Article 3 of that  Agreement.  The Appellate Body also upheld the Panel's findings 
that the export credit guarantee programmes at i ssue, i.e. GSM 102, GSM 103 and SCGP, constituted 
per se  export subsidies within the meaning of Item (j) of the Illustrative List of Export Subsidies in 
Annex I of the SCM Agreement  and therefore were subsidies incons istent with Article 3.1(a) and 3.2 
of the SCM Agreement .  The Appellate Body also upheld the Panel's conclusion that the effect of 
marketing loan programme payments, Step 2 paym ents, market loss assistance payments and counter-
cyclical payments (the "price-contingent subsid ies") was significant price suppression in the same 
world market within the meaning of Article 6.3 (c) of the SCM Agreement .3 
1.3 As recommended by the original panel under Article 4.7 of the SCM Agreement , the 
compliance period for the prohibited subsidies expired on 1 July 2005.  In accordance with Article 7.9 
of the SCM Agreement , the compliance period for the actionabl e subsidies expired on 21 September 
2005, six months after the date on which th e DSB adopted the Appellate Body report.4 
1.4 On 30 June 2005, the United States Department of Agriculture (the "USDA") announced that 
the United States Commodity Credit Corporation (the  "CCC") would no longer accept applications for 
export credit guarantees under the GSM 103 programme.5  The USDA also announced that the CCC 
would use a new fee structure for the GSM 102 and SCGP programmes.6 
1.5 In October 2005, the CCC ceased issuing export credit guarantees under the SCGP.7 
1.6 On 1 February 2006, United States Congress adopted legislation repealing the Step 2 
payments programme for upland cotto n effective as of 1 August 2006.8 
                                                      
1 Appellate Body Report, United States – Subsidies on Upland Cotton , WT/DS267/AB/R (hereafter the 
"Appellate Body Report"). 
2 Panel Report, United States – Subsidies on Upland Cotton , WT/DS267/R (herea fter the "Panel 
Report"). 
3 See Appellate Body Report, para. 763 (c), (d) and (e). 
4 See WT/DS267/21, WT/DS267/26. 
5 See Panel Report, para. 3.16 (referring to "USDA announces changes to export credit guarantee 
programs to comply with WTO findings", USDA Fore ign Agricultural Service (FAS) Online News Release 
of  30 June 2005 (Exhibit Bra-502 submitted by Brazil to the Panel);  and "Notice to GSM-103 Program 
Participants", USDA FAS Program Announcement of 30 J une 2005 (Exhibit Bra-503 submitted by Brazil to the 
Panel)). 
6 See Panel Report, para. 3.16.   
7 See ibid. (referring to United States' first written submission to the Panel, para. 20, and "Summary of 
FY 2006 Export Credit Guarantee Programme Activity for GSM-102 as of close of business: 9/30/2006" 
(Exhibit Bra-513 submitted by Brazil to the Panel)).   
8 See Panel Report, para. 3.7 (referring to Section 1103 of the Deficit Reduction Act of 2005, Public 
Law No. 109-171 (Exhibit Bra-435 submitted by Brazil to the Panel)). WT/DS267/ARB/2 
Page 2 
 
 
  1.7 On 18 August 2006, Brazil requested the establishm ent of a panel pursuant to Article 21.5 of 
the Dispute Settlement Understanding ("DSU") concer ning the alleged failure of the United States to 
implement the recommendations and rulings of the DSB.9  At its meeting of 28 September 2006 the 
DSB decided, in accordance with Article 21.5 of the DSU, to refer this matter, if possible, to the 
original Panel.  The compliance panel report was circulated to Members on 18 December 2007. 
1.8 With respect to the marketing loan and c ounter-cyclical payments, the compliance panel 
found that the United States failed to comply with the DSB recommendations by acting inconsistently 
with Articles 5(c) and 6.3(c) of the SCM Agreement :  
"The United States acts inconsistently w ith its obligations under Articles 5(c) 
and 6.3(c) of the SCM Agreement  in that the  effect of marketing loan and counter-
cyclical payments provided to US upland cotton producers pursuant to the FSRI Act 
of 2002 is significant price suppression within the meaning of Article 6.3(c) of the SCM Agreement  in the world market for upland co tton constituting 'present' serious 
prejudice to the interests of Brazil within the meaning of Article 5(c) of the 
SCM Agreement.   B y  acting inconsistently with Artic les 5(c) and 6.3(c) of the 
SCM Agreement  the United States has failed to comply with the DSB 
recommendations and rulings.  Specifically, the United States has failed to comply 
with its obligation under Article 7.8 of the SCM Agreement  'to take appropriate steps 
to remove the adverse effects or ... withdraw the subsidy'."
10 
1.9 The compliance panel concluded that "to th e extent that the measures taken by the 
United States to comply with the recommendations and rulings adopted by the DSB in the original 
proceeding are inconsistent with the obligations of the United States under the covered agreements, 
these recommendations and rulings remain operative."11 
1.10 On 12 February 2008, the United States notified the DSB of its intention to appeal certain 
issues of law covered in the Report of the comp liance panel and certain legal interpretations 
developed by the panel and filed a Notice of Appeal.12  On 25 February 2008, Brazil notified the 
DSB, pursuant to Article 16.4 of the DSU, of its in tention to appeal certain issues of law covered in 
the Report of the compliance panel and certain legal interpretations developed by the Panel and filed a 
Notice of Other Appeal.13   
1.11 The Appellate Body report was circulated on 2 June 2008.  The Appellate Body upheld the 
compliance panel's conclusions with respect to the marketing loan and counte r-cyclical payments as 
well as the conclusions on the GSM 102 export credit guarantees issued under the revised GSM 102 
programme.14   
1.12 The DSB adopted the Appellate Body report a nd the compliance panel report as modified by 
the Appellate Body on 20 June 2008.   
                                                      
9 WT/DS267/30. 
10 Panel Report, US – Upland Cotton (Article 21.5 – Brazil) , para. 15.1(a). 
11 Panel Report, US – Upland Cotton (Article 21.5 – Brazil) , para. 15.2. 
12 WT/DS267/33. 
13 WT/DS267/34 . 
14 Although the Appellate Body found that the compliance panel failed to make an objective 
assessment of the revised GSM 102 programme pursuant to item (j) of the Illustrative List by not considering certain re-estimated data submitted by the United States , it also found that this did not affect the compliance 
panel's conclusion on the revised GSM 102 programme payments.  WT/DS267/ARB/2 
 Page 3 
 
 
  B. REQUEST FOR ARBITRATION AND ARBITRATION PROCEEDINGS  
1.13 On 4 July 2005, Brazil notified the DSB of  its "Recourse to Article 4.10 of the 
SCM Agreement  and Article 22.2 of the DSU" with respect to the prohibited subsidies found to be 
inconsistent by the original Panel and the Appellate Body.15  These prohibited subsidies were 
identified as follows:  (i) the 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 supported under the programmes, and in respect of one scheduled product (rice);  
(ii) Section 1207(a) of the Farm Security and Rura l Investment (FSRI) Act of 2002 providing for user 
marketing (Step 2) payments to exporters of upla nd cotton; and (iii) Section 1207(a) of the FSRI Act 
of 2002 providing for user marketing (Step 2) pa yments to domestic users of upland cotton. Brazil 
requested an authorization to take appropriate countermeasures in the amount corresponding:  (i) to 
the Step 2 payments made in the most recent concl uded marketing year; and (ii) to the total amount of 
exporter applications received un der GSM 102, GSM 103, and SCGP for the most recent concluded 
fiscal year. Brazil also requested cross-sector susp ension of obligations under the TRIPS Agreement 
and the GATS pursuant to Article 22.3(c) of the DSU.   
1.14 On 5 July 2005, Brazil and the United States notified "Agreed Procedures under Articles 21 
and 22 of the Dispute Settlement U nderstanding and Article 4 of the SCM Agreement  in the follow-up 
to the dispute" ("Agreed Procedures") to the DSB.
16  
1.15 On 14 July 2005, the United States notified the DSB of its objection "to the appropriateness 
of the countermeasures and the level of suspension of concessions or other obligations proposed by 
Brazil".  The United States also claimed that the pr inciples and procedures set forth in Article 22.3(c) 
of the DSU for requesting cross-sector suspensi on of concessions and obli gations had not been 
followed by Brazil.17   
1.16 On 15 July 2005, at the meeting of the DSB, it was agreed that the matter raised by the 
United States in WT/DS267/23 was referred to arb itration as required by Article 22.6 of the DSU and 
Article 4.11 of the SCM Agreement .  The Arbitrator was constituted on 19 July 2005.  It was 
composed of the members of the original Panel, namely Mr Darius Rosati as Chairman, and Mr Mario Matus and Mr Daniel Moulis as Members.
18  
1.17 On 17 August 2005, the United States and Brazil jointly requested suspension of the 
arbitration proceedings according to their "Agr eed Procedures" until Brazil might subsequently 
request the resumption or termination of the Arbitr ation.  The Arbitrator suspended the arbitration 
proceedings on 18 August 2005.19 
1.18 On 6 October 2005, Brazil notified to the DSB its "Recourse to Article 7.9 of the 
SCM Agreement  and Article 22.2 of the DSU by Brazil" with  respect to the actionable subsidies found 
to be inconsistent by the original panel and th e Appellate Body.  The subsidies in question were 
identified as marketing loan programme payments, u ser marketing (Step 2) payments, market loss 
assistance payments and counter-cyclical paymen ts. Brazil requested the DSB to grant Brazil 
authorization to take countermeasures in the annual amount of US$1.037 billion until the 
United States withdrew the relevant subsidies or re moved their adverse effects.  Brazil also requested 
                                                      
15 WT/DS267/21. 
16 See WT/DS267/22. 
17 See WT/DS267/23. 
18 See WT/DS267/24. 
19 WT/DS267/25. WT/DS267/ARB/2 
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  cross-sector suspension of obligations under the TRIPS Agreement and the GATS pursuant to 
Article 22.3(c) of the DSU.20  
1.19 On 17 October 2005, the United States notified to the DSB its objection to the level of 
suspension of concessions or other obligations a nd the countermeasures proposed by Brazil.  The 
United States contended that the countermeasures proposed were not commensurate with the degree 
and nature of the adverse effects determined to exist within the meaning of Article 7.9 of the 
SCM Agreement .  Further, the United States contended that  the level of suspension proposed was not 
equivalent to the level of nullifica tion or impairment within the meaning of Article 22.7 of the DSU.  
The United States also claimed that the principles a nd procedures set forth in Article 22.3(c) of the 
DSU had not been followed by Brazil in reques ting cross-sector suspension of concessions and 
obligations.21  
1.20 On 18 October 2005, at the meeting of the DSB, it was agreed that the matter raised by the 
United States was referred to arbitration.  On 18  November 2005, the Arbitrator was constituted.  It 
was composed of the members of the original Panel, namely Mr Darius Rosati as Chairman, and Mr Mario Matus and Mr Daniel Moulis as Members.
22  
1.21 On 21 November 2005, Brazil and the United States jointly notified the Arbitrator of their 
request that the arbitration proceedings be suspende d until either party were to subsequently request 
their resumption.  The Arbitrator suspended the arbitration proceedings on 7 December 2005.23   
1.22 On 25 August 2008, Brazil notified a request of  resumption of these arbitration proceedings 
(in relation to actionable subsidies) and also the resumption of the other arbitration proceedings (in 
relation to prohibited subsidies).24  
1.23 On 1 October 2008, due to the unavailability of two members of the Arbitrator upon 
resumption of the proceedings, the parties agreed on the following composition of the Arbitrator for 
both proceedings: 
 Mr Eduardo Pérez-Motta, as Chairman 
 Mr Alan Matthews 
 Mr Daniel Moulis25  
 
1.24 An organizational meeting was held on 24 Oc tober 2008 to discuss the proposed working 
procedures and timetables for both arbitration pr oceedings.  The final working procedures and 
timetables were sent to the parties on 29 October 2 008.  Brazil requested a further extension of the 
deadline for its written submission on 31 October 2008.  The Arbitrator, after considering the 
arguments of both parties in relation to Brazil's re quest, revised the timetables and sent them to the 
parties on 19 November 2008.     
1.25 On 31 October 2008, Brazil submitted its Met hodology Paper for the calculation of the 
proposed countermeasures.  The United States pr ovided a written submission on 9 December 2008.  
Brazil provided its written submissi on on 13 January 2009.  The Arbitr ator sent written questions to 
the parties on 30 January 2009.  The parties provided their replies to these questions on 13 February 2009.  
                                                     
 
20 See WT/DS267/26. 
21 See WT/DS267/27. 
22 See WT/DS267/28. 
23 See WT/DS267/29. 
24 See WT/DS267/38, WT/DS267/39. 
25 See WT/DS267/24/Add.1,  WT/DS267/28/Add.1.  WT/DS267/ARB/2 
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  1.26 The Arbitrator met with the parties on 3 March 20 09.  After the meeting, the Arbitrator posed 
additional written questions to the parties on 6 March 2009 and received their written responses on 
20 March 2009.  The parties also provided th eir comments on each other's written responses to 
questions from the Arbitrator on 31 March 2009.  On 20 April 2009, the Arbitrator informed the parties that in light of the voluminous materials re ceived from parties after the meeting with parties, 
and also taking into account the time needed for tran slation of the reports into the other two working 
languages,  the issuance date of the Arbitrator's Deci sion was delayed.  The Arbitrator asked the 
parties an additional question on 11 June 2009.  On 30 June and 5 August 2009, the Arbitrator 
informed the parties of further delays in the ci rculation of the Decision.  The Decision by the 
Arbitrator was circulated on 31 August 2009. 
C. O
RGANIZATION OF THE PROCEEDINGS AND PRESENTATION OF THE DECISION  
1.27 As described above, two separate arbitrati on proceedings were initiated pursuant to 
Article 22.6 of the DSU in this dispute, one in re lation to the prohibited subsidies at issue in the 
underlying proceedings, and the other in relation to the actionable subsidies.  These proceedings were 
conducted in parallel and the same persons served as arbitrators in both proceedings.  The parties 
presented single submissions in relation to both proceedings.  
1.28 The Arbitrator therefore sought the views of  the parties whether it should issue a single 
decision or two decisions for both proceedings and how it should treat the arguments presented in the 
parties' single submissions.  
1.29 The United States indicates that there are two arbitration requests and two arbitrations, and 
that it therefore expects the Arbitrator to issue a separate decision for each of the two arbitrations.  
With respect to the use of submissions, the United St ates indicates that the sections of the submissions 
that are not clearly related to prohibited subsidies or  to actionable subsidies may be relevant to either 
proceeding.26  Brazil on the other hand argues that the two proceedings should be harmonized as 
much as possible and considers that a single decision would be sufficient for the two arbitrations.  Also, Brazil has no objection to the Arbitrator taki ng into account arguments made in the entirety of 
Brazil's submissions for the purpose of rendering decisions in either proceeding.
27  
1.30 With respect to the treatment of the parties'  submissions, the Arbitrator notes that although 
each party submitted a single written submission, th e sections on prohibited subsidies are separate 
from the sections on actionable subsidies.  It is  therefore generally possible to distinguish the 
arguments relating to the proposed countermeasures against the prohibited subsidies at issue, from 
those relating to countermeasures against the actionable subsidies.  In addition, some sections of the 
submissions, such as the introduction and the sections on cross-retaliation, may be relevant to both 
proceedings.  The Arbitrator will therefore refer to  such arguments in this Decision as appropriate.  
1.31 With respect to the presentation of its Decisi on, the Arbitrator notes that the United States 
presented two distinct objections to the two distinct  requests for countermeasures presented by Brazil.  
Although the conduct of the two pr oceedings was harmonized and the parties both provided a single 
written submission covering both the prohibited and actiona ble subsidies at issue, the fact remains that 
there are two arbitration proceedings, and that the proceedings against prohibited subsidies are based 
on Article 4.10 of the SCM Agreement  whereas the proceedings relating to the actionable subsidies in 
the same dispute are based on Article 7.9 of the SCM Agreement .  Under these circumstances, and in 
the absence of an agreement of the parties on th e issuance of a single decision, the Arbitrator 
considered it appropriate to issue a separate decisi on with respect to each of the two proceedings.   
                                                      
26 US responses to questions from Arbitrator, question 2. 
27 Brazil's responses to questions from the Arbitrator, question 2. WT/DS267/ARB/2 
Page 6 
 
 
  II. OVERALL APPROACH OF THE ARBITRATOR 
2.1 The United States has initiated these proceedings  pursuant to Article 22.6 of the DSU and 
Article 7.10 of the SCM Agreement .  
2.2 Article 22.6 of the DSU provides in relevant part: 
"When the situation described in paragraph 2 occurs, the DSB, upon request, shall 
grant authorization to suspend concessions or other obligations within 30 days of the 
expiry of the reasonable period of time unl ess the DSB decides by consensus to reject 
the request.  However, if the Member con cerned objects to the level of suspension 
proposed, or claims that the principles and procedures set forth in paragraph 3 have 
not been followed where a complaining pa rty requested authorization to suspend 
concessions or other obligations pursuant to pa ragraph 3(b) or (c), the matter shall be 
referred to arbitration.  Such arbitration sha ll be carried out by the original panel, if 
members are available, or by an arbitrat or appointed by the Director-General and 
shall be completed within 60 days after the date of expiry of the reasonable period of 
time." 
2.3 With regard to countermeasures taken in respon se to actionable subsidies under Part III of the 
SCM Agreement , however, Article 7.10 of that Agreement provides the following mandate for the 
arbitrator: 
"In the event that a party to the dispute requests arbitration under paragraph 6 of 
Article 22 of the DSU, the arbitrator sha ll determine whether the countermeasures are 
commensurate with the degree and nature of the adverse effects determined to exist." 
2.4 In this proceeding, the United States challeng es two distinct aspects of Brazil's proposed 
countermeasures.  The United States objects first to the level of suspension of concessions or other 
obligations and the countermeasures proposed by Brazil.   In addition, the United States claims that the 
principles and procedures set forth in DSU Article 22.3 have not been followed by Brazil and therefore the United States requests the Arbitrator to reject Brazil's request to suspend concessions 
with respect to TRIPS and GATS.
28  We will therefore consider these two aspects in turn.  In light of 
the fact that our determination in relation to the level of the proposed countermeasures may have an 
impact on our determination in relation to the form of countermeasures to be taken, we consider first 
the level of the proposed countermeasures.  
2.5 As a preliminary matter, however, we must consider whether changes that have taken place in 
the legal basis for the granting of ML and CCPs a ffect Brazil's entitlement to  seek countermeasures n 
relation to these payments. 
III. PRELIMINARY ISSUE: DO CHANGES IN THE LEGAL BASIS OF THE 
MARKETING LOAN AND COUNTERCYCLICAL PAYMENTS AFFECT BRAZIL'S ENTITLEMENT TO TAKE COUNTERMEASURES? 
3.1 The United States argues that ML and CCP s ubsidies under the Farm Security and Rural 
Investment Act of 2002 ("2002 Farm Bill") will no longe r be made, so that there is no longer a legal 
basis for authorizing countermeasures,  since the measures have been withdrawn with the expiry of the 
                                                     
 
28 WT/DS267/23.  WT/DS267/ARB/2 
 Page 7 
 
 
  2002 Farm Bill.29  We must therefore consider, as a preliminary matter, whether this circumstance 
affects Brazil's entitlement to seek counter measures in relation to these payments. 
A. ARGUMENTS OF THE PARTIES  
3.2 The United States argues that the marketing loan and counter-cyclical payments challenged 
by Brazil during both the original and compliance pane l proceedings were payments authorized by the 
2002 Farm Bill.  Given that the 2002 Farm Bill has e xpired, the United States argues that the subsidy 
has been withdrawn and that, as a result, there is no longer a basis to authorize countermeasures with 
respect to these payments.  In addition, the United States considers that the condition under 
Article 22.8 of the DSU that the suspension shall onl y be applied until the rem oval of the inconsistent 
measure has been met, and therefore no countermeasure can be authorized now.30  
3.3 Brazil considers that there is no factual basis for the United States to claim that the ML and 
CCP subsidies have "expired".  In Brazil's view, not hing in the 2008 Farm Bill that repealed the 2002 
Farm Bill materially changed either the ML progra mme or the CCP programme as it applies to cotton.  
Brazil observes that the United States makes no assertions that the substance  of ML and CCP 
subsidies has been changed in the 2008 Farm Bill.  Nor could it, in Brazil's view, as demonstrated by 
USDA's "Side-By-Side" comparison of the provisions of the 2002 and 2008 Farm Bills.31 
3.4 Brazil indicates that USDA states that the 2008 Farm Bill "[c]ontinues nonrecourse 
commodity loans with marketing loan provisions fo r 2008-12 crops", including cotton, and "[r]etains 
eligibility provisions" that existed in the 2002 Farm Bill.  Brazil claims that Section 1202(a)(6) of the 
2008 Farm Bill continues the same loan rate of US$0.52 cents pe r pound that was applicable under 
the 2002 Farm Bill.  Similarly, with respect to th e counter-cyclical payment program, Brazil cites the 
relevant excerpt from USDA's "Side-By-Side" as confirming the unchanged continuation of that 
programme in the 2008 Farm Bill.32 
3.5 Brazil argues that despite the technical change in the legal basis for ML and CCP subsidies, 
the United States continues to provide them "under the same conditions and criteria as the marketing 
loan payments and counter-cyclical  payments" subject to the origin al and compliance panels' findings 
of present serious prejudice.  That is, the Unite d States cannot escape its implementation obligation 
simply through the technical change of replaci ng one measure – ML and CCP subsidies under the 
2002 Farm Bill – by another measure – ML a nd CCP subsidies under the 2008 Farm Bill. 
3.6 Citing the Appellate Body's statement in US – Continued Suspension , Brazil argues that 
unless and until the United States has achieved "subst antive compliance" with the recommendations 
and rulings by eliminating or withdrawing all of  the adverse effects – including the threat of 
continuing future adverse effects – Brazil has the right to pursue countermeasures commensurate with 
the degree and nature of the adverse effects determined to exist. 
3.7 In response to a question from the Arbitrator , the United States argues that Brazil uses a 
comparison of the provisions of the 2002 and 2008 Fa rm Bills to show that the change "did not 
reduce, or otherwise impact in any significant way"  marketing loan or countercyclical payments for 
cotton.  But, in the United States' view, the 2008 Fa rm Bill has only recently been put into effect, and 
that it is difficult to make any such conclusion on the basis of actual data.  Therefore the United States 
claims that Brazil's conclusion is only speculation th at reflects Brazil's assumptions regarding how the 
marketing loan and countercyclical payments will be made in the future.  The United States says that, 
                                                      
29 US written submission, paras. 235 and 236. 
30 US written submission, paras. 235-238. 
31 See Brazil's written submission, para. 438. 
32 Brazil's written submission, para. 439. WT/DS267/ARB/2 
Page 8 
 
 
  over time, the marketing loan and countercyclical pa yments will be affected by many factors other 
than the Farm Bill, including farmers' decisions in the United States and worldwide, the state of 
industries that use cotton as an input, etc.  In additi on, the United States claims  that even if future 
payments were certain, the effects of those paym ents on price would still be a matter of speculation.33 
B. ASSESSMENT BY THE ARBITRATOR  
3.8 The Arbitrator takes note of the parties' ag reement that the 2002 Farm Bill has expired and 
that the 2008 Farm Bill has been enacted as of 3 January 2008.34  The issue before the Arbitrator is 
that the United States claims that the 2002 Farm Bill under which ML and CCPs have been made has 
expired and these subsidies have been withdrawn, and that, therefore, there is no longer a basis to 
authorize countermeasures with respect to these payments.  
3.9 We first note that, as a result of the origin al proceedings, the DSB recommended that the 
United States withdraw the ML and CCPs or remove their adverse effects.  The compliance panel then 
found that the United States had failed to comply with the DSB recommendations with respect to 
these measures by acting inconsistently with Articles 5(c) and 6.3(c) of the SCM Agreement :  
"The United States acts inconsistently w ith its obligations under Articles 5(c) 
and 6.3(c) of the SCM Agreement  in that the  effect of marketing loan and counter-
cyclical payments provided to US upland cotton producers pursuant to the Farm Bill 
of 2002 is significant price suppression within the meaning of Article 6.3(c) of the SCM Agreement  in the world market for upland co tton constituting 'present' serious 
prejudice to the interests of Brazil within the meaning of Article 5(c) of the 
SCM Agreement.  By acting inconsistently with Artic les 5(c) and 6.3(c) of the 
SCM Agreement  the United States has failed to comply with the DSB 
recommendations and rulings.  Specifically, the United States has failed to comply 
with its obligation under Article 7.8 of the SCM Agreement  'to take appropriate steps 
to remove the adverse effects or ... withdraw the subsidy'."
35 
3.10 These conclusions were upheld by the Appella te Body, and the reports of the compliance 
panel and of the Appellate Body we re adopted on 20 June 2008.   
3.11 A multilateral determination has therefore b een made, in the context of compliance 
proceedings initiated under Article 21.5 of the DSU, that the United States has failed to comply with 
the recommendations and rulings of the DSB with re spect to the ML and CCPs.  As we understand it, 
the United States is in essence requesting us to find that this determination is no longer pertinent, 
because the legal basis upon which the payments at issue were made at the time of the ruling no 
longer exists. 
3.12 As an Arbitrator acting under Article 22.6 of th e DSU and Article 7.10 of the DSU, our task is 
to review, under the applicable legal standard, th e countermeasures proposed by Brazil in relation to 
the ML and CCPs, following the determination of n on-compliance that has been made in relation to 
them.  As the Appellate Body noted in US – Continued Suspension , "the authorization to suspend 
concessions is ... granted following a long process of multilateral dispute settlement in which relevant 
adjudicative bodies, as well as the DSB, render multila teral decisions at key stages of the process"36, 
which may include compliance proceedings, followed by an arbitration to determine the level of 
suspension of concessions.   
                                                      
33 US responses to questions from the Arbitrator, question 64, para. 164. 
34 Exhibit Bra-735. 
35 WT/DS267/RW, para. 15.1(a). 
36 Appellate Body Report, US – Continued Suspension , para. 317.  WT/DS267/ARB/2 
 Page 9 
 
 
  3.13 In this case, the compliance panel determined that "the  effect of marketing loan and counter-
cyclical payments provided to US upland cott on producers pursuant to the FSRI Act of 2002 is 
significant price suppression within the meaning of Article 6.3(c) of the SCM Agreement  in the world 
market for upland cotton constituting 'present' serious  prejudice to the interests of Brazil within the 
meaning of Article 5(c) of the SCM Agreement " and that the United States had therefore failed to 
comply with the recommendations and rulings of the DSB.37   
3.14 It is, in our view, appropriate for us, as arb itrators acting under Article 22.6 of the DSU, to 
take into account this determina tion made in the context of compliance proceedings under Article 21.5 
of the DSU and to assume a priori , on that basis, that the United  States has not complied with the 
relevant recommendations and rulings of the DSB.   
3.15 At the same time, we note that panels, incl uding compliance panels, have the discretion to 
take into account a modification or a repeal of the measure before them subsequent to their 
establishment.  We note in particular the following ruling by the Appellate Body in EC – Bananas III 
(Article 21.5 – Ecuador II) in relation to the jurisdiction of compliance panels:   
"We thus consider it to be within the discr etion of the panel to decide how it takes 
into account subsequent modifications or a repeal of the measure at issue.  
Accordingly, panels have made findings on expired measures in some cases and 
declined to do so in others, depending on the particularities of the disputes before 
them."38  
3.16 In these proceedings, the United States argues that because the legal basis of the initial 
measures has ceased to exist, it has complied with  the DSB's recommendations and rulings since the 
rulings of the DSB, and since the referral of the matter  before us to arbitration, and requests us to take 
this circumstance into consideration.   
3.17 We note that it is normally not the task of arbitrators acting under Article 22.6 of the DSU to 
review whether compliance has been achieved or no t, as arbitral proceedings under this provision 
assume that there has been no compliance, and th is will normally have been determined through 
compliance proceedings under Article 21.5 of the DSU, as was the case here.  
3.18 However, even assuming that we may be entitled,  as Arbitrator acting under Article 22.6 of 
the DSU and Article 7.9 of the SCM Agreement , to make a determination whether the United States 
has in fact come into compliance with the r ecommendations and rulings of the DSB since the 
adoption of the compliance reports, we are not pers uaded that the United States has demonstrated to 
us that it has complied with the relevant recommendations and rulings of the DSB.  
3.19 We note that "compliance" with the recommendations and rulings of the DSB must be 
understood to refer to "substantive compliance".  As  was recently stated by the Appellate Body in 
US – Continued Suspension :  
"The requirements in Article 21.5 to examine whether compliance measures exist and 
whether the measures taken to comply are consistent with the covered agreements 
also suggest that substantive compliance is required, rather than formal removal of 
the inconsistent measure."39 
                                                      
37 See Panel Report, US – Upland Cotton (Article 21.5 – Brazil) , para. 10.255.  See also Appellate 
Body Report, US – Upland Cotton (Article 21.5 – Brazil) , para. 448(c). 
38 Appellate Body Report, EC – Bananas III (Article 21.5 – Ecuador II) , para. 270. 
39 Appellate Body Report, US – Continued Suspension , para. 308. WT/DS267/ARB/2 
Page 10 
 
 
  3.20 It is clear, therefore, that a mere formal removal of the inconsistent measure would not 
necessarily mean that compliance has been achieve d, if "substantive compliance" has not been 
achieved.  
3.21 Both the original and compliance panels exam ined the ML and CCPs in the context of the 
2002 Farm Bill.  Brazil does not dispute that the 200 2 Farm Bill has expired, but it observes that the 
2008 Farm Bill now provides a continuation of the mark eting loan programme at the same rate as that 
provided by the 2002 Farm Bill and that the counte r-cyclical payments provisions provided in 2002 
Farm Bill are retained in the 2008 Farm Bill. 
3.22 Brazil has in particular presented a "side-by -side" comparison between the 2002 and 2008 
Farm Bills, posted on the website of the USDA.40 (see Annex 1)  From this comparison table, it is 
clear that the main features of the CCP as original ly provided in 2002 FSRI Act have been retained in 
the 2008 Farm Bill.  In fact, Section 1104 of both the 2002 FSRI Act and the 2008 Farm Bill 
provides:  "(a) ... for each of the ... crop year fo r each covered commodity, the Secretary shall make 
counter-cyclical payments to producers on farms for which payments yields and base acres are established with respect to the covered commodity if  the Secretary determines that the effective price 
for the covered commodity is less than the target price for the covered commodity".  Therefore, the 
substance of the provisions on CCP as original ly provided in the 2 002 FSRI Act has been 
incorporated in the 2008 Farm Bill.  It is also noteworthy from Section 1104 of both Bills that the 
target prices for the selected commodities are also unchanged.  The only change is the inclusion of 
additional commodities.
41 
3.23 Similarly, a reading of both the 2002 Farm Bill and the 2008 Farm Bill also reveals that the 
provisions on ML in the 2002 Farm Bill were retain ed in the 2008 Farm Bill.  These main provisions 
include Sections 1201and 1202, 1203 and 1204 of the Bills. 
3.24 Section 1201 concerns "Availability of non r ecourse marketing assistance loans for loan 
commodities" in both Farm Bills. This provision in cludes detailed rules on "Availability", "Terms and 
conditions", "Eligible production"  and "Compliance with conserva tion and wetland requirements".  
The only difference is that under the "Availab ility" item, the 2002 Farm Bill provided for an 
application period from 2002 to 2007, whereas the 2008  Farm Bill provides for an application period 
from 2008 to 2012.  Section 1202 of both Farm Bills provides "Loan Rates for non recourse 
marketing assistance loans", in which the rates fo r most of the products are unchanged (e.g., cotton: 
0.52 cents), and a few rates have been slightly ad justed.  Section 1203 of both Farm Bills provides a 
"Term of Loan" of 9 month duration.  Section 1204 of the two Bills provides an identical "Repayment of Loans" mechanism.   
3.25 Therefore, from the wording of the relevant se ctions of the two Bills, we consider that the 
legal basis for the "marketing loan measure" is uncha nged.  In other words, the substance of the rules 
that the original panel and the Appellate Body found not to be in compliance with the 
SCM Agreement , and which the compliance panel and the Appellate Body found not to have been 
withdrawn, have been retained.  The new legislat ive instrument in which they are found has not 
wrought any substantive changes to their nature, in  terms of their "structure, design and operation".
42 
3.26 The United States has not challenged Brazil's assertion that the relevant provisions under the 
2008 Farm Bill are essentially the same as under the 2002 Farm Bill, and it has not provided any indication as to why the same payments might  not continue under the 2008 Farm Bill.   
                                                     
 
40 Exhibit Bra-752 (2008 Farm Bill Side-By-Side, USDA, 
http://www.ers.usda.gov/FarmBill/ 2008/Titles/TitleIcommodities.htm ) (accessed December 2008). 
41 See 2002 FSRI Act, Exhibit Bra-29, 2008 Farm Bill , Exhibit Bra-735. 
42 See Panel Report, para. 7.1289.  WT/DS267/ARB/2 
 Page 11 
 
 
  3.27 The United States argues, however, that becau se the 2008 Farm Bill only recently came into 
effect, it is difficult to make any conclusion on the basis of actual data to the effect that payments 
would continue at the same level under the 2008 Farm Bill, so that this conclusion is only speculation 
that reflects Brazil's assumptions regarding how the marketing loan and countercyclical payments will 
be made in the future.   
3.28 These elements suggest that the United States in fact recognizes that ML and CCPs may 
continue to be granted under the 2008 Farm Bill, althoug h it considers that the amount of payments 
that might be made under the 2008 Farm Bill is still un certain, in light of its recent entry into force.  
To the extent that the 2002 Farm  Bill has been terminated, but h as been replaced with another Bill 
providing for essentially the same measures that were  found to be inconsistent as they applied under 
the original legal instrument, this would not provide a basis upon which to conclude that the 
United States has complied with the recommendations and rulings relating to these measures.  Rather, 
it would need to be established that the inconsistenc ies that were the object of the rulings have been 
remedied.  As the Appellate Body expressed it, "s ubstantive compliance is required, rather than 
formal removal of the inconsistent measure" in order to achieve full implementation of the DSB's 
recommendations and rulings.43  Nor can any uncertainty about what might happen in the future 
dissuade this Arbitrator from assessing the adverse eff ects determined to exist in relation to a measure 
which did exist and which, on the facts, continues to exist.44 
3.29 In the circumstances of this case,  the elements before us suggest  that, although the legal basis 
for the granting of ML and CCPs has been modified, such payments continue to be offered and may 
continue to be made under a new legal basis.  We have not been provided with any indication that the 
payments that may be made under the 2008 Farm Bill would be of a different nature than those that 
gave rise to the rulings at issue.  On the contrary , it seems the United States does not dispute that such 
payments may occur.  
3.30 To the extent that we might be entitled to revi ew, in the context of these proceedings whether 
compliance has been achieved, we would therefore not have a sufficient basis to conclude, in light of 
the elements before us, that it has been.   
3.31 Furthermore, we note that the findings in the underlying proceedings related to the different 
types of payments at issue, rather than to the 2002 Farm Bill as such.  The compliance panel explicitly 
states that "the [original] panel did not state that it had found that, in additio n to subsidies paid in 
MY 1999-2002, the Farm Bill itself was inc onsistent with Articles 5 and 6 of the SCM Agreement ".45  
Rather, it is the payments under this Bill  that were the measures at issue.   
3.32 In light of these elements, the Arbitrator c oncludes that the United States has failed to 
establish that there is no longer any legal basis fo r Brazil to seek countermeasures in relation to the 
ML and CCPs. 
3.33 We must therefore now consider whether Br azil's proposed level of countermeasures is 
"commensurate with the degree and nature of the a dverse effects determined to exist", in accordance 
with Article 7.9 of the SCM Agreement .  For this purpose, we must first clarify the meaning of these 
terms. 
                                                      
43 See Appellate Body Report, US – Continued Suspension , para. 308. 
44 We note in this respect that wherever the level of countermeasures is determined in the form of a 
fixed amount to be applied on an annual basis, it is inhe rent in this approach that  this amount will not exactly 
track the future evolution of the situation in consideratio n of the actual level of payments to occur in the future 
under the subsidies at issue.  Yet, the United States takes no issue with this approach as  a matter of principle.  
The fact that the actual level of future payments under the programs may be uncertain to date cannot in itself be an obstacle to calculating a level of  countermeasures to be applied. 
45 Panel Report, US – Upland Cotton (Article 21.5 – Brazil) , para. 9.49. WT/DS267/ARB/2 
Page 12 
 
 
  IV. ASSESSMENT OF BRAZIL'S PROPOSED LEVEL OF COUNTERMEASURES  
A. MAIN ARGUMENTS OF THE PARTIES  
4.1 In its request to the DSB, Brazil requested aut horization to take countermeasures in the annual 
amount of US$1.037 billion until such time as the United States withdraws or removes the adverse effects of certain price-contingent subsidies de termined to have caused significant price suppression 
in the world upland cotton market.  These subsidie s included marketing loan programme payments, 
user marketing (Step 2) payments, market loss assistance payments and counter-cyclical payments.  
4.2 In its Methodology Paper, Br azil further explained that suppressed prices on the world cotton 
market have two types of negative consequences for farmers worldwide: income losses on actual 
production (" sales value  effects") and a replacement of foreign supply by US production on the world 
market (" reduced production  effects").  To quantify these effects,  Brazil relies on a partial equilibrium 
model already referred to in the compliance pro ceedings, the "Sumner model".  By Brazil's own 
description, "the issue that the economic model addre sses is the magnitude of the impact that specific 
US cotton subsidies have on quantities supplied and on world market prices for cotton".
46   
4.3 Brazil quantifies the adverse effects of these subs idies to cotton farmers in the rest of the 
world, based on Marketing Year (MY) 2005.  Brazil estimates that world market prices were suppressed by 10.75 per cent in MY 2005.  It estim ates that the subsidies caused US cotton production 
to be 18.8 per cent higher than it would otherwise ha ve been but for the subsidies, and that this 
increased production boosted imports by approximately 24 per cent in the same year.  Brazil further 
estimates that the subsidies have led to a re placement of foreign cotton supply amounting to 
2.2 per cent of actual production.  On this basis, Brazil concludes that "adverse effects in MY 2005 
amounts to US$3.335 billion, consisting of US$2. 73 billion in sales value effects and US$605 million 
in reduced production effects".
47  However, Brazil limits its request for countermeasures to an amount 
of US$1.037 billion, in line w ith its original request.   
4.4 The United States considers that the requested countermeasures "far exceed what would be 
commensurate with the adverse effects determined to exist".48  The United States first notes that the 
current conditions for US cotton producers provide  guidance for the effects of US cotton support 
payments, and that since the 2006 marketing year, the US cotton sector has experienced a significant 
contraction in production, exports and domestic use.  According to  the United States, total cotton 
harvested area for the United States is forecasted at only 7.8 million acres in 2008, the lowest in 
25 years49, and that US shares of exports and world production in 2008 will reflect several years of 
decline, with US production in that year being 43 per cent below the 2005 crop.  The United States notes that Brazilian cotton production trended up in 2007  and that Brazil's exports were expected to 
reach a record in 2008. 
4.5 The United States further identifies a number of "legal, economic and conceptual errors" in 
Brazil's calculations.  Specifically, the United Stat es identifies the following errors:  (i) the decision 
not to limit the calculations to only the effects of the programs on Brazil ;  (ii) flawed choices for key 
parameters in the model;  (iii) the isolation of data  to a single year;  and (iv) the failure to limit the 
proposed countermeasures to the portion of the effect s of the payments that result in the finding of 
inconsistency with the SCM Agreement .  Brazil disagrees with each of these arguments. 
                                                     
 
46 Brazil's Methodology Paper, para. 73. 
47 Brazil's Methodology Paper, para. 69. 
48 US written submission, Section IV, para. 229 ff. 
49 US written submission, para. 231.  WT/DS267/ARB/2 
 Page 13 
 
 
  B. MANDATE OF THE ARBITRATOR AND BURDEN OF PROOF  
4.6 We recall that Article 7.9 of the SCM Agreement  provides that: 
"In the event that the Member has not take n appropriate steps to remove the adverse 
effects of the subsidy or withdraw the subs idy within six months from the date when 
the DSB adopts the panel report or the Appellate Body report, and in the absence of 
agreement on compensation, the DSB shall grant authorization to the complaining 
Member to take countermeasures, commensur ate with the degree and nature of the 
adverse effects determined to exist, unless th e DSB decides by consensus to reject the 
request." 
4.7 In addition, Article 7.10 of the same Agreemen t defines the mandate of the arbitrator as 
follows: 
"In the event that a party to the dispute requests arbitration under paragraph 6 of 
Article 22 of the DSU, the arbitrator sha ll determine whether the countermeasures are 
commensurate with the degree and nature of the adverse effects determined to exist." 
4.8 In these proceedings, we are therefore called upon to determine whether the countermeasures 
proposed by Brazil in relation to the marke ting loans and countercyclical payments are 
"commensurate with the degree and nature of the a dverse effects determined to exist" within the 
meaning of Article 7.9 of the SCM Agreement .  The United States identifies a number of "errors" in 
Brazil's request, including legal errors. 
4.9 The United States agrees that, as the party cha llenging the proposed countermeasures, it  
bears the burden of demonstrating that th e countermeasures proposed by Brazil are not 
"commensurate with the degree and nature of the a dverse effects determined to exist" within the 
meaning of Article 7.9 of the SCM Agreement .50  
4.10 The United States observes, however, that Braz il is obligated to provide the evidence to 
support its arguments and to provide the relevant facts for the Arbitrator to fulfil its mandate.51 
4.11 The basis for these proceedings is a challenge initiated by the United States in relation to 
Brazil's request to be authorized by the DSB to  take countermeasures in relation to certain 
inconsistent measures.  These circumstances are anal ogous to the situation in arbitral proceedings 
initiated under Article 22.6 of the DSU alone, and in  arbitral proceedings initiated under Article 22.6 
of the DSU and Article 4.10 of the SCM Agreement  in relation to prohibited subsidies.   
4.12 In the context of proceedings under Article 4.11 of the SCM Agreement and Article 22.6 of 
the DSU, arbitrators have consistently determ ined that the party objecting to the proposed 
countermeasure bears the burden to establish a prima facie case or presumption that the countermeasures are not "appropriate" within the meani ng of Article 4.11 and that it is then up to the 
party proposing the countermeasures to rebut such presumption.
52  
4.13 The same approach applies, in our view, to proceedings under Article 22.6 of the DSU and 
Article 7.10 of the SCM Agreement .  We therefore find that the United States bears the initial burden 
of establishing the countermeasures are not "commens urate with the degree and nature of the adverse 
effects determined to exist" and that Brazil bears the burden of rebutting such conclusions.  
                                                      
50 US responses to questions from the Arbitrator, question 41, para. 49. 
51 US responses to questions from the Arbitrator, question 41, para. 50. 
52 See Decision of the Arbitrator, Brazil – Aircraft (Article 22.6 – Brazil) , paras. 2.8-2.9. WT/DS267/ARB/2 
Page 14 
 
 
  4.14 The Arbitrator is also of the view that this allocation of burden of proof does not alleviate the 
burden on each party to establish the facts that it a lleges during the proceedings.  As observed by the 
arbitrator on US – FSC (Article 22.6 – EC) , "it is generally for each party asserting a fact, whether 
complainant or respondent, to provide proof thereof".53  Accordingly, it is also for Brazil to provide 
evidence in support of the facts that it advances.  The Arbitrator will consider all the evidence and 
arguments provided by both parties (United States and Brazil) to determine whether the proposed 
countermeasures are "commensurate with the degree a nd nature of the adverse effects determined to 
exist".   
4.15 The United States further considers that once the burden of proof has been met, the Arbitrator 
is not limited to agreeing or disagreeing with the parti es.  Rather, the Arbitrator's task is to determine, 
in the case of actionable subsidies, countermeasures "commensurate with the degree and nature of the 
adverse effects determined to exist".54  Brazil also observes that, if  the United States succeeds in 
establishing that Brazil's formula does not meet the applicable legal standard, the Arbitrator can 
consider adjustments to Brazil's formula, or if none are possible, alternative formulae.55  Brazil further 
notes that, while the Arbitrator enjoys flexibility to make adjustments to Brazil's formula, Brazil 
expects that in the interest of due process, the Arbitrator would offer the parties the opportunity to comment on any material departures it wishes to explore.
56   
4.16 We agree that, in the event that we find that Brazil's proposed countermeasures are not 
commensurate with the degree and nature of the adve rse effects determined to exist, we would be 
required also to determine what would constitute such countermeasures.  This would enable the 
complaining party to seek an authorization consistent  with our decision, as foreseen in Article 22.7 of 
the DSU. In order to fulfil this part of our ma ndate, we may be required to adopt an approach or 
methodology that differs from those proposed by the parties.   
4.17 We now turn to a consideration of the terms of the applicable legal standard for the review of 
Brazil's countermeasures, before considering Brazil's proposed countermeasures in light of these determinations.  
C. C
OUNTERMEASURES "COMMENSURATE WITH THE DEGREE AND NATURE OF THE ADVERSE 
EFFECTS DETERMINED TO EXIST " (ARTICLE  7.9 AND 7.10  OF THE SCM A GREEMENT ) 
4.18 Paragraphs 9 and 10 of Article 7 of the SCM Agreement  are "special or additional rules and 
procedures" identified in Appendix 2 of the DSU.57  Article 1.2 of the DSU provides that "to the 
extent that there is a difference between the ru les and procedures of this Understanding and the 
special or additional rules and procedures set forth in Appendix 2, the special or additional rules and 
procedures in Appendix 2 shall prevail". 
4.19 The terms of Article 7.9 of the SCM Agreement , as a "special or additional rule and 
procedure", should be interpreted on th eir own terms.  It is clear that  they may embody different rules, 
which would prevail in case of conflict.  Nonethel ess, Article 22.6 of the DSU remains relevant, as the 
general legal basis under which the proceedings are conducted.  Indeed, Article 7.9 of the 
                                                      
53 Decision of the Arbitrator, US – FSC (Article 22.6 – US) , para. 2.11. 
54 US responses to questions from the Arbitrator, question 70, para. 3. 
55 Brazil's responses to questions from the Arbitrator, question 70, para. 6. 
56 Brazil's responses to questions from the Arbitrator, question 70, para. 8.  See also the US comments 
to Brazil's response, para. 11. 
57 Throughout this section of the report, we will refer to the terms "commensurate with the degree and 
nature of the adverse effects determined to exist" in Article 7.9 of the SCM Agreement .  This reference should 
be understood to refer also to the same terms in Article 7.10 of the SCM Agreement .  We assume that these 
terms have the same meaning in both provisions.  WT/DS267/ARB/2 
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  SCM Agreement  refers expressly to Article 22.6 of the DSU as the legal basis for arbitral proceedings 
relating to countermeasures in rela tion to actionable subsidies.   
4.20 In accordance with the terms of Article 3.2 of  the DSU, the terms of Article 7.9 of the 
SCM Agreement  should be interpreted in accordance with the customary rules of interpretation of 
public international law, as reflected in particular  in Articles 31 and 32 of the Vienna Convention on 
the Law of Treaties ("Vienna Convent ion").  In particular, as reflect ed in Article 31.1 of the Vienna 
Convention, "a treaty shall be inte rpreted in good faith in accordance w ith the ordinary meaning to be 
given to the terms of the treaty in their context and in the light of its object and purpose".   
4.21 For the sake of clarity, it is useful to start the analysis with the terms of the provisions first, 
and to then turn to their co ntext and object and purpose.  
1. The terms of Article 7.9 of the SCM Agreement  
4.22 With respect to countermeasures in relation to actionable subsidies, Article 7.9 of the 
SCM Agreement  provides that: 
"[T]he DSB shall grant authorisation to the complaining Member to take 
countermeasures, commensurate with the degree and nature of the adverse effects 
determined to exist ..." 
4.23 This text therefore comprises three elements: 
(a) "countermeasures";  
(b) "commensurate with the degree and nature" and 
(c) "the adverse effects determined to exist". 
We consider the meaning of these elements in turn. 
 (a) "countermeasures" 
4.24 We note at the outset that the term "counterm easures" is used to designate retaliatory 
measures in the WTO Agreement only in the SCM Agreement .  This contrasts with the terms of 
Article 22 of the DSU, which refers to the "sus pension of concessions or other obligations".  
However, it is not argued by either party in these proceedings that the term "countermeasures" would 
designate, in the SCM Agreement , anything other  than a temporary suspension of certain obligations, 
and this is what we understa nd this term to refer to.  
4.25 The prefix "counter-" can be defined as meaning "against, in return".
58  The Oxford English 
Dictionary further cites the term "c ounter-measure" as an illustration of a situation in which this prefix 
is used to indicate something that is "[d]one, directed, or acting against, in opposition to, as a 
rejoinder or reply to another thing of the same kind already made or in existence".  Another dictionary 
defines the term "countermeasure" as an "action or  device designed to negate or offset another".59 
4.26 Brazil draws attention to the fact that the te rm "countermeasures" refers to measures taken 
"against" something, to "counteract" something.   In the context of Article 7.9 of the SCM Agreement , 
Brazil notes, the term refers to "affirmative action taken against the responding Member's failure to 
                                                      
58 Oxford English Dictionary , at www.oed.com. 
59 Merriam Webster Dictionary , at www.merriamwebster.com. WT/DS267/ARB/2 
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  remove the adverse effects of a subsidy or to w ithdraw that subsidy, as required by Article 7.8".60  The 
United States seems to essentially agree with this basic premise.61  In light of the definitions 
highlighted above, we also agree that "counter measures" are, in essen ce, measures taken to 
"counteract" something, and specifically, in  the context of Article 7.9 of the SCM Agreement , 
measures taken to act against, or in response to, a failure to remove the adverse effects of, or withdraw, an actionable subsidy w ithin the required time period. 
4.27 In Brazil's view, the dictionary meanings of this term further indicate that it refers to 
retaliatory action that goes "beyond the me re rebalancing of trade interests".
62  The United States, on 
the contrary, highlights that definitions of the term "counter" include notions of "balance" and 
"duplicate", so that an appropriate countermeasu re would be one that would "balance out the 
inconsistency or duplicate the loss of concessions resulting from the breach".63 
4.28 We are not convinced that the use of the te rm "countermeasures" necessarily connotes, in and 
of itself, an intention to refer to retaliatory ac tion that "goes beyond the mere rebalancing of trade 
interests"64, as Brazil suggests.  As noted above, the term indicates that the action is taken in response 
to another, in order to "counter" it.  This does not  necessarily connote, in our view, an intention to "go 
beyond" a rebalancing of trade interests.  Indeed, we  are not convinced that the dictionary meanings 
of the term, in and of themselves, provi de any compelling guidance as to the exact level  of 
countermeasures that may be permissible under Article 7.9 of the SCM Agreement .  We also note that 
the term "countermeasures" is similarly used in Article 4.10 of the SCM Agreement , where the 
permissible level of countermeasures is define d differently, in terms of "appropriateness".  
4.29 Brazil also refers to the use of the term "c ountermeasures" in public international law, as 
reflected in the Articles on State Responsib ility of the International Law Commission (ILC)65, as an 
"additional interpretative considera tion", to highlight that, "under the ILC Articles, countermeasures 
are taken with the goal of encouraging – 'induci ng' – the responsible State to comply with its 
obligations, without making it impossible to comply, and without punishing the respondent."66   
4.30 We note that the term "countermeasures" is the ge neral term used by the ILC in the context of 
its Articles on State Responsibility to designate te mporary measures that injured States may take in 
response to breaches of obligations under international law.67  This has been noted by arbitrators in 
the context of interpreting Article 4.10 of the SCM Agreement .68 
                                                      
60 Brazil's written submission, para. 51. 
61 See US responses to questions from the Arbitrator, question 43, para. 56:  "the "countermeasures" are 
to "counter the inconsistency with the SCM Agreement ." 
62 Brazil's written submission, para. 26. 
63 US responses to questions from the Arbitrator, question 43, para. 56. 
64 Brazil's written submission, para. 26. 
65 The International Law Commission was established by the UN General Assembly for the promotion 
of the progressive development of international law and its codification.  The Commission adopted in 2001 a set 
of  draft articles on responsibility of States for interna tionally wrongful acts consistin g of 59 articles as well as 
commentaries thereto.  The General Assembly, in re solution 56/83 of 12 December 2001, as recommended by 
the Commission, took note of the articles on responsibility of States for internationally wrongful acts, the text of 
which was annexed to the resolution, commended them to the attention of Governments without prejudice to the question of their future adoption or other appr opriate action.  See h ttp://www.un.or g/law/ilc/. 
66 Brazil's written submission, para. 43. 
67 See http://untreaty.un.org/ilc/texts/instru ments/english/commentaries/9_6_2001.pdf . 
68 See Decision by the Arbitrator, US – FSC (Article 22.6 – US) , para. 5.58.  WT/DS267/ARB/2 
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  4.31 We agree that this term, as understood in public  international law, may usefully inform our 
understanding of the same term as used in the SCM Agreement .69  Indeed, we find that the term 
"countermeasures", in the SCM Agreement , describes measures that are in the nature of 
countermeasures as defined in the ILC's Articles on State Responsibility.   
4.32 At this stage of our analysis, we therefore find that the term "countermeasures" essentially 
characterizes the nature  of the measures to be authorized, i.e. temporary measures that would 
otherwise be contrary to obligations under the re levant WTO Agreement(s) and that are taken in 
response to a breach of an obligation under the SCM Agreement .  This is also consistent with the 
meaning of this term in public international law as reflected in the ILC Articles on State 
Responsibility.   
4.33 As to the permissible level  of countermeasures that may be au thorized under Article 7.9 of the 
SCM Agreement , that Article provides specific instruction,  through the terms "commensurate with the 
degree and nature of the adverse effects determined  to exist".  We now consider these terms.   
(b) "commensurate with the degree and nature of the adverse effects determined to exist"  
4.34 The expression "commensurate with the degree and nature of the adverse effects determined 
to exist" contains two elements:  the term "comme nsurate" and the "degree and nature of the adverse 
effects determined to exist".  We c onsider these elements successively.   
(i) "commensurate" 
4.35 Brazil notes that dictionary definitions of th e term "commensurate" point to a notion of 
"correspondence" in "extent, magnitude or degree" as well as to "proportion" and that this term 
defines "a particular relationship between two th ings, in this case "countermeasures" on the one hand, 
and "the degree and nature of the adverse e ffects determined to exist", on the other".70 
4.36 Dictionary definitions of this term include: "e qual in measure or extent:  coextensive" and 
"corresponding in size, extent, amount, or degree: proportionate"71, "of equal extent, coextensive".72  
4.37 In light of these elements, we agree that the term "commensurate" essentially connotes a 
"correspondence" between two elements.  In the c ontext of Article 7.9, the "correspondence" is 
between the countermeasures and the "degree and nature  of the adverse effects determined to exist".  
4.38 Brazil also highlights that this term "does not connote equality, but adequacy, congruity, 
harmony, and proportion.  These words, which ca rry both qualitative and quantitative dimensions, 
                                                      
69 We also note however that, by their own terms, the Articles of the ILC on State Responsibility do not 
purport to prevail over any specific provisions relating to the areas it covers that would be contained in specific 
legal instruments.  We note in particul ar the following Commentary of the ILC:  
 
"In common with other chapters of these artic les, the provisions on countermeasures are 
residual and may be excluded or modified by a special rule to the contrary (see article 55). 
Thus, a treaty provision precluding the suspension of performance of an obligation under any 
circumstances will exclude countermeasures with respect to the performance of the obligation. 
Likewise, a regime for dispute resolution to which States must resort in the event of a dispute, 
especially if (as with the WTO dispute settlemen t system) it requires an authorization to take 
measures in the nature of countermeasur es in response to a proven breach." 
 
70 Brazil's written submission, para. 53. 
71 Merriam Webster Dictionary  online, at www.merriam-webster.com  
72 Shorter Oxford English Dictionary , p. 459. WT/DS267/ARB/2 
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  show that countermeasures are not defined with th e precision of equality, but more broadly in both 
qualitative and quantitative terms".73 
4.39 We agree that the term "commensurate" does not suggest that exact or precise equality is 
required, between the two elements to be compared , i.e. in this case, the proposed countermeasures 
and the "degree and nature of the adverse effects dete rmined to exist".  To that extent, we agree that 
the term "commensurate" connotes a less precise  degree of equivalence than exact numerical 
correspondence.  Nonetheless, the term "commensurat e" does indicate, in our view, a relationship of 
correspondence  and proportionality between the two elemen ts, and not merely a relationship of 
"adequacy" or "harmony" as suggested by Brazil.  We do not exclude that this correspondence may be 
qualitative as well as quantitative.  The exact nature of the correspondence at issue will further be 
informed by the identification of what exactly  the proposed countermeasures are required to be 
"commensurate" with.  This is defined through the terms "the degree and nature of the adverse effects 
determined to exist".  
(ii) The "degree and nature" of the adverse effects 
4.40 The text of Article 7.9 refers to the "degree and nature" of the adverse effects rather than their 
"level" or "magnitude".  Brazil highlights in this respect the difference with the terms of Article 22.4 
of the DSU, which requires "equivalence" in the "lev el" of nullification or impairment suffered by the 
complaining Member.  Brazil invites the Arbitrator to approach the determin ation with reference to 
the notion of "reasonableness" and points to a finding by the Appellate Body in the context of another 
provision, to the effect that "reasonableness" implies a degree of flexibility that involves a 
consideration of the specific circumstances of the case.74 
4.41 We agree that the reference to  both the "degree" and the "n ature" of the adverse effects 
determined to exist suggests that the correspondence that is required to exist, between the proposed 
countermeasures and the "degree and nature of th e adverse effects", may encompass both quantitative 
and qualitative elements.  The "degree" of the ef fects could be understood as a quantitative element, 
whereas the reference to the "nature" of the a dverse effects seems to point to something more 
qualitative.   
4.42 In this respect, both parties suggest that the "nature" of the adverse effects may be understood 
in the context of the various types of adverse e ffects that may arise under Articles 5 and 6 of the 
SCM Agreement .  Brazil notes that the "nature" of the a dverse effects determined to exist will vary 
from case to case, and could involve a range of types of effects, depending on the specific subparagraph of Article 5 or 6 at issue.
75  The United States also observes that "the nature of the 
adverse effects can be understood on the basis of the findings in the particular dispute".76 
4.43 We agree that the reference to the "nature" of  the adverse effects may be understood to refer 
to the different "types" of adverse effects that are foreseen in Articles 5 and 6, and that this therefore 
invites a consideration of the specific type of "adver se effects" that have been determined to exist as a 
result of the specific measure in relation to which countermeasures are being requested.  These effects 
could manifest themselves in a variety of ways, each reflecting a specific type of trade distortion.  
4.44 Brazil also notes that the "degree" of adverse effects refers to the "extent or scope" of the 
adverse effects "in terms of their intensity or capacity or potential for causing disruption of markets or 
                                                      
73 Brazil's written submission, para. 56. 
74 See Brazil's written submission, para. 57. 
75 Brazil's written submission, para. 63. 
76 US responses to questions from the Arbitrator, question 66, para. 175.  WT/DS267/ARB/2 
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  trading relationships".77  Brazil also observes that there may be  a correlation between the "nature" and 
"degree" of the adverse effects, in that "the broade r the scope of the nature of the adverse effects, the 
more likely the "degree" of adverse effects will be more severe in terms of actual or potential market 
disruption".78  
4.45 The United States, for its part, considers that th e reference to the "degree and nature" of the 
adverse effects "is a reminder that countermeasures s hould fit only that part of the subsidy that is 
inconsistent".  The United States also argues th at the language of Article 7.9 ensures that 
countermeasures are limited to "what is necessary to address the adverse effects of the subsidies", and 
not more.  The United States considers that anything above that "would be punitive".  The United States thus concludes that "the Arbitrators must be satisfied that the countermeasure does not 
exceed what would be sufficient to respond to that part of the effects of the actionable subsidies that 
has been found to cause significant price suppression and adverse effects on Brazil".
79   
4.46 We understand these arguments of the parties as essentially drawing attention to the 
permissible scope of what may be taken into account in assessing the "commensurateness" of the 
proposed countermeasures in relation to the "degree and nature" of the adverse effects determined to 
exist in the specific case at hand.  The United States ' arguments essentially highlight the fact that the 
proposed countermeasures may not exceed the scope of the findings, as they relate only to those 
adverse effects that have been determined to exist in  the specific case at hand, and that this is the only 
basis for the findings in relation to the subsidy at i ssue.  Brazil's arguments, on the other hand, point to 
the fact that the full extent of the degree and nature of these adverse effects must be taken into account.   
4.47 We agree in principle with both of these pr opositions.  In assessing the "commensurateness" 
of the proposed countermeasures to the "degree and natu re" of the adverse effects determined to exist, 
we are entitled to take into account fully the "d egree and nature" of these adverse effects as they 
present themselves in the case at hand, but we are not permitted to do more than that.  In other words, 
the "degree and nature" of the adverse effects dete rmined to exist in the case at hand constitute the 
entirety of what we may and must consider in assessing the "commensurateness" of the proposed 
countermeasures in that case.   
4.48 The parties disagree as to what exactly this imp lies in the circumstances of this case.  We will 
consider this question in Secti on IV.D.1 below in the context of our assessment of Brazil's proposed 
countermeasures in this case.  We now turn to th e final element of the terms of Article 7.9, the 
"adverse effects determined to exist". 
(iii) The "adverse effects determined to exist" 
4.49 Brazil observes that the term "adverse effects dete rmined to exist" sends the treaty interpreter 
back to the precise findings on adverse effects made  by the panels and the Appellate Body as these 
constitute the "adverse effects determined to exist".  We agree. 
4.50 The expression "adverse effects determined to exist"  refers us to the specific "adverse effects" 
within the meaning of Articles 5 and 6 of the SCM Agreement  that form the basis of the underlying 
findings in the case at hand. 
                                                     
 
77 Brazil's written submission, para. 64. 
78 Brazil's written submission, para. 64. 
79 US written submission, para. 300. WT/DS267/ARB/2 
Page 20 
 
 
  4.51 We note in this respect that Article 5 of the SCM Agreement  identifies three categories of 
"adverse effects to the interests of other Members", that "no Member should cause, through the use of 
any subsidy referred to in paragraphs  1 and 2 of Article 1".  These are: 
(a) injury to the domestic industry of another Member; 
(b) nullification or impairment of benefits accruing directly or indirectly to other 
Members under GATT 1994 in particular the benefits of concessions bound under 
Article II of GATT 1994; 
(c) serious prejudice to the interests of another Member." 
4.52 Article 7.1 further provides the possibility fo r any WTO Member to request consultations 
with another Member, whenever it has reason to belie ve that "any subsidy referred to in Article 1, 
granted or maintained by another Member, results in  injury to its domestic industry, nullification or 
impairment or serious prejudice".   
4.53 In principle, therefore, the "adverse effects dete rmined to exist" in the underlying proceedings 
ultimately leading to a request for countermeasures under Article 7.9 of the SCM Agreement  may be 
in the form of injury to the domestic industry of  a Member, nullification or impairment, or serious 
prejudice to the interests of another Member.   
2. Context 
4.54 A number of provisions within the SCM Agreement  provide useful context for the 
interpretation of Article 7.9.  As noted above, the notion of "adverse effects" and the definition of the 
various types of adverse effects under Articles 5 a nd 6 of the Agreement shed light on the expression 
"degree and nature of the adverse effects determined to exist".  
4.55 Article 4.10 of the SCM Agreement  and Article 22.4 of the DSU also provide useful context 
for a proper understanding of this provision.  Article 4.10 of the SCM Agreement  provides the legal 
standard for countermeasures in relation to pr ohibited subsidies.  Under that provision, 
countermeasures in relation to prohibited subs idies must be "appropriate", and "not … 
disproportionate in light of the fact the subsidi es dealt with under these provisions are prohibited".  
The clear difference in the wordi ng of both provisions within the SCM Agreement confirms to us that 
the terms of Article 7.9, which expressly refer to  the "degree and nature of the adverse effects 
determined to exist", are intended to closely tailor,  in all cases, the countermeasures to the legal basis 
for the underlying findings.  We also note that there is no suggestion, in Article 7.9, that there would be any flexibility to take into account any consider ations other than the "degree and nature of the 
adverse effects determined to exist".  This can be  understood to reflect the specificity of the legal 
basis on which findings arise in relation to ac tionable subsidies, which are not prohibited per se .  The 
scope of potential countermeasures is  accordingly limited in scope, to the "degree and nature" of those 
effects of the subsidy that are the basis for the successful challenge.   
4.56 These elements confirm our understanding of the meaning of the terms of Article 7.9, as we 
have determined it so far on the b asis of the terms of the provision. 
3. Object and purpose 
4.57 The question of the objective of retaliatory me asures in the WTO has been addressed in the 
context of proceedings under Article 22.4 of the DSU.  The arbitrator on EC – Bananas III (US) 
(Article 22.6 – EC)  thus found that:   WT/DS267/ARB/2 
 Page 21 
 
 
  "[T]he overall objective of compensation or  the suspension of concessions or other 
obligations as described in Article 22.1: 
'Compensation and the suspension of concession or other obligations 
are temporary measures available in the event that the 
recommendations or rulings are not implemented within a reasonable 
period of time.  However, neither compensation nor the suspension of 
concessions or other obligations is preferred to full implementation of 
a recommendation to bring a measure into conformity with the covered agreements.  Compensation is voluntary and, if granted, shall 
be consistent with th e covered agreements.' 
Accordingly, the authorization to suspe nd concessions or other obligations is a 
temporary measure pending full implementation by the Member concerned.  We 
agree with the United States that this temporary nature indicates that it is the purpose 
of countermeasures to induce compliance .  But this purpose does not mean that the 
DSB should grant authorization to suspend concessions beyond what is equivalent to 
the level of nullification or impairment.  In  our view, there is nothing in Article 22.1 
of the DSU, let alone in paragraphs 4 and 7 of Article 22, that could be read as a 
justification for counter-measures of a punitive  nature." 
4.58 This objective of suspension of concessions or  other obligations under Article 22.4 of the 
DSU has been recently confirmed by the Appellate Body in US – Continued Suspension .
80  Arbitrators 
have also found that the objective of countermeasures under Article 4.10 of the SCM Agreement  is to 
"induce compliance".81   
4.59 We see no reason to assume that c ountermeasures under Article 7.9 of the SCM Agreement  
would serve a different purpose.  The authorizatio n of countermeasures in relation to actionable 
subsidies arises in circumstances comparable to t hose relating to countermeasures under Article 4.10 
of the SCM Agreement  or Article 22.4 of the DSU, i.e. in  a situation where the responding Member 
has failed to comply with the recommendations and ru lings of the DSB in the prescribed time period.  
As under Article 22.4 of the DSU and Article 4.10 of the SCM Agreement , countermeasures under 
Article 7.9 of the SCM Agreement  constitute temporary measures ta ken in response to a continued 
breach of the obligations of the Member concerned, and pending full compliance with the recommendations and rulings of the DSB.  We consider, therefore, that countermeasures under 
Article 7.9 of the SCM Agreement  also serve to "induce compliance".   
4.60 However, we do not consider that this purpose in and of itself provides specific indications as 
to the level  of countermeasures that may be permissible unde r this provision.  Indeed, this purpose is 
common to all three legal bases for countermeasure s or suspension of obligations under the WTO 
Agreements, each of which defines the permissibl e level of countermeasures in relation to the 
measures that it relates to.  In the case of countermeasures relati ng to actionable subsidies under the 
SCM Agreement , the permissible level of countermeasures is defined, as we have seen above, through 
the terms "commensurate with the degree and nature of the adverse effects determined to exist".  
4.61 We note that this distinction is also found under ge neral rules of international law, as reflected 
in the ILC's Articles on State Responsibility, wh ich have been referred to by Brazil in these 
proceedings.  Article 49 of these Articles defines "inducing compliance" as the only legitimate object 
                                                     
 
80 See Appellate Body Report, US – Continued Suspension , para. 309. 
81 See Decision by the Arbitrator, US – FSC (Article 22.6 – US) , para. 5.57;  Decision by the Arbitrator, 
Canada – Aircraft Credits and Guarantees (Article 22.6 – Canada) , paras. 3.47-3.48;  Decision by the 
Arbitrator, Brazil – Aircraft (Article 22.6 – Brazil) , paras. 3.44, 3.54, 3.57 and 3.58. WT/DS267/ARB/2 
Page 22 
 
 
  of countermeasures, while a separate provision, Ar ticle 51, addresses the question of the permissible 
level of countermeasures, which is defined in relation to proportionalit y to the injury suffered, taking 
into account the gravity of the breach.82   
4.62 Finally, we note that the terms of Article 7.9 of the SCM Agreement , which refer exclusively 
to the "degree and nature of the adverse effects de termined to exist", do not suggest that there would 
be any basis for increasing their level, in a subj ective sense, to specifically take into account a 
superadded objective of inducing compliance.  We  are not empowered to "adjust" the level of 
countermeasures beyond what these terms allow, in our assessment of the level of countermeasures to 
be authorized.  Such an adjustment would go beyond the stated correspondence between the 
countermeasure and the degree and nature of th e adverse effects.  The objective of inducing 
compliance must be seen to arise from the ability of  a Member to obtain an authorization, and not 
from an exaggeration of its permitted amount. 
D. ASSESSMENT OF BRAZIL 'S PROPOSED COUNTERMEASURES  
4.63 Brazil has proposed countermeasu res in the amount of US$1.037 billion in relation to the 
marketing loan and countercyclical payments.  This amount is based on certain assumptions which 
Brazil argues should be adopted in their calculation,  a number of which the United States disagrees 
with.  In addition to that, the United States disagrees with Brazil's actual calculations.  We therefore 
consider the underlying assumptions in Brazil's appr oach which are disputed by the United States, 
before turning to the calculation of the proposed countermeasures. 
1. Should the level of countermeasures be limited to the adverse effects suffered by Brazil? 
4.64 Brazil's counterfactual simulation involves a calcu lation of the global impact of eliminating 
marketing loans and countercyclical payments.  Th e result of the simulation is the sum of (i) the 
income losses on actual cotton production due to supp ressed world market prices and (ii) the value of 
the cotton production foregone by otherwise competitiv e farmers in the rest of the world due to 
suppressed world market prices.  These income losse s and the value of the cotton production foregone 
were incurred not only by Brazilian farmers but also by other non-US producers. 
4.65 The United States argues that because the findings  in this case concern serious prejudice to 
Brazil alone, it is necessary to separate the effects on Brazil in particular from the worldwide effects.83  
The allowed countermeasures should be equal only to  (i) the sum of the income losses on actual 
Brazilian cotton production due to suppressed world market prices and (ii) the value of the cotton 
production foregone by Brazilian farmers due to suppressed world market prices.   
4.66 We must therefore consider whether the pr oposed countermeasures may legitimately include 
a calculation of the effects of the "global impact" of  eliminating the subsidies at issue, as argued by 
Brazil, or whether they should be limited to the adverse impact of the subsidy on Brazil alone.  
(a) Arguments of the parties 
4.67 Brazil's request seeks to quantify the entirety of the adverse effects of the ML and CCP 
subsidies on the world cotton market, on the assumption that this is the basis on which the finding of 
"adverse effects" was made in the underlying proceedings.   
4.68 In the view of the United States, the DSB' s recommendations and rulings were based on a 
finding of "present" serious prejudice to the interests of Brazil within the meaning of Article 5(c) of 
                                                      
82 See http://untreaty.un.org/ilc/texts/instru ments/english/commentaries/9_6_2001.pdf . 
83 US written submission, para. 308.  WT/DS267/ARB/2 
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  the SCM Agreement and Brazil's inclusion of the alleged effects of the payments on the entire world 
exceeds what is permissible.  In the United States'  view, the type of "adverse effects" relied on by 
Brazil in the underlying proceedings in this case is "serious prejudice to the interests of another Member", so that the only relevant effects are tho se on Brazil, and those are the adverse effects that 
are relevant here.  The United States explains that th e panel looked at the "world price" in determining 
whether there was price suppression as a result of the US measures, and agrees that price effects on 
the world market would affect Brazil.  But, the Unit ed States argues, in the final analysis the enquiry 
focused on the existence of serious prejudice to the in terests of Brazil, and the use of a world price (to 
establish price suppression) does not mean that the finding of serious prejudice  concerned the entire 
world.  In the United States' view, a recalculation of the effects of the measures on Brazil alone leads 
to a figure of US$30.4 million (or US$134.3 million, without corrections to Brazil's model).
84 
4.69 Brazil responds that the countermeasures must be commensurate with the significant price 
suppression determined to exist in the world market for cotton.85  Brazil argues that in the underlying 
rulings, both in the initial and compliance proceed ings, the Panels and the Appellate Body found 
"adverse effects to the interests of Brazil in the form of significant price suppression in the world 
market for cotton"86, and that in this dispute, the adverse e ffects determinations relate to the very 
existence of a suppressed world market.  Brazil consid ers that the United States is reading Article 7.9 
of the SCM Agreement  out of the Agreement in effectively seekin g to equate the standard it contains 
with the standard in Article 22.4 of the DSU, which provides for equivalence to the level of 
nullification or impairment (suffered by the complain ing party).  In Brazil's view, the legal standard 
under Article 7.9 of the SCM Agreement  is more flexible than the DSU and can provide for 
countermeasures on a broader scale than equiva lence with nullification or impairment.  
4.70 The United States notes that Article 6.3 of the SCM Agreement  defines four types of "subsidy 
effects" that may constitute serious prejudice to the interests of a complaining Member.  The 
United States considers that Brazil's interpretation of these provisions would read each in isolation 
from the governing provisions of Article 5 and from othe r elements of Article 6.  In the United States' 
view, "when Article 6.3 is interpre ted in context, it is evident that the effect on the complaining 
Member is the concern for all types of subsidy effect described therein".87 
(b) Analysis by the Arbitrator 
4.71 Brazil analyses the findings of the original and compliance panels as confirmed by the 
Appellate Body in relation to the "adverse effects de termined to exist", to support its argument that 
these effects encompass price suppression on the world cotton market.  Brazil highlights the fact that 
these findings were based on Article 6.3(c) of the SCM Agreement , which relates to "price 
suppression" on the market, and that the relevant ma rket in the panel's findings in this case was the 
world market.  Brazil draws attention to statements by the original and compliance panels that "the 
effect of [the ML and CCP payments] is signifi cant price suppression on the world market" and that 
the determination of the effect of the subsidies at  issue was made in relatio n to the world market.  
Brazil does not dispute that the serious prejudice find ing relates to the interest of Brazil but it argues 
that such serious prejudice is precisely constituted by price suppression on the world market .   
4.72 The United States, by contrast, draws attention to the fact that these rulings must be seen in 
their proper context, and that, in particular, the various subparagra phs under Article 6.3 (including 
subparagraph (c)), must be read in the context of Article 5, which refers to "adverse effects to the 
interests of other Members" and of subparagraph (c ) of the same provision, which defines the notion 
                                                      
84 US written submission, para. 245. 
85 Brazil's written submission, paras. 289-330. 
86 Brazil's written submission, para. 290. 
87 US responses to questions from the Arbitrator, question 115, para. 96. WT/DS267/ARB/2 
Page 24 
 
 
  of "serious prejudice" with reference to "the inte rests of another Member".  In this regard the 
United States points out that the chapeau to Article 6.3 specifically refers to serious prejudice "in the 
sense of paragraph (c) of Article 5".  
4.73 In order to address this issue, we find it useful  to consider the specific findings of "adverse 
effects" at issue in this case as well as the broader legal context in which these findings arise, in order 
to clarify what the "degree and nature of the a dverse effects determined to exist" are in the 
circumstances of this case. 
4.74 As we have noted above, Article 5 of the SCM Agreement  identifies three types of "adverse 
effects to the interests of other Members" arisi ng from subsidies, that Members should not cause.  
These are (a) injury to the domestic industry of another Member, (b) nullification or impairment of benefits accruing to other Members, and (c) "serious prejudice to the interests of another Member". 
4.75 We note, at this stage of our analysis, that the expression "adverse effects" is defined with 
reference to "the interests of other Members".  We also note that the specific type of "adverse effect" 
that is at issue in the circumstan ces of this case, "serious prejudice", is also defined specifically with 
reference to the interest of "another Member".  It is  clear therefore that the notion of "adverse effects" 
within the meaning of Article 5 and the notion of  "serious prejudice" are both inherently and by 
definition tied to the manner in which they affect th e interests of other WTO Members.  In the case of 
"serious prejudice", this is even defined more spec ifically in relation to the interests of "another 
Member", rather than all Members.  
4.76 Article 6 further elaborates on the circumstance s in which "serious prejudice" within the 
meaning of Article 5(c), i.e. "serious prejudice to the interests of another Member", may arise.  In this 
case, the findings in the underlying proceedings are based on subparagraph (c) of Article 6.3, which 
provides that "serious prejudice" may arise in any case where: 
"[T]he effect of the subsidy is a significant price undercutting by the subsidized 
product as compared with the price of a like product of another Member in the same market or significant price suppression, price depression or lost sales in the same 
market." 
4.77 Specifically, the findings of the panel and the Appellate Body in this case were based on a 
determination that the subsidies at issue caused "s ignificant price suppression" within the meaning of 
this provision, on the world market for cotton.  
4.78 Brazil considers that, since these findings relate to the existence of a "significant price 
suppression" on the world market , the entirety of the effects of this price suppression on that market, 
in other words the worldwide impact of the pri ce suppression, must be the basis for the award of 
countermeasures in relation to these "adverse effects".  In Brazil's view, this would reflect the "degree 
and nature" of the findings of "adverse eff ects" in the circumstances of this case.  
4.79 Brazil draws our attention in particular to the fact that the various subparagraphs under 
Article 6.3 define differently in each case the circumstances in which "serious prejudice" may be considered to arise.  Brazil highlights the fact  that subparagraph (c) of this provision, unlike 
subparagraphs (a) and (b), does not expressly refer to the specific effect on another Member as the 
basis for the existence of "serious prejudice".
88  The United States agrees that each of the provisions 
of Article 6.3 "take a different approach, reflecting the particular type of serious prejudice to which it 
pertains".89  In the United States' view, however, Articl e 6.3(c) "guides the fact-finder to the trade 
                                                      
88 See Brazil's oral statement, paras. 51 ff. 
89 US responses to questions from the Arbitrator, question 115, para. 98.  WT/DS267/ARB/2 
 Page 25 
 
 
  relationship between the complaining Member and th e subsidizing Member, so that any decision will 
be based on the effects of the subsidies on the comp laining Member.  Those effects can be of price 
undercutting of the non-subsidized product "in the same market" or of price suppression, price 
depression, or "lost sales" in the same market" that  is, the market in which the products of the 
subsidizing Member and the complaining Member compete".90 
4.80 We agree with the United States that, even if subparagraph (c) of Article 6.3 does not 
expressly refer to the impact of the type of serious prejudice at issue "on the complaining Member", 
nonetheless the essence of this type of adverse effect  is that it causes serious prejudice "to the interests 
of another Member" as defined in Article 5, item (c).  In the circumstances of this case, that "other Member" is Brazil.   
4.81 An examination of the terms of the underlying fi ndings in this dispute also provides useful 
guidance as to their nature.  As is highlighted by Brazil, the underlying findings are based on a 
determination that the subsidies at issue caused  "significant price suppression" on the world upland 
cotton market.  Although a determination of the ex istence of "significant price suppression" on the 
world market may not, as such,  involve or require a specific evaluation of the impact of such price 
suppression on Brazil, this does not mean that a consid eration of this impact was irrelevant to the 
panel's ultimate finding that such price suppression constituted "serious prejudice to the interests of 
Brazil".  In fact, the original panel specifically e xplained why it considered that a price suppression on 
the world market would inevitably affect Brazil: 
"We also find that developments on the world upland cotton market price would 
inevitably affect prices in other markets where Brazil and the United States may 
compete, due to the nature of the world prices in question, and the relative proportion 
of that market enjoyed by the United States and Brazil.  All individual sales of upland 
cotton by Brazil and the United States in any domestic market in which both were 
present would occur against this backdrop."
91 
4.82 The Appellate Body referred to th is determination, to confirm that "it was not necessary, in 
these circumstances, for the Panel to  proceed to a separate analysis of the prices of Brazilian upland 
cotton in the world market".92  Had the impact on Brazil of the price suppression at issue been 
irrelevant to the determination, it would not  even have been necessary to explain how price 
suppression on the world market impacted on Brazil.   
4.83 The original panel also considered in some de tail the question of what may constitute "serious 
prejudice" to the interests of another Member.  In this context, the panel found that: 
"[A]t the very least, given the subject-matter covered by the SCM Agreement  – 
government subsidies in respect of goods – th e effects-based situations identified in 
the subparagraphs of Article 6.3, and the re ference in the chapeau of Article 6.3 to 
serious prejudice 'in the sense of' Article 5(c), we believe that such 'serious prejudice' 
may involve the effects of subsidies on th e complaining Member's trade in a given 
product.  That is, it addresses the volumes and prices and flows of such trade, which may, by logical extension, affect a producing Member's domestic production of that 
product.  We, therefore, consider that  a detrimental impact on a complaining 
Member's production of, and/or trade in, th e product concerned may fall within the 
concept of 'prejudice' in Article 5(c) of the SCM Agreement . 
                                                     
 
90 US responses to questions from the Arbitrator, question 115, para. 99. 
91 Panel Report, para. 7.1313. 
92 Appellate Body Report, para. 417. WT/DS267/ARB/2 
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  Moreover, the prejudice must be 'serious'.  In one of its ordinary meanings, 'serious' 
means 'important' and 'not slight or neglig ible'.  Thus, the prejudice in terms of the 
effect on Brazil's production of, and/or trade in, upland cotton must be such as to affect Brazil's production of cotton, to a degree that is 'important', not slight or 
negligible, or meaningful. 
We recall our conclusion that the price suppression is 'significant'.  We note, 
moreover, Brazil has submitted ev idence to substantiate its assertions that here is a 
close relationship between movements of  Brazilian prices and movements in the 
A-index and that Brazilian producers have suffered from the suppressed price trends 
in the Brazilian market and in Brazilian  export markets, including in terms of 
Brazilian producers having reduced  production and investment."
93 
4.84 These elements suggest to us that, even if the na ture of the adverse effects determined to exist 
in this case is a "significant price suppression" on the world cotton market, the conclusion that such 
price suppression constitutes serious prejudice "to the interests of Brazil"  was not reached in 
abstraction of the impact of this price suppression on  Brazil.  On the contrary, the panel specifically 
explains how this price suppression affects Brazil as a producer and exporter of upland cotton.  
4.85 This is further confirmed, in our view, by the terms of Article 7.1 of the SCM Agreement , 
which sets out the basis upon which Members may initiate proceedings in relation to actionable 
subsidies.  This provision foresees that a Member  may request consultations with another Member 
whenever it has reason to believe that any subsidy re ferred to in Article 1, granted or maintained by 
another Member, "results in injury to its domestic industry, nullification or impairment or serious 
prejudice" (emphasis added). The terms of this provi sion suggest to us that the very basis for the 
initiation of proceedings relating to actionable subsid ies is the fact that the complaining Member has 
reason to believe that the measure c oncerned affects its own interests. 
4.86 The original panel, in considering an argument by Brazil that other WTO Members had 
suffered serious prejudice as a result of the US subsidies, made a comparable observation:  
"The text of Article 7.2 of the SCM Agreement  makes it clear that the dispute 
settlement procedures set forth in Article 7 of the SCM Agreement  may only be 
invoked by a Member where that Member be lieves that it has itself suffered serious 
prejudice as a result of the subsidization.  Fr om this, the only logical inference is that 
the serious prejudice under examination by a WTO panel is the serious prejudice 
experienced by the complaining Member."94 
4.87 The panel then finds further support for its conc lusion in the terms of Articles 5 and 6 of the 
SCM Agreement .  Further to its examination of these provisions, and in light also of the terms of 
Article 10 of the DSU in relation to the interests of  third parties in dispute settlement procedures, the 
panel concluded that "in examini ng Brazil's allegations … that it has suffered serious prejudice to its 
interests within the meaning of Article 5(c), we take full account of the interests of all Members", and 
it indicates that it has taken into account serious prejudice allegations of other Members: 
"[T]o the extent these constitute evidentiary su pport of the effect of the subsidy borne 
by Brazil as a Member whose producers are involved in the production and trade in 
                                                      
93 Panel Report, paras. 7.1392-7.1394. 
94 Panel Report, para. 7.1403.  WT/DS267/ARB/2 
 Page 27 
 
 
  upland cotton in the world market.  However, we have not based our decision on any 
alleged serious prejudice caused to them."95 
4.88 These findings confirm us in our conclusion that, even if the "significant price suppression" 
determined to exist was in relation to the world market, the finding in essence relates to the interests 
of Brazil and reflects "serious prejudice" to the interests of Brazil specifically.  As we have seen 
above, this determination was in fact not entirely de tached from a consideration of the effects of this 
price suppression on Brazil specifically.  On the co ntrary, the panel took care to explain how the 
existence of significant price suppression on the world market affected Brazil's production and trade in upland cotton.  
4.89 These considerations must, in our view, info rm and guide our understanding of what the 
expression "degree and nature of the adverse effect s determined to exist" means in this case.  
Specifically, we consider that it is the very nature of the findings at issue that they relate to the 
adverse effects of the subsidies at issue on Brazil.  This in turn implies that the scope of the "degree 
and nature" of these adverse effects must be unders tood in this light.  We therefore understand the 
"degree and nature of the adverse effects", in the ci rcumstances of this case, to refer to the extent to 
which Brazil is affected by the price suppression on the world cotton market caused by the ML and 
CCPs that has been determined to exist in th e underlying proceedings.  The provisions of the 
SCM Agreement  as we have interpreted them, and the finding s of the Panel and the Appellate Body in 
the original proceedings, make it clear to the Arbitrator that these were the "adverse affects 
determined to exist". 
4.90 We find it important, however, to emphasize in this context that, contrary to what Brazil 
argues, such an interpretation does not "render inu tile the implementation obligations for findings of 
worldwide adverse effects".
96  The obligation of the United States in terms of implementation remains 
to remove  the adverse effects determined to exist (or withdraw the subsidy).  This is a distinct 
question from the question of the quantum of count ermeasures that Brazil is entitled to seek, as the 
complaining Member whose interests are adversely a ffected by the existence of this significant price 
suppression, such that these countermeasures would be  "commensurate with the nature and degree of 
the adverse effects (to the interests of Braz il) determined to exist" in this case.   
4.91 The fact that the remedies available to Brazil must be commensurate with the degree and 
nature of the adverse effects in relation to its own interests does not alter the scope of what the 
United States might be required to do in order to re move such adverse effects.  In particular, it does 
not modify the fact that the source of the advers e effects determined to exist in this case is the 
existence of "significant price suppression" on the world market, and that this is what the 
United States must address in removing the adverse effects at issue.  This is comparable, mutatis 
mutandis , to the situation that arises in the case of a vi olation, for example, of Article XI of the 
GATT 1994 through an import ban, in which the sc ope of the permissible countermeasures is a 
function of the level of nullification or impairment  of benefits accruing to the complaining Member, 
but this does not modify in any way the nature of the implementation requirements that may arise 
from the rulings for the Member concerned (for example, through the removal of the WTO-inconsistent import ban).  
4.92 In conclusion, in determining whether Brazi l's proposed countermeasures are "commensurate 
with the degree and nature of the adverse effects dete rmined to exist", we must consider whether they 
are commensurate with the impact on Brazil  of the price suppression resulting from the granting of 
ML and CCPs on the world cotton market.   
                                                     
 
95 Panel Report, para. 7.1415. 
96 Brazil's written submission, para. 325. WT/DS267/ARB/2 
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  2. Should the level of countermeasures be adjusted to account for a threshold of 
"significant" price suppression? 
4.93 Brazil's counterfactual assumes a complete wit hdrawal of the ML and CCP subsidies.  The 
United States, however, considers that the counterm easures "should fit only that part of the subsidy 
that is inconsistent, and, to the extent quantiti es are compared, the Arbitrator should compare the 
proposed countermeasures with the part of th e subsidy causing the price suppression over the 
"significant" threshold, not the effect of the entire subsidy."97 
(a) Arguments of the parties 
4.94 The United States contends that the Arbitrator  should make a downward adjustment to the 
measure of total effects in order to meet the legal standard under Article 7.10 of the SCM Agreement .  
The United States acknowledges that the precise amount of the deduction is difficult to determine but 
it believes this to be nonetheless critical.   
4.95 The parties were requested to provide a quan titative threshold of significance.  Brazil has 
stated that "it would not consider any price suppression, however small, as significant as long as it is greater than zero"
98 but did not propose a specific threshol d.  The United States responded that it 
cannot propose an exact threshold as to what dis tinguishes "significant" price suppression from price 
suppression in this particular dispute.99   
4.96 Instead, both parties have stressed the nature of  the product, the world market for cotton and 
the behaviour of the price itself.  For Brazil, upland cotton is a homogeneous  product whose sales are 
price sensitive.100  It is a basic and widely traded commod ity so that a relatively small decrease or 
suppression of prices could be significant.101  It also argues that there ar e continuing effects from past 
marketing loans and countercyclical payments  which are significant in and of themselves.102 
4.97 The United States claims that the price of upl and cotton is highly variable, with frequent 
swings of substantial degree.  It claims that an analysis of cotton price variability over 1980 to 2003 
shows that annual cotton price variability for the entir e period is in range of 18 to 20 per cent.  It 
argues that strong or frequent fluctuations in price would themselves tend to cut against a finding that 
any alleged suppression is "significant", especially if the variability frequently brings the price of the 
product to a level at which the alleged suppression (j udged in light of that price) no longer exists.103   
(b) Analysis by the Arbitrator 
4.98 The question before us is whether the Arbitr ator should, in assessing the level of Brazil's 
proposed countermeasures, aim to capture only th at portion of the price suppression on the world 
cotton market resulting from the ML and CCPs that re nders it "significant", or whether the entirety of 
this price suppression may be taken into account. 
4.99 We find it useful to start our analysis of th is question with a reference to the underlying 
findings, through which the existence of "significan t price suppression" under Article 6.3(c) of the 
SCM Agreement  was established.   
                                                      
97 US written submission, para. 298. 
98 Brazil's responses to questions from the Arbitrator, question 38, para. 445. 
99 US responses to questions from the Arbitrators, question 132, para. 159. 
100 Brazil's comments on US responses to questions from the Arbitrator, question 122, para. 299. 
101 Brazil's responses to questions from the Arbitrator, question 36, para. 404. 
102 Brazil's responses to questions from the Arbitrator, question 36, para. 432. 
103 US responses to questions from the Arbitrators, question 132, para. 160.  WT/DS267/ARB/2 
 Page 29 
 
 
  4.100  The original panel considered the meaning of the term "significant" in the expression 
"significant price suppression" under Article 6.3(c) and determined that "it is the degree of price 
suppression or depression itself that must be "signifi cant (i.e. important, notable or consequential)"104 
under this provision.  The panel further consider ed how the "significance" of a price suppression 
might be assessed, including in the co ntext of the world cotton market: 
"The 'significance' of any degree of pri ce suppression may vary from case to case, 
depending upon the factual circumstances, and may not solely depend upon a given 
level of numeric significance.  Other consider ations, including the nature of the 'same 
market' and the product under consideration may also enter into such an assessment, 
as appropriate in a given case.   
We cannot believe that what may be significant in a market for upland cotton would 
necessarily also be applicable or relevant to  a market for a very different product.  We 
consider that, for a basic and widely tr aded commodity, such as upland cotton, a 
relatively small decrease or suppression of  prices could be significant because, for 
example, profit margins may ordinarily be narrow, product homogeneity means that 
sales are price sensitive or b ecause of the sheer size of the market in terms of the 
amount of revenue involved in large volumes  traded on the markets experiencing the 
price suppression."105 
4.101  The panel then considered the relative magnit ude of the United States production and exports, 
the overall price trends in the world market and the mandatory nature of the subsidies in question and 
well as the available evidence of the order of magn itude of the subsidy, to conclude that it was 
"certainly not, by any means, looking at an in significant or unimportant world price phenomenon".106   
4.102  The panel therefore did not find it necessary to specifically quantify the degree of 
"significance" of the price suppression at issue in order to determine that "significant price suppression" existed.  Nor did it suggest that its findi ng was limited to a certain "portion" of the price 
suppression that had been determined to exist on th e world cotton market.  Rather, it considered the 
elements before it, and determined that the price suppression at issue, i.e. the price suppression caused 
by the subsidies under consideration on the world cott on market, was "significant".  In so doing, the 
panel noted that the "significance" of any degree of price suppression "may not solely depend upon a 
given level of numeric significance" and that "[o]th er considerations, including the nature of the 
"same market" and the product unde r consideration, may also en ter into such an assessment"
107 and 
that in the case of cotton, in light of the characte ristics of the product and the market, "a relatively 
small decrease or suppression of prices could be significant".108 
4.103  The compliance panel concurred with the orig inal panel's understanding of the term 
"significant" in "significant price suppression" in Article 6.3(c) and specifically cites the panel's conclusion in relation to the degree of price suppressi on that might be considered "significant" with 
respect to upland cotton, as cited in paragraph 4.100 above.
109  
4.104  In light of these elements, we do not consider that it is necessary, for the purposes of 
assessing the impact of this "significant price s uppression", to exclude in the calculation of the 
adverse effects a portion of the price increase said to be below an alleged threshold of "significance".  
                                                      
104 Panel Report, para. 7.1328. 
105 Panel Report, paras. 7.1329-7.1330. 
106 Panel Report, para. 7.1332. 
107 Panel Report, para. 7.1329. 
108 Panel Report, para. 7.1330. 
109 Panel Report, US – Upland Cotton (Article 21.5 – Brazil) , para. 10.50. WT/DS267/ARB/2 
Page 30 
 
 
  The threshold of "significance" is set in order to  ascertain whether the price suppression at issue is 
sufficiently "important, notable or consequential", as the original panel put it, to fall within the scope 
of Article 6.3(c) and form the basis of a findi ng of "serious prejudice" under Article 6 of the 
SCM Agreement .  Once it is determined that the price suppression is significant, and therefore that it is 
within the scope of the provision, then it is the entir ety of that existing "significant price suppression" 
that is the basis for the determination of "serious prejudice".  
4.105  To adjust the level of price suppression downw ards, for the purposes of estimating the level 
of countermeasures that Brazil is entitled to, would m ean that we would not in fact take into account 
the entirety of the situation that has given rise to th e findings, namely the fact that a certain degree of 
price suppression exists on the world cotton market, that has been found to be "significant".  It is not for us to second-guess what alternative lower leve l of price suppression on the world cotton market 
might have been found not to be "significant" in the ci rcumstances of this case.  In fact, in light of the 
original panel's determination that the "significance" of a certain price suppression may not "solely 
depend upon a given level of numeric significance" , we cannot even assume that a purely quantitative 
threshold would appropriately reflect such "signifi cance".  Indeed, the United States itself, although it 
considers such an adjustment to be "critical", d eclined to propose a specific quantitative threshold by 
which "significance" might be accounted for.   
4.106  The Arbitrator therefore concludes that it is not required, for the purposes of estimating the 
effects of the significant price suppression determined to exist on the world cotton market, to adjust 
downwards the degree of this price suppres sion for "significance" (or, more correctly, 
"insignificance"). 
4.107  We also note that this is comparable, in concep tual terms, with the practice under the relevant 
WTO agreements in relation to the imposition of safeguards, or countervailing duties, or under the 
Anti-Dumping Agreement  in relation to the imposition of anti- dumping duties reflecting the entirety of 
the dumping margin, where such margin is more than de minimis .
110  In our view, this is conceptually 
similar to the reasoning we are applying to the dete rmination of the "degree and nature of the adverse 
effects determined to exist". Once the existe nce of "significant price suppression" has been 
established, it is legitimate to take into account the entirety of the price suppression caused by the 
measures at issue on the world cotton market in assessing its impact on Brazil.  A de minimis , or 
"insignificant", amount of that price suppression is not to be ignored in terms of the "remedy" which, 
in our case, is the countermeasure. 
3. Choice of reference period  
4.108  Brazil quantifies the adverse effects of marke ting loans and countercyclical payments based 
on a counterfactual, assessing how much higher wo rld market prices for cotton would have been 
pursuant to a complete withdrawal of marketing loans and countercyclical payments in MY 2005.  
The United States considers this period not to be re presentative in light of more recent evolutions on 
                                                      
110 For example, in a safeguards case, when setting the level of the duty sufficient to eliminate a serious 
injury, the Member applying the duty would be entitled to impose a duty reflecting the entirety of the injury, and would not be expected to impose a duty that would for example permit injury that might be material but falls 
short of a "serious" level.  Similarl y, when considering import volumes for the application of anti-dumping or 
countervailing duties, it woul d not be expected that an  "initial" amount of supp ly up to the negligibility 
threshold  would be exempted from application of a measure for a non-negligible supplier.  Furthermore, under 
the Anti-Dumping Agreement , a margin of dumping which is less than 2 per cent is said to be de minimis .  
Dumping that is determined to be lower than this threshold will result in immediate termination of the 
investigation.  However, if the dumping margin is found to equal or exceed this threshold, and the investigating 
authorities subsequently find that all other grounds for imposing an anti-dumping duty are present, the duty can be set as high as the entirety of the dumping margin.  There is no requirement to reduce the anti-dumping duty 
by the amount of the de minimis  threshold.  WT/DS267/ARB/2 
 Page 31 
 
 
  the market and proposes instead that a three-year period covering MY 2005-07 be used to calculate 
the amount of countermeasures to which Brazil is entitled. 
(a) Arguments of the parties 
4.109  The United States argues that the task of the Arbitrator is to determine the amount of 
countermeasures permitted based on the findings of th e compliance panel and that, in this case, the 
Arbitrator will be making its dete rmination over three years after the end of the reasonable period.  In 
its view, it "makes sense that the Arbitrators use ac tual data of the period following the end of the 
reasonable period to provide more informa tion about the likely harm to Brazil".   
4.110  Brazil objects to the argument that the Arbitrator should determine the amount of 
countermeasures based on the findings of the compli ance panel.  It maintains that allowing a non-
compliant Member to rely on its own failure to comply in order to limit the amount of countermeasures is inconsistent with  the Article 7.9 and 7.10 of the SCM Agreement  and Article 22 of 
the DSU.  These provisions do not allow a non-complia nt Member to extend a reference period long 
past the end of the implementation period to limit the scope of countermeasures.   
4.111  The United States further contends that using a single year – MY 2005 – for an agricultural 
product that has volatile prices is not representative of the potential effects in future to Brazil.
111  The 
United States has presented data of the A-i ndex from MY 1971 through MY 2007 to illustrate 
historical movements in world cotton prices.  It argues that the A-index for MY 2007 is in line with 
historical A-index values while the period MY 1999-MY 2002 represents a period in which the 
A-index is extremely low from a historical perspective.  Given that prices vary from year to year, the United States advocates the averaging of three years to smooth out the ups and downs to provide a middle ground instead of relying on any single year.
112   
4.112  Brazil notes that the question before the Arbitr ator is whether the level of countermeasures 
proposed by Brazil is commensurate with the degree a nd nature of the adverse effects at the end of the 
period for implementation – and not whether the le vel of countermeasures is "representative of 
potential effects going forward".113  It then challenges the United St ates' assertion that MY 2005 is not 
representative of the "potential effects going forward to Brazil" and that the average of MY 2005 to 2007 is more representative.  It provides data that shows prices, and hence in its view, effects in 
MY 2005 that were close to the average of the nine-year period since 1999, the first year covered by 
the findings of the original panel.  As such, it finds MY 2005 to be representative of the per-unit 
amount of marketing loans and countercyclical paymen ts over the nine-year peri od and hence, of their 
effects.  In contrast, it says that prices in MY 2007 were abnormally high, and in fact, are the highest 
of the decade.  As a result, it maintains that ta king an average that includes MY 2007 prices is not 
"representative", and understates the amount of  the subsidy and the adverse effects caused.
114    
4.113  Finally, Brazil argues that past arbitrators have used the approach that it is proposing in this 
dispute, i.e. using the year straddling the end of the implementation period.  It claims that past 
arbitrations have stressed that compliance must be assessed at the time of expiry of the implementation period.  It further claims that arb itrators have used reference periods longer than one 
year only in cases involving subsidies provided for an  order of large capital goods  to be delivered over 
a number of years.  
                                                     
 
111 US written submission, para. 277. 
112 US responses to questions from the Arbitrator, question 60, para. 153. 
113 Brazil written submission, para. 374. 
114 Brazil written submission, para. 376. WT/DS267/ARB/2 
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  4.114  The United States observes that prior arbitrations do not suggest a narrow one-year analysis.  
In terms of taking into account more recent data, it claims that arbitrators have taken into account 
current conditions – including evaluation of changes to policies at issue.  The United States notes that arbitrators have also taken approaches that use multi-year time horizons, whether in projections of 
several years for a subsidy or in the use of formulas.
115  
(b) Analysis by the Arbitrator 
4.115  Brazil has based its calculation of the amount of countermeasures that it seeks in relation to 
the ML and CCPs on MY 2005, and justifies the choice of that period as the year "straddling" the end of the implementation period.  The United States argu es that this is not "representative", and that a 
multi-year reference period should be used.   
4.116  The question we must consider here is whether the specific period proposed by Brazil is such 
that it would not lead to an estimation of the adverse effects at issue that would be "commensurate 
with the degree and nature" of those adverse effects.  We recall in this respect the fact that the burden 
rests on the United States to demonstrate that Brazil's proposed countermeasures do not meet this 
standard.  In order to prevail in its argument, th e United States must therefore persuade us not only 
that there may be alternatives to the choice of MY 2005 as the period of reference, but rather that the 
use of MY 2005 as period of reference would l ead to countermeasures that would not be 
"commensurate" within the meaning of Article 7.9.  The United States has not convinced us that this 
would be the case. 
4.117  We recognize that price fluctuations on the world upland cotton market may affect the 
calculation of the adverse effects of the ML and CCP  subsidies at issue over time.  Indeed, there may 
be a number of economic or other factors that woul d affect the evolution over time of the impact of 
the subsidies at issue, and we do not exclude th at there may have been different permissible 
approaches to the choice of period of reference fo r the purposes of such calculations.  In a situation 
where a fixed annual amount of countermeasures is dete rmined, that will be applied in the future and 
for an undetermined period of time, there is necessar ily an inherent uncertainty as to how closely the 
said amount will represent the actual continued adver se effects of the measure over time.  What we 
must ensure, however, is that there is a legitima te basis for assuming that the chosen period of 
reference may lead to a reasonable estimation of these effects.   
4.118  In the circumstances of this case, we find th at the choice of MY 2005, which represents the 
first moment at which the United States should ha ve come into compliance with the recommendations 
and rulings at issue by removing the adverse effect s of the subsidies or withdrawing them, is in 
principle legitimate.  We note that the end of th e implementation period has been chosen as period of 
reference in arbitrations under Article 22.6 of the DSU previously.
116  We also find that the elements 
before us do not persuade us th at this period would be "unrepresentative", as the United States 
suggests.  In fact, Brazil's analysis of cotton pr ices (the Adjusted World price, the A-index and 
US farm price) shows that prices in MY 2005 were more representative, in the sense that they were 
close to the average of the nine-year period since MY 1999, than prices over the three-year period 
proposed by the United States.  We concur with th e significance attached by Brazil to this nine-year 
period since MY 1999 was the first year covered by the findings of the original panel .117  While the 
                                                      
115 US written submission, para. 278. 
116 Decision by the Arbitrator, US – FSC (Article 22.6 – US) , para. 2.15. 
117 See Panel Report, para. 7.1416:  "In conclusion, in light of all of these considerations, we find that 
the effect of the mandatory, price contingent United States subsidies at issue – that is, marketing loan 
programme payments, user marketing (Step 2) payments and MLA payments and CCP payments – is significant price suppression in the same world market for upland cotton in the period MY 1999-2002 within the meaning 
of Articles 6.3(c) and 5(c) of the SCM Agreement. " 
   WT/DS267/ARB/2 
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  most recent market evolutions may suggest rising pri ces, we have little basis to assume that this most 
recent trend represents a sustained medium or long- term trajectory of the market given that cotton 
prices vary considerably from year to year, a pattern that both parties have attested to and documented.  
4.119  In light of these elements, we conclude that the United States has not demonstrated that the 
reference period proposed by Brazil for the calculati on of its proposed countermeasures is inadequate, 
and we accept the use of MY 2005 as peri od of reference for the calculations.  
4. Calculations 
(a) Introduction 
4.120  Brazil calculates the amount of adverse e ffects on rest of the world producers from 
US marketing loans and countercyclical payments to be US$3.335 billion, although it only requests 
countermeasures equal to US$1.037 billion annually in line with its original request to the DSB.  The 
adverse effects are comprised of two parts.  The fi rst is the income losses by rest of the world 
producers on actual cotton productio n in MY 2005 due to suppressed world market prices ("sales 
value effect") which Brazil calculates amounts to US$2.73 billion.  The second is the value of the 
cotton production foregone by otherwise competi tive producers in the rest of the world due to 
suppressed world market prices ("reduced production effects") which Brazil calculates at 
US$604.7 million. 
4.121  The United States argues that Brazil's methodolo gy or approach to the calculations suffers 
from serious defects so that it shoul d be rejected by the Arbitrator.  It describes these defects as:  
(i) the decision not to limit the calculations of adverse effect to only the effects of US programmes on Brazil;  (ii) the choices for key parameters (elast icities, coupling factor and indicator of price 
expectations) in the model;  (iii) Brazil's use of data for a single year (MY 2005), which the 
United States argues is not representative of the fl uctuation of marketing loan and countercyclical 
payments and their effects;  and (iv) Brazil's failure to limit the proposed countermeasures to the 
portion of the effects of the marketing loan and co unter-cyclical payments that resulted in the finding 
of inconsistency with the SCM Agreement .
118   
4.122  Employing the same economic simulation model submitted by Brazil but employing a 
different set of parameters and reference period, it cal culates the "total effects" of marketing loans and 
countercyclical payments on Brazil to average no more US$30.4 million annually.  The United States confines its calculation only to the adverse effects on Brazil and excludes the adverse effects on other 
countries.  Finally, it argues that the allowable countermeasures will have to be lowered further 
depending on the chosen threshold for "significant" price suppression.  For the United States, only price suppression that breaches this threshold of being significant can be authorized for 
countermeasures.  
4.123  Some of the issues raised by the United St ates which concern limiting the calculations of 
adverse effect to only the effects of US programme s on Brazil, limiting the proposed countermeasures 
to the portion of the effects of the marketing loan  and counter-cyclical payments that result in the 
finding of inconsistency with the SCM Agreement  and the choice of the reference period have already 
been considered and decided upon by the Arbitrator (see Section IV.D.1-3 above).  The Arbitrator 
now takes up the other remaining issues. 
                                                     
 
118 US written submission, para. 239. WT/DS267/ARB/2 
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  (b) Brazil's methodology and model 
4.124  Brazil's methodology entails simulating a counterfactual scenario involving the permanent 
and anticipated removal of US cotton marketing lo ans and countercyclical payments.  This policy 
change moves the world market of cotton to a ne w equilibrium with a new world market price and 
new supply and demand quantities.119  Based on this counterfactual scenario, Brazil calculates the 
percentage change in the world market price, cott on production in the United States and in the rest of 
the world relative to the baseline scenario where these US cotton subsidies are in place.  Brazil uses 
the change in the world market price to establis h the amount of price suppression.  According to 
Brazil, the suppressed price in the world market  for cotton in turn has two related negative 
consequences for cotton farmers worldwide.  First,  actual world production is valued at a lower price 
thereby resulting in income loss for farmers in the rest of the world.  Second, the lower world price 
reduces the incentive to produce more cotton in the rest of the world, and so leads to foregone 
revenues from cotton production.120  For Brazil, the sum of these two effects represents the adverse 
effects of the US subsidies.  
4.125  To conduct this counterfactual simulation, Br azil employs what it describes as a traditional 
demand and supply log-linear displacement model th at calculates percentage changes from an initial 
baseline equilibrium in which all US cotton subsidies are in place.121  The model considers two 
regions, the United States and the rest of the worl d.  Brazil constructs s upply and demand functions 
for cotton in the United States and the rest of the wo rld.  The world market for cotton is assumed to be 
in initial equilibrium (at which the world market  price for cotton equates world demand and supply 
for that commodity) in which all US cotton subsidies are in place.122  In characterizing its model, 
Brazil observes that it had been considered by th e compliance Panel and the Appellate Body, and both 
relied on its results.123  It further notes that the United States had even used the model for its 
alternative calculations.124   
(i) Arguments of the United States 
4.126  The United States identifies what it claims are a number of problems with Brazil's model, 
pointing to Brazil's choice of certain parameters such as United States and rest-of the-world demand 
and supply elasticities; the coupling factor for coun ter-cyclical payments; and the indicator of price 
expectations.125  While these are not the only problems th at the United States finds with Brazil's 
methodology, they are the ones that it highlights and for which it provides alternatives that could be 
used to calculate the amount of allowable countermeasures.126   
4.127  In responding to Brazil's claim that the co mpliance panel had relied on the model, the 
United States emphasizes that the compliance pane l only needed to determine whether the price 
suppression indicated by the model was "significant".  However, the nature of the question before the 
Arbitrator makes the issues it has ra ised about the model more "sensitive" at this stage of the dispute.  
It believes that the task of determining countermeasu res under the legal standard of Article 7.9 of the 
SCM Agreement  requires that the parameters in the model be correct. 
                                                      
119 Brazil's Methodology Paper, para. 75. 
120 Brazil's Methodology Paper, para. 66. 
121 Brazil's Methodology Paper, para. 74. 
122 Brazil's Methodology Paper, para. 74. 
123 Brazil's Methodology Paper, para. 67. 
124 Brazil's Methodology Paper, para. 67. 
125 US written submission, para. 251. 
126 The United States has resubmitted 'Annex I: A Review of the Simulation Analysis Presented by 
Dr. Sumner' which contains a more detailed critique of Br azil's model.  The document was originally submitted 
to the compliance panel.  WT/DS267/ARB/2 
 Page 35 
 
 
  (ii) Analysis by the Arbitrator 
4.128  Brazil's calculation of adverse effects from US marketing loans and countercyclical payments 
can be graphically represented by Figure 1.  It represents the supply curve of a cotton producing country in the rest of the world.  With US subsidies in place, the world price is at OP and quantity produced in the country at OQ.  Without the US subsidies, the world price would be at the higher level OP' and cotton producers in the country would have responded by producing more cotton, 
represented here by OQ'.   
Figure 1:  Adverse Effects on Producers in the Rest of the World 
 
 
 
  
 
 
 
  
 
  
 
 4.129  The area A in Figure 1 is what Brazil terms the "sales value effect" while the sum of the 
areas B and C is what it terms the "reduced production effects".  The Arbitrator notes that the 
United States has not disputed Brazil's decomposition of the adverse effects from the actionable subsidies into this sales value and reduced productio n effects.  An alternative way of characterizing 
these effects can be provided using standard economic concepts.  The sales value effect is the increase 
in producer surplus that farmers in the rest of the world would have received based on their current 
output of cotton had world prices been at the coun terfactual (no subsidies)  level.  The reduced 
production effects are made up of two parts: the pr oducer surplus from the additional production QQ' 
(area B) and the opportunity cost of the resources ne eded to produce the additional cotton (area C).  
The Arbitrator notes that if one were only inter ested in measuring how US cotton subsidies have 
reduced producer welfare in the rest of the world,  then this would be represented by the loss in 
producer surplus (sum of areas A and B).  This is because those resources used to produce QQ' of 
cotton would have found employment elsewhere an d consequently, there would have been no loss 
associated with those resources to the rest of the world. However, the Arbitrator understands that 
adverse effects may have a wider meaning than prod ucer surplus and that Brazil's economic analysis 
of adverse effects is consistent with the language of Article 6.3(c) of the SCM Agreement , particularly 
in its reference to "lost sales".   
4.130  On the subject of the model proposed by Brazil,  the Arbitrator determines that, for the reasons 
provided below, Brazil's log-linear displacement model can be used to estimate the amount of 
countermeasures that Brazil is entitled to for the fail ure of the United States to comply with the DSB 
ruling to remove the adverse effects of its marketi ng loans and countercyclical payments (or withdraw 
the subsidies). 
4.131  First, the United States has stated that with th e corrections it proposes, Brazil's model while 
far from perfect could be used to estimate what it  terms the "total effects" from the removal of Price
QuantitySupply curve
A
CBA = Sales value 
effect
B + C = Reduced 
production effect
QQ ’PP’WT/DS267/ARB/2 
Page 36 
 
 
  marketing loans and countercyclical payments.127  It is understood of course that from these estimated 
"total effects", the United States will require additio nal reductions so that they are commensurate with 
the adverse effects and further that they are limited only to the adverse effects on Brazil.   
4.132  Second, the United States has in fact employed the model, using its own set of parameters and 
reference period, to calculate what the United Stat es believes is the amount of countermeasures Brazil 
is entitled to.  Further, the United States does not provide its own simulation model which could be 
employed to calculate the amount of countermeasures.128     
4.133  Finally, Brazil's model was submitted to the co mpliance panel which had used the simulations 
of the model to support its finding of non-complian ce by the United States.  While the Arbitrator 
agrees with the United States that the model was on ly used by the compliance panel to determine 
whether the price suppression caused by US cotton subs idies was "significant" and not to ascertain the 
exact magnitude of allowable countermeasures, its use by the panel nevertheless provides the 
Arbitrator with greater confidence than if the m odel were being submitted to it for the first time. 
4.134  Needless to say, the model requires a set of parameters and inputs, such as the demand and 
supply elasticities, the value of the coupling factor, and an indicator of expected market prices, in order to be able to calculate the amount of  adverse effects from US marketing loans and 
countercyclical payments.  The choices for these pa rameters and inputs are the subject of numerous 
disagreements between the parties.  The Arbitr ator turns to each of these issues in turn. 
(c) Elasticities used in the model 
(i) Long-run vs. short-run analysis 
4.135  Brazil contends that a short-run economic analysis is what is required in calculating the 
amount of countermeasures given that a non-complia nt Member must impl ement adverse effects 
findings within six months.  In Brazil's view, a Member whose subsidies are determined to cause 
adverse effects must, within the short period of six months, withdraw those s ubsidies or remove their 
adverse effects.  Consequently, a short-term assessment is required.
129   
4.136  Brazil explains that its choice of values for the demand and supply elasticities reflects the 
nature of the policy change that is being simulated.   The policy scenario involves a large, anticipated, 
permanent removal of marketing loans and countercy clical payments for cotton in MY 2005 holding 
all other potential parameters constant.130  It explains that the elasticit ies chosen for this counterfactual 
reflect the rational and expeditious reaction of US  farmers to the policy change and the somewhat 
muted initial reactions of farmers in the rest of the world.131    
Arguments of the United States  
4.137  The United States believes that the correct way to conduct the economic modelling of the 
impact of the removal of marketing loans and count ercyclical payments is to use long-run elasticities 
to allow for full adjustment to policy change.132  It contends that the most appropriate method of 
ensuring that non-compliance no longer affects decisi on-making by market participants is to utilize 
                                                      
127 US responses to questions from the Arbitrator, question 62, para. 159. 
128 US responses to questions from the Arbitrator, question 62, para. 159. 
129 Brazil's written submission, para. 358. 
130 Brazil's written submission, para. 332. 
131 Brazil's written submission, para. 356. 
132 US oral statement, para. 11.  WT/DS267/ARB/2 
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  long-run elasticities.  In its view, long-run elasticities reflect a situation in which all actors fully adjust 
to the policy change, thereby removing any influences of the non-compliance.133 
4.138  It claims that the proper question is what th e price of upland cotton would be in the absence 
of marketing loan and countercyclical payments, not how producers and purchasers react before they 
have time to adjust to the lack of these payments.134  It is because of the need for the modelling to 
show what the counterfactual situation looks like that a short-term, reactive approach is not 
appropriate.  Thus, the number of  months permitted for adjustment, per se , is not the relevant factor.  
In its mind, what is critical is that the counte rfactual modelling shows full adjustment so that the 
situation with marketing loan and countercyclical  payments can be compared to the situation 
without.135 
4.139  The United States criticizes the choice of elasticities of Brazil, claiming that in spite of 
Brazil's assertion that it is applying a short-run an alysis, the elasticities chosen are "some type of 
hybrid of short run and long run."136  It believes that this choice of elasticities dramatically inflates the 
effects of the US cotton subsidies.137  In its view Brazil's choice for the US supply elasticity suggests a 
complete, long-run response to the change in subsi dy payments and shows up in  the model as a large 
change in US supply.  By contrast, it believes othe r elements of the model – US demand elasticity and 
rest-of-world supply and demand elasticities – are lower, showing less responsiveness, as would occur 
in a short-run period before there is a full response to  a change.  Thus, in its view the magnitude of the 
other responses represented by these other elasticities,  which would mitigate the effect of the change 
in US production on price, is lower.  As an  example, it notes that if US producers decrease 
production, but others increase production, the price effect of the change in US production is less.138 
4.140  The United States argues that if Brazil's counterfactual simulation assumes complete, 
permanent removal of marketing loan and counter -cyclical payments, and adjustment of cotton 
production to that change, this is consistent with a long-run scenario .  In this case, the United States 
proposes that all the values of the elasticities be  taken from the UNCTAD-FAO Agricultural Trade 
Policy Simulation Model (ATPSM).  Employing the elasticities in that model and other assumptions about the reference period, the coupling factor and pr ice expectations, it  estimates the "total effects" 
of marketing loans and countercyclical payments  on Brazil to average no more than US$30.4 million 
annually.   
Arguments of Brazil
 
4.141  Brazil disputes the arguments of the United States that a long-run analysis is required.  In its 
view, the United States' argument for a long-term  approach would bypass the requirement that 
implementation take place within six months, implyi ng that a non-compliant Member can take a long-
term approach to achieving compliance. 
4.142  In addition, Brazil argues that the SCM Agreement  (Article 7.9 and 7.10) requires that 
countermeasures responding to a failure to implemen t be "commensurate with the degree and nature 
of the adverse effects determined to exist".  In its view, this means that countermeasures should be 
calculated on the basis of the entirety of the adver se effects existing in MY 2005, which are the sum 
of the effects of the subsidies that US cotton fa rmers anticipated receiving in MY 2005, and of 
                                                      
133 US written submission, para. 254. 
134 US responses to questions from the Arbitrator, question 119, para. 109. 
135 US responses to questions from the Arbitrator, question 119, para. 110. 
136 US written submission, para. 255. 
137 US written submission, para. 256. 
138 US written submission, para. 256. WT/DS267/ARB/2 
Page 38 
 
 
  continuing effects in MY 2005 from subsidies received in previous years.139  Consequently, it 
contends that it is not permissible to consider so lely the change between (i) actual cotton prices and 
quantities in the reference period and (ii) counte rfactual long-term cotton prices and quantities absent 
solely the subsidies anticipat ed in the reference period.140   
4.143  Furthermore, Brazil asserts that even if an assessment of the l ong-term effects of the subsidies 
at issue is adopted, the use of long-run elasticities as proposed by the United States would be flawed 
since market participants' full adjustments will take  time. Under the short-term approach adopted by 
Brazil, the amount of adverse effect s removed in year one is measured.  At that point there remain, 
however, some continuing effects that will only di ssipate from the market in subsequent years, 
resulting in a new market equilibrium at some point  in the future.  Thus, implementing a long-term 
approach requires summing up the adverse effects existing in each year of the dynamic adjustment 
process until the new market equilibrium is achieve d.  In other words, implementing a long-term 
approach properly requires using Brazil's short- term adjustment as the starting point and adding 
additional effects in subsequent years.  In its view, the United States' approach only compares the 
starting and end point in this dynamic adjustment process, and ignores large portions of the adverse 
effects caused throughout the adjustment process.141    
Analysis by the Arbitrator  
4.144  The parties disagree on whether the counterfactual simulation requires a short-run or a long-
run analysis.  In the context of the argumentation of the parties, the concepts of short-run and long-run 
relate to the process of economic adjustment ar ising from the exogenous change in the economic 
environment.  The long-run essentially refers to a situation where all adjustments by producers, 
consumers, and owners of factors of production to  the given change have been completed and the 
market has settled down to a (long-run) equilibrium.  The short-run refers to a situation, which could 
be one of (short-run) equilibrium, where the pro cess of adjustment by producers, consumers and 
owners of factors of production has not been fully co mpleted.  This less than complete adjustment in 
the economy may be the result of certain rigidities in the market or simply that it takes time for 
producers to re-allocate resources.   
4.145  To make this discussion more concrete, we rela te these concepts to the specific matters under 
consideration in this case.  The exogenous change re ferred to in the previous  paragraph would be the 
elimination of marketing loans and countercyclical  payments.  Given that Brazil assumes a large 
behavioural response by US cotton farmers to this policy change, the lack of complete adjustment 
arises partly in the rest of the world, and partly in domestic US demand for cotton.  Brazil has argued 
that there may be incomplete price transmission of  the policy change to foreign growers of cotton.142  
It has also suggested that foreign farmers lack the expertise or sophistication, have limited access to 
information, and face other constraints that typi cally afflict farmers from developing and least 
developed countries thus making immedi ate production responses more difficult.143  Furthermore, 
Brazil has claimed that there are continuing adverse e ffects from past subsidies that need to be taken 
into account.  It points out for example that lower cotton prices, which are the result of the actionable subsidies, have resulted in lower investme nt levels by rest of the world producers.
144   Lower tha n 
optimal investments result in relatively higher pr oduction costs, reducing present production levels.  
As a result of these rigidities and continuing adver se effects, foreign growers of cotton will not be 
able to immediately increase their plantings of cotton.  Farmers in the rest of the world, who have the 
                                                      
139 Brazil's responses to questions from the Arbitrator, question 119, para. 245. 
140 Brazil's responses to questions from the Arbitrator, question 119, para. 247. 
141 Brazil's written submission, para. 360. 
142 Brazil's written submission, para. 405. 
143 Brazil's written submission, para. 406. 
144 Brazil's responses to questions from the Arbitrator, question 119, para. 263.  WT/DS267/ARB/2 
 Page 39 
 
 
  feasibility to shift to cotton, may not immediately ma ke the change if the in crease in cotton price is 
not transmitted fully or if they do not believe the el imination of subsidies is permanent.  Even if they 
do begin to cultivate more cotton, past low le vels of investments will mean low productivity. 
4.146  The existence of such rigidities and continui ng effects means that the adverse effects of 
marketing loans and countercyclical payments are correspondingly greater.  Producers in the rest of the world are not able to immediately and fully prof it from the increase in the world price of cotton or 
from increased production of cotton despite the el imination of the subsidies.  Using long-run 
elasticities, which assumes that all adjustments have been completed (or that there are no adjustment 
costs), will underestimate the adverse effects of the measures.  The rationale for the application of a 
short-run analysis, and consequently  of short-run elasticities, is not because of the need to capture 
each step of the adjustment pr ocess but because the incompleteness of adjustment implies greater 
costs on producers in the rest of the world.   
4.147  We believe that the United States' argument for a long-run analysis may be more appropriate 
in cases where there are no adjustme nt costs.  In this case it can fairly be said that these adjustment 
factors are due in part to the existence of the subs idies  themselves.  The United States is required to 
withdraw the subsidies or remove the adverse effect s within six months.  It has done neither.  Brazil 
has established a plausible case that it will take time for consumers and producers to fully adjust to the 
removal of marketing loans and countercyclical paym ents.  As we have noted in our analysis, this 
means that producers in the rest of the world would continue to experience the adverse effects of the 
subsidies even after they have been removed.  Since the calculated countermeasures must be 
"commensurate with the degree and nature of the adve rse effects determined to exist", the Arbitrator 
believes that the economic modelling must account for these rigidities.  This makes a short-run 
analysis, and the use of short-run elasticities,  not inappropriate for the economic modelling. 
(ii) Values of the elasticities 
US supply elasticity
 
4.148  The elasticity of supply measures the responsiveness of production to a change in price.  The 
higher this elasticity, the greater the percentage in crease in cotton supply for any given change in the 
world price of cotton.   
4.149  Brazil's model uses a supply elasticity of 0.8.  It justifies this choice as a reflection of the 
anticipations of US cotton farmers, as well as the na ture of the expected short-term policy shock at 
issue, which will be a persistent, large-scale reduc tion of cotton subsidi es while other non-cotton 
subsidies remain in place.145  Given that the counterfactual scenario at issue involves a large and 
permanent loss of revenue to only US cotton farm ers, it believes that those farmers will necessarily 
adjust faster and more significantly than farmers reacting to temporary and transient reductions in 
revenue.146  It contends that this is unlike the policy simulations usually considered in computable 
general equilibrium models which involve an ac ross-the-board removal of all farm subsidies.147  In 
Brazil's view, with US cotton farmers' revenues expected to decline dramatically following the 
withdrawal of marketing loans and countercyclical  payments, they will have strong and immediate 
incentives to switch to alternative crops because there is nothing to gain (and much to lose) from 
deferring a production reaction.148   
                                                      
145 Brazil's Methodology Paper, para. 99. 
146 Brazil's Methodology Paper, para. 101. 
147 Brazil's Methodology Paper, para. 101. 
148 Brazil's written submission, para. 404. WT/DS267/ARB/2 
Page 40 
 
 
  4.150  The United States disagrees that a value of 0.8 for the US supply elasticity correctly reflects a 
short-run analysis; rather such a value is in fact  a long-run supply elasticity.  In its view, Brazil's 
characterization of the policy counterfactual as  a large and permanent loss of revenue to 
US producers, and the possibility of US producers taking the significant step of exiting cotton farming altogether in response to the United States' withdrawal  of subsidies, are events usually associated with 
a long-run scenario.
149  It emphasizes that Brazil's assumption that US producers would be able to 
fully adjust to the permanent change in US polic y within the terms of the model implies a long-run 
perspective.    
ROW supply elasticity  
4.151  Brazil's model employs a value of 0.2 for the rest  of the world supply elasticity.  Brazil claims 
that the rest of the world supply elasticity mu st necessarily be smaller in magnitude than the 
US supply elasticity.  This is because of the adap tation by rest of the world producers to a policy 
shock that is:  (i) indirect, (ii) relatively small co mpared to the revenue loss faced by US producers, 
and (iii) in the opposite direction from that faced by US producers.  It claims that transmissions of 
world market price movements into local price changes in local currencies relevant for non-
US farmers can be slow and incomp lete due to barriers such as market institutions, centralized crop 
marketing, government policies, limited info rmation, and high per-unit transport costs.150  Further, it 
contends that lagged price adjustments, the lack of  expertise or sophistication, restricted access to 
information, as well as other constraints affecting especially developing and least developed country 
farmers make immediate production responses more difficult.151 
4.152  While the United States acknowledges that price changes may not fully be transmitted in the 
short-run, it believes that this is less the case in th e long-run and, that in any event, it does not mean 
that producers in the rest of the world never fully ad just to policy change.  It claims that in some 
countries where farmers typically wo rk on small farms and additional la nd is available, such as India 
and Pakistan, farmers will likely adjust to  such changes in policy without delay. 
4.153  It also disputes Brazil's claim that foreign su ppliers would be slow to respond because they 
would be unable to distinguish whether the change  in prices was a temporary market condition or a 
change in US policy.  The United States belie ves this argument lacks any foundation given the 
continuous press coverage and major cotton pr oducing states' focus on the impacts of the 
US programmes. 
Demand elasticities  
4.154  The elasticity of demand measures the responsiven ess of consumption to a change in price.  
The higher this elasticity, the greater the percen tage increase in cotton demand for any given 
percentage change in the world price of cotton.   
4.155  Brazil's model employs a value of -0.2 for the US and ROW elasticities of demand for cotton.  
Brazil claims that cotton demand is mainly determ ined by end consumers and that their demand is 
relatively inelastic with respect to changes in co tton prices for a number of reasons.  First, Brazil 
claims that consumers have a preference for cotton over synthetic fabrics.  Second, it asserts that the 
cost of raw cotton only makes up a small share of  the final price of textile products.  Thus, it 
concludes that consumers worldwid e respond little to changes in the price of raw cotton, since the 
impact of such changes on the relative price of reta il textile products is limited.  As for demand from 
                                                      
149 US written submission, para. 258. 
150 Brazil's written submission, para. 405. 
151 Brazil's written submission, para. 406.  WT/DS267/ARB/2 
 Page 41 
 
 
  cotton mills, it claims that this is characterized by inelastic demand, not least because mill technology 
favours the use of particular fibres. 
4.156  Brazil contends that the values of the elasticitie s are conservative relative to recent studies in 
agricultural economics and consistent with the em pirical and econometric literature.  Comparing the 
chosen values with other studies or models, it maintain s that they are equal to the weighted average of 
the demand elasticities in the Iowa State CARD inte rnational cotton model, twice the magnitude of 
the demand elasticity parameter used by Goreux,  and four times the magnitude of the demand 
elasticity parameter used by ICAC in their studies.   
4.157  The United States disputes Brazil's claim that cotton demand is mainly determined by final 
consumers.  It argues that actual demand for cotton is  at the mill, where the cost of cotton accounts for 
nearly 70 per cent of mill production costs.  Additiona lly, it asserts that it is the mills that decide the 
mix of fibres in producing yarn and therefore the mix is  affected by relative prices of available fibres.   
4.158  The United States objects to Brazil's choice of US and ROW demand elasticities as being near 
the lower bound of that found in the literature on studies looking at impact of the removal of 
US cotton programmes. It judges the premise of ve ry inelastic demand as being doubtful even in the 
short-run.  And in the long-run, it argues that cotton mills will adjust their use of cotton even more.  In 
the light of the type of significant shock that Brazi l posits in its counterfact ual, the United States 
believes such adjustment would be expected.  And it points to the changes that the global financial 
crisis and economic slowdown have caused with the demand for cotton demand declining 
significantly. 
4.159  It also contends that if a short-run analysis is  to be employed, cotton stocks must be accounted 
for.  It claims Brazil's model does not account fo r stocks and one method to incorporate stocks is 
through adjusting the demand elasticity.152   
Analysis by the Arbitrator  
4.160  Brazil has proposed a set of elasticities to conduct its counterfactual analysis (see Table 1).  
Although the United States has argued for the appropr iateness of a long-run analysis and the use of 
long-run elasticities, it has also proposed an alternativ e set of values of short-run elasticities based on 
the FAPRI model.   
Table 1:  Values of short-run elasticiti es proposed for simulating the removal 
of marketing loans and countercyclical payments 
 
Parameter Brazil United States 
US cotton supply elasticity 0.80 0.21 
ROW cotton supply elasticity 0.20 0.33 
US demand elasticity -0.20 -0.82 
ROW demand elasticity -0.20 -0.39 
 
4.161  In the Arbitrator's view, Brazil needs to show th at there is support to be found in the research 
literature for the values of the US and ROW el asticities that it has proposed to employ in the 
simulations.  The Arbitrator had requested both parti es to review this literature for estimates of cotton 
                                                      
152 US comments on Brazil's responses to questions from the Arbitrator, question 121, para. 156. WT/DS267/ARB/2 
Page 42 
 
 
  demand and supply elasticities and both parties have  provided their reviews to the Arbitrator.153  The 
Arbitrator has assembled part of this information in Tables 2A-D which show the values of the short-
run elasticities from the economic literature.  In their response to the Arbitrator, the parties sometimes 
did not indicate whether the elasticity was short-r un or not.  What appears in Tables 2A-D are only 
those values explicitly described as short-run by the parties.   
Table 2A: Survey of values of short-run US supply elasticities 
 
Author Value of Elasticity US Region Supply Response 
0.18 Delta Acreage 
0.11 Southeastern  Acreage FAPRI 
0.237 South Plains Acreage 
0.586 Southeast and Delta Acreage response Lin 
2.282 South Plains Acreage response 
0.9 Southeast and Delta Acreage response Adams 
0.797 South Plains Acreage response 
Meyer 0 US (National) Area harvested 
0.18 Delta Acreage response 
0.16 Southeast Acreage response 
0.31 Southwest Irrigated Acreage response 
0.37 Southwest Dryland Acreage response Pan, Mohanty et al 
0.42 West Acreage response 
CARD (Babcock) 0.21 US (National) - 
 
 
Table 2B: Survey of values of short-run ROW supply elasticities 
 
Author Value of Elasticity Region Supply Response 
Meyer 0.01 Rest of world Area harvested 
0.1 Rest of world Acreage response Pan, Mohanty et al 
0.54 Rest of world Acreage response 
Orden, Salam, Dewina, 
Nazli and Minot 0.3 Pakistan - 
Babcock et al 0.2 Rest of world - 
Fang and Babcock 0.2 Rest of world - 
FAPRI 0.33 Rest of world - 
 
 
                                                      
153 Brazil's responses to questions from the Arbitrator, question 5, paras 15-83 and US responses to 
questions from the Arbitrator, question 5, paras. 22-30.  WT/DS267/ARB/2 
 Page 43 
 
 
  Table 2C: Survey of values of short-run US demand elasticities 
 
Author Value of Elasticity Demand by  
Meyer -0.256 Mills 
Babcock et al -0.82 - 
FAPRI -0.82 - 
 
 
Table 2D: Survey of values of short-run ROW demand elasticities 
 
Author Value of Elasticity Demand by  
Babcock et al -0.2 - 
Fang and Babcock -0.2 - 
FAPRI -0.39 - 
Sources : Brazil's responses to questions from the Arbitrator, question 5, paras. 15-83 and US responses to the 
questions from the Arbitrator, question 5, paras. 22-30. 
 
4.162  Tables 2A-D provide support for Brazil's proposed elasticity values, although the Arbitrator is 
of the view that this is not by any means overwhe lming.  The US supply elasticity adopted by Brazil 
is in the upper end of the distribution.  There is  far less literature on cott on demand elasticities and the 
estimates shown in Tables 2A-D tend to take the competing values claimed by the parties.  
• US Supply Elasticity: The lowest estimate is provided by Meyer with a value of zero.  
The largest values are from the studies by Ad ams (0.8 to 0.9) and by Lin (0.59 and 
2.28) which provide support for Brazil's choice.  The FAPRI, Pan, Mohanty et al and Babcock et al studies have elasticities that, averaged at the national level, will range 
between 0.2 and 0.25. 
 
• ROW Supply Elasticity: The elasticities range  from near zero (Meyer) to 0.54 (Pan, 
Mohanty, et al).  Two studies (Babcock et al and Fang and Babcock) use Brazil's 
value of 0.2. 
 
• US Demand Elasticity: Three studies are reported in Table 2C with only the Meyer 
study providing support for Brazil's  proposed value of -0.2.  However, we note that 
this estimate is of mill demand, which was the subject of much of the US criticism against Brazil's proposed value.  
 
• ROW Demand Elasticity: Only three studies are reported in Table 2D and two of 
them (Babcock et al and Fang and Babcock) use identical values as Brazil. 
 
4.163  On the basis of the Arbitrator's determination th at a short-run analysis is appropriate for the 
economic modelling and the finding, based on the review of the literature provided by the parties, that 
econometric estimates and other modellers have em ployed the elasticity values proposed by Brazil, 
the Arbitrator determines that the values proposed by Brazil are available and not unsuitable to be 
used in the economic modelling. 
(d) Coupling factor 
4.164  Brazil's model assigns to each cotton subsidy programme a "coupling factor" which indicates 
the degree of production incentive that a particular  programme has on US cotton farmers relative to 
revenue from the market.  Unlike marketing loan s ubsidies, which are based on current production, WT/DS267/ARB/2 
Page 44 
 
 
  countercyclical payments are paid on the basis of a farm's historical base area and historical 
programme yield.  This suggests that payments under the programme will give less of a production 
incentive than marketing loans.  While Brazil uses a coupling factor of one for marketing loans, it 
employs a coupling factor of 0.4 for countercyclical payments.   
(i) Arguments of the United States 
4.165  The United States disagrees with Brazil's choice of 0.4 for the coupling factor. The 
United States proposes to follow what it states is "the FAPRI approach of modelling these payments 
with a coupling factor of 0.25."154   
4.166  The United States disputes the claims made by  Brazil that countercyclical payments allow 
US cotton farmers to take on greater business risk and that such payments provide US cotton farmers 
additional income that can be used to get commerc ial credit for further productive investments.  The 
United States claims that Brazil's claim would ap ply to any additional income that these farmers 
received, whether it be income support not tie d to production or off-farm income.   
4.167  The United States disagrees with Brazil's claims that farmers expect that payment acres would 
be updated in the next farm bill resulting in them pl anting cotton now to ensure larger acreage for the 
next farm bill.  It argues that the original panel st ated that there was no evidence before it regarding 
farmers' expectations relating to base updating, a nd the Appellate Body agreed with the panel's 
determination not to find such expectations.  It also notes that the compliance panel had the 
understanding that the issue of base acreage updating w as not before it.  Further, it claims that with 
the enactment on 18 June 2008 (eff ective 22 May 2008) of the "2008 Farm Bill", farmers would have 
no basis for an expectation of cotton base updating today.   
4.168  The United States contends that data on planting show that farmers holding cotton base acres 
widely plant crops other than cotton and as such ar e inconsistent with Brazil's argument that legal 
restrictions on land use under the FSRI Act of  2002 undermine farmers' flexibility to switch to 
alternative crops.  It also points to the shift in  the production on farms holding cotton base acres.  
When faced with relative prices that favoured the planting of another crop, when agronomic 
conditions are favourable, it states that US cotton pr oducers have responded in a significant way.    
4.169  The United States has referred to three new studies on the production effects of 
countercyclical payments published since the comp liance panel proceedings. It acknowledges that as 
was the case with the studies submitted during the compliance panel proceedings, none of the new 
papers deal directly with the impact of counter cyclical payments for cotton on production.  The 
United States argues that studies nevertheless show that countercyclical paym ents have a relatively 
small production impact.155  It adds that as with many studies about decoupled payments, where 
authors find positive production effects, such effects are small, difficult to quantify, and subject to 
many qualifiers.156  Table 3 summarizes the United States' analysis of these studies. 
                                                      
154 US written submission, para. 274. 
155 US responses to questions from the Arbitrator, question 6, para. 31. 
156 US responses to questions from the Arbitrator, question 6, para. 38.  WT/DS267/ARB/2 
 Page 45 
 
 
  Table 3:  US analysis of studies about countercyclical payments 
 
Study US Analysis 
Bhaskar and Beghin study This is a survey of research on decoupled payments, including 
countercyclical payments.  The United States then cites the 
conclusions from several studies reviewed in this paper that 
specifically examined countercyclical  payments.  It states that the 
paper by Anton and Le Mouel  shows a small risk reducing effect 
from countercyclical payments. It claims that the paper by Makki, 
Johnson and Somwaru shows larger production effects but this is 
because of certain assumptions, especially about base updating, 
which have not materialized thus throwing doubt on the conclusions.  
It contends that the paper by Beckman and Wailes suggests very 
high production effects for rice but  the United States argues that 
there are significant problems  with the estimations for 
countercyclical payments that call into question the validity of these 
results. 
Anderson, Coble and Miller study The United States quot es the abstract of the paper which states that: 
"This research evaluates whether the introduction of countercyclical 
payments creates an incentive for program crop producers to hedge 
the expected government payment using futures and/or options.  
Results indicate that some level of countercyclical payment hedging 
is optimal for risk-averse decision makers.  However, optimal hedge 
ratios depend on planting time expectations of marketing year 
average price as well as on what cr op, if any, has been planted on 
countercyclical payment base acres.  These results suggest that the 
ability to hedge may make these payments more decoupled but also 
illustrate the distortion of producer behaviour induced by farm 
programs."   
Coble, Miller and Hudson study This study reports analysis of the subjective expectations of 
producers for base updating and an analysis of the effect these 
expectations have on producer willingness to accept a buyout of the 
right to update.  The United States quotes one passage from the 
study which it believes has some bearing on this subject: 
"Interestingly, more producers think countercyclical payment rates 
will decline than believe marketing loan rates will decline. As a 
reviewer noted, producers may percei ve the loan program with its 
link to production to be a more essential program than a program 
decoupled from production, and ther efore believe it less likely to be 
eliminated."   
 
4.170  The United States has also reviewed the Beckman and Wailes study analysed by Brazil.  The 
United States claims that countercy clical payments for rice have b een erratic and variable, and in 
some years zero.157  Since Brazil dismisses some studies offered by the United States that use data for 
commodities such as corn and wheat (the study by Anton and Le Mouel), stating that they are not 
relevant because these products have not regular ly received countercyclical payments, then the 
United States argues that the Beckman and Wa iles study should be similarly dismissed.   
                                                      
157 US responses to questions from the Arbitrator, question 130, para. 150. WT/DS267/ARB/2 
Page 46 
 
 
  (ii) Arguments of Brazil 
4.171  In response to the criticisms of the United States, Brazil provides an analysis of how 
countercyclical payments can increase production.  It contends that countercyclical payments increase 
farmers' wealth, reducing risk aversi on and increasing the planting of cotton.158  It believes that the 
presence of countercyclical payments allows credit-constrained farmers to finance investments in land, equipment, and in the purchase of fa rm inputs, making production more efficient.
159  It claims 
that farmers may be willing to produce more output since countercyclical payments, which vary with 
the market price, reduce revenue risk.160 It professes that countercyclical payments contribute to 
covering fixed costs, allowing marginal farmers to avoid exiting cotton production.161  
4.172  The possibility that base yields and base acres, which determine the amount of CCP subsidies, 
would be updated in the 2008 Farm Bill is another factor cited by Brazil as supporting the choice of a 
coupling factor of 0.4.  It argues that if farmer s believe that future payments are based on current 
production, because of the possibility of updating b ase acres, they may increase the current production 
of those crops for which they expect to receive future payments.162  Brazil admits that this updating 
did not materialize with the 2008 Farm Bill but it claims that this is beside the point as what matters for current production is whether farm ers expected base updating to occur.
163     
4.173  Brazil has also responded to the review of the literature on the production effects of 
countercyclical payments provided by the United States.164  Table 4 summarizes its analysis of the 
studies. 
Table 4:  Brazil's analysis of studies about countercyclical payments 
 
Study Brazil's Analysis 
Beckman and Wailes study Brazil claims that the authors find significant production-enhancing 
effects of countercyclical payments  for rice, which is the only crop 
other than cotton which has recei ved significant countercyclical 
payments.  It states that two models were run with the second model 
finding that "as [per hundredweight] counter-cyclical payments 
increase a dollar for the year, ar ea harvested increases 956.29 
thousand acres."  It characterizes th is result as significant since this 
acreage represents almost one thir d of US rice production.  The 
implied coupling factor in this study is greater than 1.0.  
Anton and Le Mouel study This study suggests that risk-reducing effects of countercyclical 
payments for sorghum, corn and wh eat are small.  However, Brazil 
argues that all three of thes e crops have received little or no 
countercyclical payments prior to the date of the study (year 2004).  
Thus in its view, the results of this study are not relevant to the issue 
of the cotton CCP coupling factor.   
                                                      
158 Brazil's written submission, para. 411. 
159 Brazil's written submission, para. 411. 
160 Brazil's written submission, para. 412. 
161 Brazil's written submission, para. 412. 
162 Brazil's written submission, para. 412. 
163 Brazil's written submission, paras. 416-417. 
164 Statement by Professor Daniel Sumner concerning adverse effects under Article 7.9 of the 
SCM Agreement , Exhibit Bra-803, paras. 27-32.  WT/DS267/ARB/2 
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  Study Brazil's Analysis 
Makki, Johnson and Somwaru study The study analyses  the effects of countercyclical payments on 
income variability for Minnesota farms.  Brazil states that Minnesota 
grows primarily corn and wheat, but no cotton.  Brazil suggests that 
the results of the study indicate th at farmers may increase acreage of 
crops with higher CCP ra tes, especially if base updating is allowed, 
as it was under the 2002 FSRI Act. 
Coble, Miller and Hudson study Brazil describes the study as indicating that cotton farmers 
anticipated a significant chance of  an update of the CCP subsidy 
base acres and yields and, based on that anticipation, in fact, 
increased their plantin gs and production. 
Anderson, Coble and Miller study Brazil concludes that the study finds a strong incentive to plant the 
cotton base crop implying significant supply effects from the CCP 
subsidy.   
 
4.174  Based on this analysis, Brazil concludes that contrary to the United States response to the 
Arbitrator's questions, the economic studies cite d by the United States lend support to a coupling 
factor of 0.4 for cotton.165  Furthermore, Brazil asserts that the weight of the economic literature 
continues to confirm significant supply effects from countercyclical payments for cotton.166   
(iii) Analysis by the Arbitrator 
4.175  The Arbitrator understands that there is no di spute between Brazil and the United States that 
countercyclical payments can have a production effect .  There are a number of possible ways that the 
payments can affect production.  Since countercyclical  payments vary inversely with the market price 
of cotton, they have the effect of stabilizing reve nues and reducing the risk to cotton farmers.  The 
payments can alleviate credit constraints enabling mo re purchases of inputs.  The availability of the 
payments would have allowed farm ers to cover fixed costs and may have allowed more farmers to 
continue with cotton farming.  To the extent that  farmers anticipated the possibility of updating base 
acres, it would have provided an incentive to in crease plantings.  These have been described in 
Brazil's recapitulation of previous decisions made by  the original panel, the compliance panel and the 
Appellate Body.   
4.176  The fact that the United States proposes to use a coupling factor of 0.25 and not zero attests to 
its view that the payments have a production effe ct.  Where the parties disagree is how large the 
production effects of the payments are.  But even here , it does not appear that they are too far apart.  
The United States believes that a dollar of countercy clical payment to US cotton producers generates 
a production incentive equivalent to an increase in the market price by 25 cents while Brazil believes 
it generates a production incentive equivalent to a 40 cent rise in the market price of cotton.    
4.177  The Arbitrator notes that unlike the demand and su pply elasticities that are also the subject of 
disagreement between the parties, there is hardly an y econometric literature that estimates the value of 
the "coupling" factor for countercyclical cotton payments.  The Arbitrators did ask the parties to 
review any new economic research on the production effects of countercyclical payments that had 
appeared since the compliance pane l.  Both Brazil and the United States have done so.  These do not 
directly provide estimates of the coupling factor for cotton, but in examining empirically how much 
                                                      
165 Statement by Professor Daniel Sumner concerning adverse effects under Article 7.9 of the 
SCM Agreement , Exhibit Bra-803, para. 23. 
166 Statement by Professor Daniel Sumner concerning adverse effects under Article 7.9 of the 
SCM Agreement , Exhibit Bra-803, para. 33. WT/DS267/ARB/2 
Page 48 
 
 
  the production effects of these payments are, they have an important bearing on the question before 
the Arbitrator.   
4.178  The Arbitrator does not necessarily disagree w ith the assessment of the United States that 
these studies do not allow a conclusive assessment to be made about the exact magnitude of the 
coupling factor.167  The studies have been done for different  crops, using different data sources, and 
different methods and assumptions.168  For every study that finds a la rge production effect, one is able 
to offer another study that finds a negligible eff ect.  For one crop where one finds a given production 
effect, whether small or large, it is always possi ble to provide some mitigating circumstance why the 
results can or cannot be applied to cotton.  But ther e is certainly a theoretical presumption, shared by 
both Brazil and the United States, that the payments affect production decisions.  Furthermore, and as Brazil has pointed out, the review of the economic lite rature suggest that countercyclical payments not 
only have production effects but, under certain ci rcumstances, can have substantial production 
effects.
169  Accordingly, the Arbitrator determines th at a value of 0.4 for the coupling factor as 
proposed by Brazil is within the range found in th e relevant literature and is not inappropriate.   
(e) Price expectations 
4.179  As both Brazil and the United States have expl ained, cotton farmers typically make their 
planting decisions around late winter and early sp ring (Brazil claims it is in February while the 
United States claims that it is in April).  But mo st cotton is marketed in December so how much 
cotton farmers will plant depends on what they believe cotton prices will be in December. The 
simulation model employed by Brazil therefore requir es some indicator of farmers' expectations about 
the market price.  Brazil uses the one-year lag of farm gate prices as its indicator of farmers' market price expectations.  It claims that this approach  is standard procedure in the modelling literature.
170   
4.180  Since marketing loans and countercyclical payments vary with cotton prices, farmer's 
expectations of market prices also trigger expecta tions how much of these subsidies they will receive.  
In Brazil's model, the expected revenue per unit of  cotton then is made up of the expected market 
price and what Brazil terms the expected "effective per-unit revenue received from government subsidies".
171  As Brazil describes it, this second term is not simply the per-unit revenue from 
government subsidies to US cotton farmers but reflect s the degree to which these subsidies provide an 
incentive for production relative to th e incentive created by market prices.172  F i n a l l y ,  B r a z i l  
calculates the effective per-unit revenue received from government subsidies as the product of the 
per-unit government support from all subsidies and the overall coupling factor, the weighted average 
of all production incentives yielded by all subsidies.173 
(i) Arguments of the United States 
4.181  The United States argues that Brazil provides no evidence that farmers make their planting 
decisions based on last year's market prices.  The United States believes that the futures price provides 
for a better measure of price expectations than the previous year's market price.  In its view, the 
futures price incorporates the latest information av ailable and is the result of market participants' 
views.  It contends that the use of futures pri ces employ data from a real-world market in which 
                                                      
167 US responses to questions from the Arbitrator, question 130, para. 152. 
168 US responses to questions from the Arbitrator, question 130, para. 150. 
169 Brazil's comments on US responses to questions from the Arbitrator, question 130, para. 357. 
170 Brazil's Methodology Paper, para. 112 and footnote 131. 
171 Brazil's Methodology Paper, para. 78. 
172 Brazil's Methodology Paper, para. 79. 
173 Brazil's Methodology Paper, para. 80.  WT/DS267/ARB/2 
 Page 49 
 
 
  economic actors, such as farmers and merchants, come together and engage in market price 
discovery.174   
4.182  For the relevant value of the futures price, the United States used the average for January-
March futures for December delivery.  To derive the expected annual farm price, it also deducted 
5 cents from this average.  The United States explai ns that this deduction is necessary to adjust the 
futures price to the particular quality of a grower 's cotton and to include costs for delivery to the 
grower's geographic location.  While the futures ma rket is the best barometer of the value of the 
cotton, that price corresponds to a particular quality and location.175  It claims that data from 2001 
through 2007 show that the basis, defined as New York December futures minus average farm price, 
for the months of October-December average between  4 and 5 cents consistently regardless of the 
period to generate the average.176  
(ii) Arguments of Brazil 
4.183  Brazil has indicated that it has no strong genera l preference for using the lagged price or the 
futures price in the simulation.  It acknowledges th at both futures market prices and lagged prices are 
prone to similar errors as predictors for prices a nd subsidy revenues in the upcoming marketing year.  
In some years and in times of rapid and significant market changes, it states that past prices may be a 
poor reflection of prices for the following season.  In  that case, it believes that futures market prices 
might be a more appropriate indicator for measuring farmers' price and subsidy expectations.  It points 
out that for MY 2005, choosing between the two does not result in any substantial difference in price 
effects simulated by its model.  Thus it recognizes that there is no substantive difference in results 
between using futures market prices or lagged prices as the basis for price expectations.177   
4.184  However, it disputes the manner in which the Un ited States has made adjustments to futures 
prices, which involves deducting a 5 cents basis from the futures market price to derive the expected 
season average US farm price.  Brazil argues that the root mean square error of a simple regression of 
the futures market price is – as it must be – lower th an the root mean square error of an additive basis 
approach to using the futures market price.  Thus, a priori , it believes there is a strong reason to prefer 
the regression approach.178  Furthermore, it claims that there ar e flaws in the US calculations leading 
to the 5 cent basis.  If only the adju stment for quality and location were  relevant, it contends that this 
would involve calculating the basis between (i) the average December quote of the December contract 
and (ii) the December price received by farmers.   But Brazil points out that the United States has 
included data from October and November which it argues distorts the calculation.  Using an 
alternative set of publicly available data, and a different time period than that selected by the 
United States, it arrives at a basis of 7.5 cents.179 
4.185  In Brazil's view, the result of the 5 cent deduc tion made by the United States to the futures 
price is to introduce an upward bias in the expect ed market price and a significant understating of the 
subsidy payments.180  Also, Brazil claims that the alternative simulation performed by the 
United States using Brazil's model and u tilizing future prices was improperly done.181  Together, it 
                                                      
174 US written submission, para. 275. 
175 US responses to questions from the Arbitrator, question 131, para. 154. 
176 US responses to questions from the Arbitrator, question 131, para. 155. 
177 Statement by Professor Daniel Sumner concerning adverse effects under Article 7.9 of the 
SCM Agreement , Exhibit Bra-803, para. 4. 
178 Brazil's comments on US responses to questions from the Arbitrator, question 131, para. 368. 
179 Brazil's comments on US responses to questions from the Arbitrator, question 131, para. 372. 
180 Statement by Professor Daniel Sumner concerning adverse effects under Article 7.9 of the 
SCM Agreement , Exhibit Bra-803, para. 7. 
181 Statement by Professor Daniel Sumner concerning adverse effects under Article 7.9 of the 
SCM Agreement , Exhibit Bra-803, para. 9. WT/DS267/ARB/2 
Page 50 
 
 
  contends that these biases would lead to a signi ficant decline in the calculated amount of price 
suppression.182   
(iii) Analysis by the Arbitrator 
4.186  Both parties have acknowledged that there are various indicators and methods that can be 
used to estimate farmers' market price expectations , including futures prices and lagged prices.  Brazil 
has in fact even stated that it has no strong general preference for using the lagged price or the futures 
price in the simulation.   
4.187  The Arbitrator requested the parties to provide  calculations of the root mean square error 
(RMSE) of forecasts using either the lagged price or the futures price.  They were also requested to 
provide the data used in the calculations.  The root mean  square error is a statistic that is often used to 
judge how well a particular indicator performs in forecasting some variable.183  The lower the RMSE, 
the better the indicator is as a tool for forecasting the variable of interest.  Brazil provided data 
covering the period from 1960 to 2005 but data on Fe bruary futures for D ecember deliveries are 
available only from 1975 onwards.  The United States submitted data from 1985 to 2007 using average January to March futures prices for December deliveries. 
4.188  The results of the calculations of the root m ean square error of the forecasts are shown in 
Table 5.  The parties have used two types of indicator s.  One is simply the variable itself (lagged farm 
price or futures price).  The second is the fitted value of the variable based on a regression of the farm 
price on either the lagged price or the futures pri ce.  To make the results comparable, two periods 
have been chosen corresponding to the futures pr ice data submitted by the parties: 1975-2005 and 
1985-2007.  The data and calculati ons are shown in Annex 1.  
4.189  The table shows that farmers will obtain better fo recasts (in terms of lower RMSE) if they use 
the fitted value of the futures price, whether Febr uary futures or the average of January to March 
futures prices.  In general, the root mean square e rror of the fitted futures price is lower than that of 
the fitted lagged price, although the diff erence is not particularly large.   
4.190  Furthermore, the lagged price is not observed by farmers when they make their planting 
decisions in February-April.
184  The cotton marketing year starts from 1 August of the calendar year 
and ends on 31 July of the following year. So to ta ke an example, the 2008 marketing year covers the 
period 1 August 2008 to 31 July 2009.  The lagg ed price will be the average cotton price of 
1 August 2007 to 31 July 2008.  Thus, when farmer s begin planting in February-April 2008, they will 
not have yet observed the lagged price. The lagged price actually contains information that extends 
several months beyond the period when farmers make their planting decisions.  In contrast, the futures 
price is known to farmers when they make th eir planting decisions in February-April.   
                                                      
182 Statement by Professor Daniel Sumner concerning adverse effects under Article 7.9 of the 
SCM Agreement , Exhibit Bra-803, para. 10. 
183 The root mean square error (RMSE) is defined as: ()kTp p RMSET
ie
t tt −−=∑
=−
12
1 .  Here 
tp is the price of cotton at time t and e
t tp1− is the forecast of the cotton price, with the expectations formed one 
period before at t-1.  T is the total number of marketing years and k is the number of regressors, including the 
constant term. 
184 US responses to questions from the Arbitrator, question 61, para. 155.  WT/DS267/ARB/2 
 Page 51 
 
 
  Table 5: Root measure sq uare error (RMSE) of various indicato rs of cotton price expectations 
 
Indicator of expectations RMSE 
Period: 1975-2005 
Lagged farm price 10.58 
February futures 11.64 
Regression on lagged farm price 9.16 
Regression on February futures 8.81 
Period: 1985-2007 
Lagged farm price 10.46 
Jan-March futures 11.08 
Regression on lagged farm price 9.52 
Regression on Jan-March futures 9.21 
Sources : Exhibit Bra-770;  US responses to questions from the Arbitrator, question 7, para. 39 . 
 
4.191  Given that the root mean square error of the fitte d futures price is lower than that of the fitted 
lagged price, and that when farmers make their pl anting decision in February-April they would have 
observed the futures price but not the lagged price (t he price of the previous marketing year), the 
Arbitrator resolves that the futures price better represe nts farmers' expectation of the price of cotton.   
4.192  In implementing this change in the calculations , the Arbitrator has utilized Brazil's Annex I 
submission to the compliance panel.185  This contains the results of Brazil's regression approach to 
determining the expected price as well as the price contingent payments (Step 2, marketing loans and 
countercyclical payments).  The results of the Arb itrator's own analysis of various indicators of 
market price expectations strongly support the re gression-based approach, since it produces the lowest 
root mean square error.  Deducting a constant basis from the futures prices will not change the 
conclusion.  As Brazil has observed, the root mean square error of a simple regression of the futures 
market price will be lower than the root mean square  error of an additive basis approach to using the 
futures market price.  The Arbitrator has also  used the updated data provided by Brazil in 
Worksheet 6 of Exhibit Bra-704.  In so doing, the Ar bitrator has imposed the constraint that expected 
CCP payments should not be higher than 13.73 cents per pound.186  
(f) Conclusions 
4.193  On the basis of these determinations, and previous findings made in Section IV.D.3 of this 
Decision about the reference period (MY 2005), the Ar bitrator has rerun Brazil's model.  Expected 
prices as well as subsidy payments were based on regressions on futures prices.  For MY 2005, the 
Arbitrator calculates that the world price w ould have been higher by 9.38 per cent but for 
US marketing loans and countercyclical payments.  The adverse effects on the rest of the world from 
US marketing loans and countercyclical payments in MY 2005 amounted to US$2.905 billion .  This 
is comprised of sales value effects of US $2.384 billion and reduced production effects of 
US$521.5 million. 
                                                      
185 Annex I, Brazil's first written submission to the Panel, United States – Subsidies on Upland Cotton : 
Recourse by Brazil to Article 21.5 of the DSU . 
186 Countercyclical payments are pa id whenever the effective price of the commodity falls below the 
target price, which is fixed by the FSRI Act of 2002 at 72.4 cents per pound for upland cotton.  The effective 
price for cotton is the sum of the direct payment rate (6.67 cents per pound), plus the higher of the national average farm price for the marketing year or the loan rate (52 cents per pound).  More precisely, 
CCPCotton = 72.4 – (6.67 + Max (national average farm price, 52)).  Thus countercyclical payments for cotton 
cannot exceed 13.73 cents per pound.  This maximum is triggered whenever the national average farm price falls below 52 cents per pound.  See also footnote 12 of Statement by Professor Daniel Sumner concerning 
adverse effects under Article 7.9 of the SCM Agreement .   WT/DS267/ARB/2 
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  4.194  In Section IV.D.2 above, the Arbitrator furt her determined that once the existence of 
"significant price suppression" has been established, it is  legitimate to take into account the entirety of 
the price suppression caused by th e measures at issue on the world cotton market in assessing its 
impact on Brazil.  Accordingly, the level of count ermeasures should not be limited to those adverse 
effects that render the subsidy actionable under the SCM Agreement .  Thus, the amount of 
US$2.905 billion  which was determined to be the amount of adverse effects to the rest of the world 
from US marketing loans and countercyclical payments need not be revised downwards. 
4.195  However, the Arbitrator has also determined that this amount needs to be apportioned to 
Brazil (Section IV.D.1).  Brazil's share of cotton production in the rest of the world was 5.1 per cent  
in MY 2005.187  After making this apportionment, the Arbitrator therefore finds that the amount of 
countermeasures that are commensurate with the degr ee and nature of the adverse effects determined 
to exist is US$147,314,091 (US$147.3 million) .  The detailed calculations and data appear in 
Annex 2.188   
V. BRAZIL'S REQUEST TO APPLY COUNTERMEASURES UNDER THE 
TRIPS AGREEMENT AND THE GATS  
5.1 In its request to the DSB, Brazil requests au thorization to suspend concessions or other 
obligations in the annual amount of US$1.037 billion with respect to cer tain actionable subsidies.  In 
its view, given the amount, it is neither practicab le nor effective for Brazil to suspend concessions 
only on imports of US goods and the circumstances are serious enough to justify the suspension of 
concession or obligations under other covered agreem ents.  Brazil therefore proposed to suspend 
obligations under GATT 1994, and also unde r the GATS and the TRIPS Agreement under 
Article 22.3(c) of the DSU.189  
5.2 The United States challenges this request, arguing that Brazil had not followed the procedures 
and principles of Article 22.3 of the DSU.  The United States argues that given the size and diversity 
of the Brazilian economy, Brazil cannot justify and demonstrate its claim that applying 
countermeasures with respect to goods is not practicable or effective.190  In these proceedings, 
however, Brazil argued that the provisions of Artic le 22.3 of the DSU do not apply, and that its 
request must be considered on the basis of Article 7.9 of the SCM Agreement  only.   
5.3 In light of the parties' disagreement as to the applicable legal standard for this part of our 
assessment, we must first consider whether the principles and procedures of Article 22.3 of the DSU apply, before we can proceed with an assessment of Brazil's request on the basis of the applicable 
legal standard.  
                                                     
 
187 The market share is calculated from data in Exhibit US-68, Worksheet "Production". 
188 Annex 2 is based on Exhibit Bra-704.  Worksheets 6 and 7 of Annex 2 have been substantially 
revised as futures prices (or regression s thereof) are used as the basis for expectations of the market price and 
subsidy payments.  They are derived from Exhibit Bra-17 (Annex I), which was originally submitted to the 
compliance panel.   
189 WT/DS267/26. 
190 US written submission, paras. 318-319.  WT/DS267/ARB/2 
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  A. DO THE PRINCIPLES AND PROCEDURES OF ARTICLE  22.3  OF THE DSU  APPLY TO BRAZIL 'S 
REQUEST ? 
1. Arguments of the parties191 
5.4 Brazil argues in its Methodology Paper that th e countermeasures proposed by Brazil, which 
include the suspension of concessions or other obliga tions not only with respect to trade in goods but 
also under TRIPS and GATS, are "appropriate" and "c ommensurate with the degree and nature of the 
adverse effects determined to exist", within  the meaning of Articles 4.10 and 7.9 of the 
SCM Agreement .  Brazil argues that the countermeasures it proposes, both in their quantitative and in 
their qualitative aspects, must be assessed solely ag ainst the requirements of Articles 4.10 and 7.9 of 
the SCM Agreement .192  Brazil considers that these are the only standards against which the 
countermeasures must be assessed.193  
5.5 Brazil also argues that the United States, as th e party objecting to the proposed requests for 
countermeasures bears the burden of proving that th e type of the countermeasures proposed by Brazil 
is such as to render them not "appropriate" in the meaning of Article 4.10 of the SCM Agreement .  
Likewise, with respect to the actionable subsidies,  Brazil argues that the United States has the burden 
of proving that the type of the countermeasures pr oposed by Brazil is such as to render them not 
"commensurate with the degree and nature of the a dverse effects determined to exist" as required by 
Article 7.9 of the SCM Agreement .  Brazil argues that the United States failed to discharge its burden 
since it merely asserts that DSU Article 22.3 applies to the SCM Agreement .  In Brazil's view, 
Articles 4.10 and 7.9 of the SCM Agreement  provide for countermeasures that are different from those 
available under the DSU.194 
5.6 Brazil argues that Articles 4.10 and 7.9 of the SCM Agreement  provide for "countermeasures" 
and such countermeasures can well encompass the suspension of concessions or obligations under 
sectors or agreements other that in which a violation was found.195  Citing Article 49 of the Draft 
Articles on Responsibility of States for Internationally Wrongful Acts , Brazil argues that the purpose 
of a "countermeasure" as stated in that article is to induce the offending state to comply with its 
obligations. Therefore, Brazil advocates that there is  nothing in public international law to support the 
notion that a countermeasure has to be taken in the same area or under the same agreement in which a 
violation is found.196  Brazil is of the view that Articles 4.10 and 7.9 are "special or additional rules" 
within the meaning of Article 1.2 of the DSU, a nd that they address both the level and the type of 
countermeasures that may be imposed by the original complaining Member in sharp contrast to Article 22.4 and 22.3 of the DSU.
197  Brazil contends that the Arb itrator should apply the standards 
under the SCM Agreement , not the principles and procedures under Article 22.3 of the DSU.198 The 
mandate of the Arbitrator is solely to determ ine whether countermeasures are "appropriate" or 
"commensurate".199  
                                                      
191 In this section, the arguments of the parties are reflected as they were presented by the parties in 
their submissions, i.e. with reference both to the actio nable subsidies addressed in this Decision and to the 
prohibited subsidies addressed in the separate Decision in WT/DS267/ARB/1.   In the subsequent assessment by the Arbitrator in section 2 below, only the arguments relating to the actionable subsidies at issue in these 
proceedings are addressed.  
192 Brazil's Methodology Paper, para. 142. 
193 Brazil's written submission, para. 450. 
194 Brazil's written submission, paras. 452-453. 
195 Brazil's written submission, para. 454. 
196 Brazil's written submission, paras. 458-459. 
197 Brazil's written submission, paras. 464-465. 
198 Brazil's written submission, para. 472. 
199 Brazil's written submission, para. 470. WT/DS267/ARB/2 
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  5.7 With respect to the issue whether SCM Agreement  and Article 22.3 of the DSU can be read as 
complementing each other, Brazil argues that "if a special or additional rule or procedure does not 
provide additional requirements that are to be met together with the corresponding provisions of the 
DSU – so as to effectively complement them without negatively affecti ng their legal integrity – the 
two sets of provisions cannot be applied together ."  Brazil continues to argue that if they cannot be 
applied together it is because there is a differe nce between them.  In such case, Brazil argues the 
special or additional rule or procedure must prevail over the corresponding DSU provisions.200 
5.8 Brazil considers that Article 22.3 of the DS U establishes a legal standard based on the 
consideration by the Member concerned of the practicability and effectiveness of suspension of 
concessions and sets out a number of elements that have to be considered, whereas Articles 4.10 and 7.9 of the SCM Agreement  contain no restrictions on the type of countermeasures that may be 
taken.  Articles 4.10 and 7.9 of the SCM Agreement  grant to the Member concerned a margin of 
appreciation that is broader than the one reflecte d in the requirements of Article 22.3 of the DSU. 
They cannot be applied together.
201 
5.9 The United States argues that DSU discip lines concerning suspension of concessions, 
including Article 22.3, apply to the SCM Agreement .202  In its view, the fact that the SCM Agreement  
does not provide for rules relating to cross-sector  suspension of concessions independent of DSU 
Article 22.3, when special rules for other i ssues were carved out, suggests the disciplines on 
cross-sector suspension of concessions remain securely tied to the existing DSU rules and 
procedures.203 
5.10 The United States also argues that Brazil itself explicitly invoked Article 22.3 of the DSU in 
its request for countermeasures for prohibited subsidi es and in its request for actionable subsidies.  
Therefore, in the United States' view, Brazil has act ually conceded that its requests are subject to 
Article 22.3 of the DSU.  The United States also argues that the fact that Article 22.3(g) cross-
references the agreements to which it applies, including the SCM Agreement , also indicates that 
Article 22.3 of the DSU applies to requests for countermeasures under the SCM Agreement .204 
5.11 The United States argues that given the general ru le for suspension of concessions within the 
same sector under the DSU and the absence of any rule  to the contrary in Articles 4.10 and 7.9 of the 
SCM Agreement , there is no conflict in applying both the SCM Agreement  and Article 22.3 of the 
DSU. Thus, the better interpretation – and one  that allows Articles 4.10 and 7.9 of the 
SCM Agreement  to be applied in a complementary fashi on with Article 22.3 of the DSU – is that 
Articles 4.10 and 7.9 deal with the amount of count ermeasures, while Article 22.3 of the DSU sets 
forth rules for determining when countermeasures can be applied on  a cross-sector basis.  To the 
extent there is conflict between them, it is in re gard to the assessment of quantity, or the amount, of 
the suspension of concessions.  With regard to "t ype" or "form", the United States argues that the 
silence of the SCM Agreement  as to cross-agreement or cross-sec tor countermeasures mean that there 
is no "difference" in the meaning of Article 1.2 of  the DSU that would require ignoring the carefully 
articulated, hierarchical test under Article 22.3.205 
                                                      
200 Brazil's responses to questions from the Arbitrator, question 40, para. 460. 
201 Brazil's responses to questions from the Arbitrator, question 40, paras. 461-462. 
202 US written submission, para. 320. 
203 US written submission, para. 323. 
204 US oral statement, para. 67. 
205 US responses to questions from the Arbitrator, question 67, para. 185.  WT/DS267/ARB/2 
 Page 55 
 
 
  2. Assessment by the Arbitrator 
5.12 The question before us relates to the definiti on of our mandate, as well as to the substantive 
legal standard that is applicable to the imposition of cross-retaliation under the SCM Agreement .  Both 
aspects are closely related, in that the nature an d scope of our mandate is logically tied to the 
applicable substantive requirements, the application of which we must review. 
5.13 The parties essentially disagree as to the extent to which the provisions of Article 22.3 of the 
DSU, which set out specific principles and procedur es for the authorization of cross-retaliation in 
dispute settlement proceedings under the DSU, ar e applicable in the context of proceedings 
concerning actionable subsidies under the SCM Agreement , which contains specific provisions 
relating to countermeasures.  
5.14 As a starting point, we need to consider the terms of the relevant provisions of the 
SCM Agreement  and of the DSU.  We recall that Article 7.9 of the SCM Agreement  specifically 
addresses the question of the coun termeasures that may be authorized in relation to actionable 
subsidies, and Article 7.10 addresses the mandate of the arbitrator in relation to such countermeasures, 
in the event that an arbitration is requested unde r Article 22.6 of the DSU in relation to actionable 
subsidies.  Article 7.9 requires countermeasure s in relation to actionable subsidies to be 
"commensurate with the degree and natu re of the adverse effects determined to exist".  Article 7.10, in 
turn, provides that, in the event that a party to the dispute requests arbitration under paragraph 6 of 
Article 22 of the DSU, the arbitrator shall dete rmine whether the counterme asures are "commensurate 
with the degree and nature of the a dverse effects determined to exist". 
5.15 Article 22.6 of the DSU, in turn, provides that: 
"When the situation described in paragraph 2 occurs, the DSB, upon request, shall 
grant authorization to suspend concessions or other obligations within 30 days of the 
expiry of the reasonable period of time unl ess the DSB decides by consensus to reject 
the request.  However, if the member con cerned objects to the level of suspension 
proposed, or claims that the principles and procedures set forth in paragraph 3 have 
not been followed where a complaining part y has requested authorization to suspend 
concessions or other obligations pursuant to pa ragraph 3(b) or (c), the matter shall be 
referred to arbitration." 
5.16 Paragraphs 9 and 10 of Article 7 of the SCM Agreement  constitute "special or additional 
rules" under Appendix 2 of the DSU.  In accordance w ith Article 1.2 of the DSU, "to the extent that 
there is a difference between the rules and pro cedures of this understanding and the special or 
additional rules and procedures set forth in Appendix 2, the special or additional rules and procedures 
in Appendix 2 shall prevail". 
5.17 The Appellate Body has clarified the circumstanc es in which such a "difference" would exist: 
"[I]t is only where the provisions of the DS U and the special or additional rules and 
procedures of a covered agreement cannot  be read as complementing  each other that 
the special or additional provisions are to prevail . A special or additional provision 
should only be found to prevail  over a provision of the DSU in a situation where 
adherence to the one provision will lead to a violation of the other provision, that is, 
in the case of a conflict  between them. An interpreter must, therefore, identify an 
inconsistency  or a difference  between a provision of the DSU and a special or WT/DS267/ARB/2 
Page 56 
 
 
  additional provision of a covered agreement before  concluding that the latter prevails  
and that the provision of the DSU does not apply."206 
5.18 The question before us in this case is whethe r Article 22.3 of the DS U and Article 7.9 and 
7.10 of the SCM Agreement  can be read as complementing each other, or whether adherence to the 
principles and procedures contained in Article 22.3 of the DSU would lead to a violation of 
Article 7.9 or 7.10 of the SCM Agreement , such that there is a conflict  between the two provisions.  In 
other words, we must clarify whether the special or  additional rules of Article 7.9 and 7.10 of the 
SCM Agreement  constitute the entirety of the applicable rules relating to the type and level of 
countermeasures that may be authorized in relation to  actionable subsidies, or whether the principles 
and procedures of Article 22.3 of the DSU and these  provisions may be read as complementing each 
other in defining the rules applicab le to the suspension of concessions or other obligations in relation 
to actionable subsidies.  
5.19 We first note that paragraphs 9 and 10 of Ar ticle 7, and more generally the provisions of 
Article 7 of the SCM Agreement  concerning "remedies", are closely tied to the terms and procedures 
of the DSU itself.  Indeed, the arbitration that is  addressed in Article 7.10, which defines the mandate 
of the arbitrator with reference to  the terms of Article 7.9, is defi ned as an arbitration requested "under 
paragraph 6 of Article 22 of the DSU".  It is clear fro m the use of this cross-reference, that the arbitral 
proceedings at issue, even though they are in relation to actionable subsidies under the SCM Agreement , are initiated under Article 22.6 of the DSU.  The legal basis for such proceedings is 
therefore Article 22.6 of the DSU, as well as Article 7.10 of the SCM Agreement .  
5.20 Under the terms of Article 22.6 of the DSU,  the Member concerned may challenge two 
distinct aspects of a request for authorization to suspend concessions or other obligations.  The 
Member concerned may object to "the level of su spension proposed", or it  may "claim that the 
principles and procedures set forth in paragraph 3 (of Article 22) have not been followed" where a 
complaining party has requested authorization to su spend concessions or other obligations pursuant to 
paragraph 3(b) or (c).  If either of these two clai ms is made, then "the matter shall be referred to 
arbitration".  The reference to an arbitration requ ested "under paragraph 6 of Article 22 of the DSU" 
in Article 7.10 of the SCM Agreement , therefore, on its face, refers to the existence of (i) an objection 
to the "level of suspension proposed" and/or ( ii) a claim that the principles and procedures of 
Article 22.3 of the DSU have not been followed, which are to be referred to arbitration.   
5.21 In the case of an arbitration carried out under th e DSU alone, the mandate of the arbitrator is 
further defined in Article 22.7, which provides in its first sentence that "the arbitrator acting pursuant 
to paragraph 6 shall not examine the nature of th e concessions or other obligations to be suspended 
but shall determine whether the leve l of such suspension is equivalent to the level of nullification or 
impairment".  This is in line with the terms of Article 22.4, which provides that the level of the 
suspension shall be "equivalent to the level of nulli fication or impairment".  This is comparable, in 
structure, to the terms of Article 7.10 of the SCM Agreement , which provides that the arbitrator "shall 
determine whether the countermeasures are commensur ate with the degree and nature of the adverse 
effects determined to exist", in line with the term s of Article 7.9, which provides that the DSB shall 
grant authorization to take countermeasures "commens urate with the degree and nature of the adverse 
effects determined to exist".  
5.22 The provisions of Article 22.7 of the DSU and Article 7.10 of the SCM Agreement
 differ, in 
that Article 22.7 of the DSU further articulates that , if the matter referred to the arbitrator includes a 
claim that the principles and procedures have not b een followed, the arbitrator shall examine that 
claim, whereas Article 7.10 of the SCM Agreement  contains no exact equivalent.  The question 
therefore arises as to how the mandate of the arbitr ator should be understood in a situation where a 
                                                      
206 Appellate Body Report, Guatemala – Cement I , para. 65.  WT/DS267/ARB/2 
 Page 57 
 
 
  claim that the principles and procedures of Article 22. 3 of the DSU have not been followed is referred 
to arbitration in accordance with Article 22.6 of the DSU, in relation to actionable subsidies.   
5.23 In order to give useful meaning to all the term s of the treaty, including those of Article 22.3 of 
the DSU and the reference to Article 22.6 of the DSU in Article 7.10 of the SCM Agreement , we must 
a priori read the terms of that provision as envisaging that the principles and procedures of 
Article 22.3 of the DSU apply, including in cases re lating to actionable subsidies, and that a claim 
may be made in relation to these principles and pro cedures.  In accordance with  the principle that the 
special or additional rules listed in Appendix 2 of the DSU would only prevail in the event of a "difference" (i.e. if it were not possible to apply bo th simultaneously), it is only in the event that we 
determine that there is a conflict or incompatib ility between such a reading and the terms of 
Article 7.10 of the SCM Agreement , that we should conclude otherwise.   
5.24 It appears to us that such a conflict or inco mpatibility would arise between the application of 
the principles and procedures in Article 22.3 of the DSU and the terms of Article 7.9 and 7.10 of the 
SCM Agreement  only if the terms "countermeasures commensur ate with the degree and nature of the 
adverse effects determined to exist" in these pr ovisions are interpreted to define not only the 
permissible level of countermeasures in the case of  actionable subsidies, but also the type of 
countermeasures that may be authorized, so that th e principles and procedures of Article 22.3 of the 
DSU would be inoperative in cases relating to actionable subsidies.  
5.25 We are not persuaded that this is the case.  As  was discussed in detail in Section IV.C above it 
is undisputed that the expression "countermeasures co mmensurate with the degree and nature of the 
adverse effects determined to exist" defines the permissible level of countermeasures in relation to 
actionable subsidies.  In our view, it does not do mo re than that.  The notion of "commensurateness" 
clearly connotes a certain correspondence" in the le vel or measurement of the countermeasures.  By 
contrast, it is not clear that these terms provide any guidance as to the type of countermeasures that 
may be authorized.   
5.26 In light of the level of detail in which the matt er of cross-sectoral retaliation is addressed in 
the DSU, one would have expected the drafters of the SCM Agreement  to provide express guidance to 
this effect, if they had intended to address diffe rently the question of the type of permissible 
countermeasures, as well as their level.  In fact, th is would have been especially necessary in light of 
the fact that Article 22.6 of the DSU, which is  expressly referred to in Article 7.10 of the 
SCM Agreement , foresees that a challenge to proposed susp ension of concessions or other obligations 
may be based either on the level of suspension proposed, or on a claim "that the principles or 
procedures of paragraph 3 (of Article 22 of  the DSU) have not been followed".   
5.27 While the expression "the level of proposed suspension" does not in itself prejudge the 
standard upon which such "level" might be review ed, and thus allows th is standard to differ 
depending on the type of measure at issue, the reference to the "principles and procedures" of 
Article 22.3 of the DSU leaves no doubt as to the relevant  legal standard.  This pa rt of the reference to 
Article 22.6 of the DSU in Article 7.10 of the SCM Agreement  would have to be read out of the 
provision in order to conclude that the principl es and procedures of Article 22.3 of the DSU do not 
apply in the context of proceedings relating to actiona ble subsidies.  In light of our analysis above, we 
see no basis to do so.  We also note that, as treaty inte rpreters, we are required to "read all applicable 
provisions of a treaty in a way that gives meaning to all of them, harmoniously".207  The only manner 
in which we can give full meaning to all the term s of the treaty harmoniously in this context is to 
understand the terms of Article 7.9 and 7.10 of the SCM Agreement  as meaning that the mandate of 
the arbitrator as defined in Article 7.10 of the SCM Agreement  relates to the determination of the level 
                                                      
207 See for example Appellate Body Report, Canada – Dairy , para. 133, and Appellate Body Report, 
US – Upland Cotton , para. 549.   WT/DS267/ARB/2 
Page 58 
 
 
  of countermeasures, while the terms of the arbitr ator's mandate in relation to a claim that the 
procedures and principles of Article 22.3 of the DSU have not been followed is contained in 
Article 22.6 of the DSU.  
5.28 This interpretation is also consistent, in our view, with the context in which these provisions 
arise.  The various paragraphs under Article 7 of the SCM Agreement  may not be read in isolation 
from the DSU.  Rather, we understand the terms of Article 7 of the SCM Agreement  as providing 
specific additional rules on specifi c aspects of dispute settlement proceedings relating to actionable 
subsidies, which replace the equivalent rules of the DSU only to the extent that they differ from and 
are incompatible with such rules.   
5.29 In Article 7.10 of the SCM Agreement , it was not necessary for the drafters to clarify that, in 
relation to a claim that the principles and proce dures of Article 22.3 have not been followed, the 
arbitrator would review that claim, since the terms of Article 22.7 of the DSU, which generally define 
the terms under which an arbitration under Article 22.6 is to be carried out, already address this point.  
Only to the extent that the mandate of the arbitrator differed from that set forth in Article 22.7 of the 
DSU, was it necessary to explicitly define it in Article 7.10 of the SCM Agreement , in order to ensure 
that the mandate of the arbitrator in relation to  the proposed level of countermeasures would be 
consistent with the manner in which the permissible level of countermeasures is defined in Article 7.9 
of the SCM Agreement  for actionable subsidies.  Indeed, Article 22.7 of the DSU sets out a number of 
other aspects relating to arbitration proceedings pur suant to Article 22.6 of the DSU, which are not 
replicated in Article 7.10 of the SCM Agreement , but which nonetheless are clearly relevant and 
applicable to such proceedings.  In particular, the last two sentences of Article 22.7 provide that: 
"The parties shall accept the arbitrator's decision as final and the parties concerned 
shall not seek a second arbitration.  The DS B shall be informed promptly of the 
decision of the arbitrator and shall, upon request, grant authorization to suspend concessions or other obligations where the re quest is consistent with the decision of 
the arbitrator, unless the DSB decides by consensus to reject the request." 
These important provisions are clearly relevant to arbitral proceedings in relation to actionable 
subsidies under the SCM Agreement .   
 
5.30 Finally, we consider that our interpretation is faithful also to the object and purpose of dispute 
settlement proceedings in the WTO and to their integrated nature.  Th e DSU provides the common 
framework under which dispute settlement proceedings are initiated in the WTO, and brings together 
all the covered Agreements.  This is the overall framework in which the question of the possibility of 
seeking suspension of obligations under another sector , or another covered Agreement than that under 
which the violation has been found, arises, and this is logically addressed in the context of the DSU.   
5.31 We are mindful that we must give full meaning to all the terms of the treaty, including the 
special or additional rules identified in Appendix 2,  and that such special or additional rules may 
legitimately prevail over any relevant DSU rules and procedures.  However, we are not persuaded that 
there is a conflict, such that the principles a nd procedures of Article 22.3 of the DSU would be 
inapplicable in the case of disputes relating to actionable subsidies under the SCM Agreement .  
5.32 In light of all the above, we conclude that th e principles and procedures of Article 22.3 of the 
DSU apply to the claim before us and that we must review the United States' claim that these 
principles and procedures have not been followed by Brazil.    WT/DS267/ARB/2 
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  B. MANDATE OF THE ARBITRATOR AND BURDEN OF PROOF  
5.33 Having determined that the principles and pro cedures of Article 22.3 of the DSU apply to 
Brazil's request and that we are required to revi ew the United States' claim that Brazil has not 
followed these principles and procedures, we need to cl arify further what our mandate is, in relation to 
this claim, and what burden of proof applies to it.  
1. Main arguments of the parties 
5.34 The United States considers that the drafter' s intention was that suspending concessions 
across sectors and agreements was the exception rather  than the rule.  In the United States' view, 
Article 22.3 establishes a hierarchy of suspension:  Members must first try to suspend concessions 
within the same sector, and if that is not practicab le or effective, can then request permission to 
suspend in a different sector.  This distincti on is important in the GATS and TRIPS Agreements 
where there are multiple sectors, but does not apply with respect to goods. The bar for suspending 
concessions under other agreements is higher still.  The United States adds that not only does the 
suspension within the agreement have to be neither practicable nor effective, but the violation must be 
serious enough to warrant cross-agreement suspension.208  
5.35 The United States further considers that the discip lines of Article 22.3 are an integral part of 
the dispute resolution process a nd the rebalancing of concessions.  The United States cites the 
statement of the arbitrator on EC – Bananas III (US) (Article 22.6 – EC) , that "the basic rationale of 
these disciplines is to ensure that the suspension of concessions or other obligations across sectors or 
across agreements (beyond those sectors or agreem ents under which a panel or the Appellate Body 
has found violations) remains the exception and do es not become the rule".  The United States 
therefore considers it necessary for the Arbitrat or to determine whether Brazil has objectively 
followed these procedures.  The United States also cont ends that Brazil is entitled to a certain margin 
of appreciation in making this de termination, but the Arbitrator also has an oblig ation to judge 
whether Brazil has objectively reviewed the f acts and has reached a plausible conclusion.209  
5.36 The United States argues that for a party to request cross-agreement suspension of 
concessions, it must find that: 
(a) it is not practicable or effective to susp end concessions or other obligations with 
respect to other sectors under the same agreement; and  
(b) that the circumstances are serious enough to  warrant cross-agreement suspension of 
concessions. 
5.37 It considers that, when analysing these requirement s, the party must take into account:  (i) the 
trade in the sector or under the agreement under which the panel or Appellate Body has found a 
violation or other nullification or impairment, and the importance of such tr ade to that party, and 
(ii) the broader economic elements related to the nullification or impairment and the broader 
economic consequences of the suspension of concessions  or other obligations.  The complaining party 
must further explain how it has reached the c onclusion that cross-agreement suspension of 
concessions is warranted.210  
5.38 Brazil notes the arbitrator's "plausib ility" standard as enunciated in the US – Gambling 
(Article 22.6 – US) arbitration.  This standard calls for an objective assessment of the facts and a 
                                                      
208 US written submission, para. 325. 
209 US written submission, para. 326. 
210 US written submission, para. 327. WT/DS267/ARB/2 
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  plausible conclusion on the issue of whether it is "pr acticable or effective" to seek countermeasures in 
the same sector and on whether th e circumstances are serious enough.211  Brazil considers, however, 
that the Arbitrator should be limited to examining wh ether Brazil has in fact considered the principles 
set forth in Article 22.3 of the DSU, not whether Brazil's considerations are plausible.212  Brazil notes 
the United States position, in the DSB meeting on the adoption of the  EC – Bananas III (US) 
(Article 22.6 – EC) arbitration report, that arbitrators are not supposed to "second guess" the 
conclusions reached by the Member who considers that  it is not practicable or effective to suspend 
concessions or other obligations under the same agre ement, and that the circumstances are serious 
enough within the meaning of Article 22.3.213   
5.39 Brazil also argues that the United States bears the burden of proving that Brazil has not 
followed the principles laid out in Article 22.3, sp ecifically, (i) that it is both "practicable" and 
"effective" for Brazil to suspend concessions only in  the goods sector, or (ii) that the circumstances 
are not "serious enough" to justify applying coun termeasures under another covered agreement.  With 
respect to Article 22.3(d), Brazil argues that the United States has to prove that in selecting 
countermeasures, Brazil did not take into account th e elements indicated in items (d)(i) and (ii).214 
2. Approach of the Arbitrator 
5.40 Article 22.3 sets out certain principles and pro cedures to be followed by a complaining party 
seeking to suspend concessions, as to the sector(s) an d/or covered agreement in which the suspension 
can take place, which the United States claims that Brazil did not follow.   
5.41 We recall our earlier determination that these principles and procedures apply to Brazil's 
request, and that Article 22.7 of the DSU provides th e basis for our mandate to review this claim.  
Article 22.7 provides that "if the matter referred to arbitration includes a claim that the principles and 
procedures set forth in paragraph 3 have not been fo llowed, the arbitrator shall examine that claim" 
and that "[i]n the event the arbitrator determines that those principles and procedures have not been 
followed, the complaining party shall apply them consistent with paragraph 3".   
5.42 We are therefore required to examine the United States' claim that Brazil has not followed the 
principles and procedures of Article 22.3 of the DSU. 
5.43 As a general principle, Article 22.3(a) of th e DSU provides that suspension of concessions or 
other obligations should first be sought in the same  sector as that in which a violation was found.  
Article 22.3 provides in relevant part that: 
"In considering what concessions or other obligations to suspend, the complaining 
party shall apply the following principles and procedures: 
(a) the general principle is that the complaining party should 
first seek to suspend concessions  or other obligations with 
respect to the same sector(s) as that in which the panel or 
Appellate Body has found a violation or other nullification or 
impairment." 
                                                      
211 Brazil's written submission, para. 501. 
212 Brazil's written submission, para. 406. 
213 Brazil's written submission, para. 505. 
214 Brazil's written submission, para. 509.  WT/DS267/ARB/2 
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  5.44 Subparagraphs (b) and (c) of Article 22.3 furthe r specify the principles and procedures to be 
followed by a complaining party wishing to seek su spension in another sector, or another agreement, 
than that in which a violation was found: 
"(b) if that party considers that it is not  practicable or effective for it to suspend 
concessions or other obligations with respect to the same sector(s), it may 
seek to suspend concessions or other obligations in other sectors under the 
same agreement; 
(c) if that party considers that it is not practicable or effective to suspend 
concessions or other obligations with respect to other sectors under the same 
agreement, and that the circumstances are serious enough, it may seek to suspend concessions or other obligations  under another covered agreement."   
5.45 In addition, subparagraph (d) of Article 22.3 provides that: 
"(d) in applying the above principles,  that party shall take into account: 
(i)  the trade in the sector or under the agreement under which 
the panel or the Appellate Body has found a violation or 
other nullification or impairment, and the importance of such trade to that party; 
(ii) the broader economic elements  related to the nullification or 
impairment and the broader ec onomic consequences of the 
suspension of concessions or other obligations."  
5.46 Two prior arbitrators have considered the mandate  of the arbitrator set out in Article 22.7 of 
the DSU with respect to the principles and procedures se t forth in Article 22.3, and we find it useful to 
refer to their findings in clarifying the terms of our own mandate.  
5.47 The arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC) , in determining the scope 
of its authority to review the principles and procedures relating to requests for suspension of 
concessions or other obligations under subparagraphs (b) and/or (c), cons idered that "the fact that the 
powers of arbitrators under subparagraphs (b)-(c) ar e explicitly provided for in Article 22.6 implies 
a fortiori  that the authority of Arbitrators includes th e power to review whether the principles and 
procedures set forth in these subparagraphs have be en followed by the Member seeking authorization 
for suspension".
215     
5.48 The arbitrator also considered the terms of Ar ticle 22.3, including the fact that a certain 
margin of appreciation is left to the complaining part y in arriving at conclusions in respect of certain 
factual elements (i.e. "if that party considers " in subparagraphs (b) and (c)) as well as the fact that the 
party concerned is required to apply th e principles of Article 22.3 (i.e. " shall  apply the following 
principles and procedures" in the introductory clause of Article 22.3).  On the basis of that textual 
analysis, the arbitrator determined that: 
"[T]he margin of review by the Arbitrat ors implies the authority to broadly judge 
whether the complaining party in ques tion has considered the necessary facts 
objectively and whether, on the basis of these facts, it could plausibly arrive at the 
conclusion that it was not practicable or eff ective to seek suspen sion within the same 
                                                      
215 Decision by th e Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC) , para. 50. WT/DS267/ARB/2 
Page 62 
 
 
  sector under the same agreements, or only under another agreement provided that the 
circumstances were serious enough."216    
5.49 The arbitrator in that dispute also considered more broadly the terms of  Article 22.3 and noted 
that "these provisions imply a sequence of steps towards WTO-consistent suspension of concessions 
or other obligations which respects both a margin of  appreciation for the complaining party as well as 
a margin of review by Arbitrators, if a request  for suspension under Article 22.2 is challenged under 
Article 22.6".217    
5.50 Like the arbitrator on US – Gambling (Article 22.6 – US) , we agree with these determinations.  
We agree that the principles and procedures set fort h in Article 22.3 of the DSU, which require the 
complaining party to make certain determinati ons, imply "a margin of appreciation" for the 
complaining party in making these determinations.  At the same time, Article 22.3 sets out specific 
principles and procedures that the complaining party must follow, and we understand the role of the 
arbitrator acting pursuant to Article 22.7 of the DSU to involve a review of whether those principles and procedures have been followed.  It would not  be sufficient for a complaining party to have 
considered those principles and procedures solely fro m the viewpoint of being able to say that it did 
so.  The consideration must be a substantive a nd reasoned one, and a claim to be entitled to impose 
countermeasures outside the relevant sector, and then  outside the relevant agreement, must arise from 
that consideration. 
5.51 We also agree with the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC)  that this 
mandate includes a determination of "whether the complaining party in question has considered the 
necessary facts objectively" and also "whether, on the b asis of these facts, it could plausibly arrive at 
the conclusion that it was not practicable or effec tive to seek suspension within the same sector under 
the same agreements, or only unde r another agreement provided that the circumstances were serious 
enough".   
5.52 In addition, should we determine that Brazil has not followed these procedures or principles, 
we believe it to be both necessary and appropriate fo r us to articulate how the analysis could properly 
take place to the extent necessary to ensure that Brazil is in a position to apply these procedures and 
principles "consistent with paragr aph 3" and present a request "cons istent with the decision of the 
arbitrator" in a subsequent phase of these disput e settlement proceedings, as foreseen in Article 22.7 
of the DSU.   
5.53 We note in this respect that Article 22.7 provides in relevant part that:  
"[I]f the matter referred to arbitration includes a claim that the principles and 
procedures set forth in paragraph 3 have not been followed, the arbitrator shall 
examine that claim.  In the event the arbitrator determines that those principles and 
procedures have not been followed, the compla ining party shall apply them consistent 
with paragraph 3.   The parties shall accept the arbitrator's decision as final and the 
parties concerned shall not seek a second arbitration.  The DSB shall be informed 
promptly of the decision of the arbitrator and shall upon request, grant authorization 
to suspend concessions or other obligations where the request is consistent with the 
decision of the arbitrator , unless the DSB decides by consen sus to reject the request." 
(emphasis added) 
5.54 This approach is consistent with the objectiv e of prompt and positive settlement of disputes. 
This approach is also consistent with the prac tice of arbitrators acting under Article 4.10 of the 
                                                     
 
216 Decision by th e Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC) , para. 52. 
217 Decision by th e Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC) , para. 55.  WT/DS267/ARB/2 
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  SCM Agreement  and/or Article 22.6 of the DSU, of proceeding with a calculation of the permissible 
level of countermeasures in the event that they  find the proposed countermeasures not to be in 
accordance with the applicable legal standard.218 
5.55 In terms of burden of proof, we consider that it is for the United States, as the party 
challenging Brazil's determinations , to demonstrate that Brazil has not followed the principles and 
procedures of Article 22.3 of the DSU.  At the same  time, it is essential that Brazil provides us with 
explanations on how it made this dete rmination, in order for us to be in a position to review it, and to 
determine whether Brazil has, in making its de terminations, "considered the necessary facts 
objectively" and whether it could plausibl y reach the conclusions that it did.  
5.56 The United States also asks the Arbitrator to  indicate in its decision, if necessary, the 
maximum amount up to which Brazi l would be permitted to impose cross-agreement suspension of 
concessions.219  The United States requests the Arbitrator to issue separate awards, one in relation to 
the prohibited subsidies and one concerning actionabl e subsidies so that, in case the United States 
brings one subsidy into compliance with the DSB recommendations and rulings before it is able to 
comply with the other, the separate awards provide  a legal basis to ensure that countermeasures are 
still consistent with the legal standards of the SCM Agreement  and the DSU in that situation.220   
5.57 We first recall that two separate decisions are being issued, one in relation to the prohibited 
subsidies221 and one concerning actionable subsidies (t his Decision), as the United States requests.222     
5.58 We agree that, to the extent that we might determine that Brazil may impose part of the 
proposed countermeasures in another sector or agre ement, we would need to indicate clearly the 
amount of countermeasures in respect of which it would be entitled to suspend concessions or other 
obligations in such other sector or agreement.  
5.59 We do not consider it necessary, however, to determine in this Decision what our conclusion 
might have been, in the event that the United States s hould, at some future point in time, comply with 
the DSB's recommendations and rulings in rela tion to the measures covered by the other 
proceedings.223  This is a hypothetical matter on which it would not be appropriate for us to speculate.  
Rather, we base our assessment on the situation as it ex ists at the time of our determination, which 
includes the fact that the United States has not comp lied with two separate asp ects of the underlying 
recommendations and rulings in this dispute and that this gives rise to an entitlement for Brazil to take 
countermeasures in relation to both aspects.   
5.60 At the same time, we recall that our determina tions in these proceedings relate only to Brazil's 
request in relation to the actionable subsidies at issue.  Our determinations on Brazil's request for 
cross-retaliation take into account the factual ci rcumstances arising from the separate proceedings 
relating to the prohibited subsidies also ruled on  in the underlying proceedings, but no entitlement 
arises from this Decision for Brazil to take count ermeasures in relation to such subsidies.   
                                                      
218 See for example Decision by the Arbitrators,  EC – Hormones (US) (Article 22.6 – EC) , para. 12. 
219 US responses to questions from the Arbitrator, question 134, para. 165. 
220 US comments on Brazil's responses to questions from the Arbitrator, question 134, para. 171. 
221 See WT/DS267/ARB/1. 
222 See Section I.C above, at paras. 1.27-1.31. 
223 See WT/DS267/ARB/1. WT/DS267/ARB/2 
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  C. BRAZIL 'S DETERMINATION THAT IT IS NOT PRACTICABLE OR EFFECTIVE TO TAKE 
COUNTERMEASURES WHOLLY IN TRADE IN GOODS  
1. The principles and procedures of Article 22.3 of the DSU 
5.61 Article 22.3 of the DSU, as we have observed earlier, foresees certain "procedures and 
principles" to be followed by the complaining pa rty, in order to seek to suspend concessions in 
another sector or another agreement than that in which the violation was found.   
5.62 As observed by the arbitrator on US – Gambling (Article 22.6 – US):  
" '[T]hese provisions imply a sequence of steps towards WTO-consistent suspension 
of concessions or other obligations'.224  In other words, as Antigua has expressed it, 
Article 22.3 of the DSU provides a 'hierarchy' of remedies that a complaining party 
must follow in determining in which sector s or under which agreements suspension 
of concessions or other obligations can be sought, namely (1) seek to suspend in the 
same sector in the same agreement, (2) seek to suspend within the same agreement 
and (3) seek to suspend under another agreement."225  
5.63 In this case, the initial violation was found in rela tion to trade in goods, and this is the "sector" 
(as defined in subparagraph (g) of Article 22.3) in which Brazil woul d normally be expected to apply 
countermeasures under subparagraph (a).  Subparagr aph (b) affords the possibility of seeking to 
suspend concessions or other obligations "in othe r sectors under the same agreement".  For the 
purposes of this provision, all the agreements on tr ade in goods contained in  Annex 1A of the WTO 
Agreement "taken as a whole" are considered to be  an "agreement", and a sector is defined, with 
respect to goods, as "all goods".  
5.64 Therefore, recourse to subparagraph (b) would in principle allow Brazil to seek to suspend 
concessions or other obligations in all goods, under the Agreements on trade in goods.  Brazil seeks to 
apply countermeasures under the TRIPS and GATS Agre ement.  This would constitute suspension of 
concession or other obligations "under another agreem ent" within the meaning of subparagraph (c) of 
Article 22.3.   
5.65 Accordingly, Brazil will have followed the principles and procedures of Article 22.3 if it has 
determined, in accordance with the terms of subparagraph (c), that: 
(a) "it is not practicable or effective" to seek  suspension under the same agreement (i.e. 
under the agreements on trade in goods); and 
(b) "the circumstances were serious enough".  
5.66 In addition, in applying these principles, Braz il is required to have taken into account the 
factors identified in subparagraph (d) of Article 22.3.  
5.67 As we have determined above , our mandate is to review whether, in making these 
determinations, Brazil has considered the necessar y facts objectively and whether, on the basis of 
these facts, it could plausibly arrive at the conclusi on that it was not practicable or effective to seek 
suspension under the same agreement and that the circumstances were serious enough.  In order to 
conduct this assessment, we must first clarify the te rms of these requirements, as well as the role of 
the elements referred to in subparagraph (d).   
                                                      
224 (original footnote ) Decision by the arbitrators,  EC – Bananas III , (request by Ecuador),  para. 55. 
225 Decision by the Arbitrator, US – Gambling (Article 22.6 – US) , para. 4.19.  WT/DS267/ARB/2 
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  5.68 At the outset, we note that the two requirements within subparagraph (c) are cumulative, 
i.e. the complaining Member must consider that "it is not practicable or effective" to seek suspension 
of concessions or other obligati ons under the same agreement and that "the circumstances are serious 
enough".  The additional requireme nt, under subparagraph (d), to take into account certain 
considerations, further qualifies the manner in whic h the principles contained in subparagraph (c) are 
to be applied.  
(a) First requirement under subparagra ph (c):  a determination that it is "not practicable or 
effective" to suspend concessions or other oblig ations with respect to other sectors under the 
same agreement  
5.69 In order to seek to suspend concessions or ot her obligations under another agreement, the 
complaining party must in the first instance consider that it is "not practicable or effective" to seek 
suspension under the same agreement.  Brazil c onsiders that it does not need to meet both the 
"practicable" and "effective" criteria, and that it is  sufficient to satisfy one of the two conditions.226    
5.70 We agree that the wording of the provision imp lies that the complaining party may consider 
either that it is "not practicable" or that it is  "not effective" to seek suspension under the same 
agreement, and that it need not conclude that same -agreement suspension is both "not practicable" and 
"not effective", in order to reach the conclusi on that it is "not practicable or effective".227 
(i) "practicable" 
5.71 In Brazil's view, the standard of "practicability " under Article 22.3 refers to the availability 
for application in practice of the suspen sion of concessions only in the goods sector.228  In Brazil's 
view, "practicability" refers to whether susp ension in the same sector or agreement is available for 
application in practice , as well as suited for being used in a particular case .  If it is not a real option 
or it is not suited to be used in the circumstances, it will be not practicable.229  This is how the 
arbitrators on EC – Bananas III  and US – Gambling  understood this term, and we agree with this 
determination.  
5.72 As Brazil describes it, and as the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – 
EC) put it, a consideration of whether suspension in a given sector or agreement is "practicable" 
relates primarily to whether it is actually "available in  practice" to the complaining party.  We find the 
example used by the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC)  helpful in 
clarifying the types of considerations that may be pertinent in such a determination:  
"To give an obvious example, suspension of commitments in service sub-sectors or in 
respect of modes of service supply which a particular complaining party has not 
bound in its GATS schedule is not available for application in practice and thus 
cannot be considered as practicable."230   
5.73 There may be a range of situations in wh ich the suspension of concessions or other 
obligations in relation to a certain sector or agreemen t is not "available in practice".  In our view, the 
essence of a consideration of "practicability" of susp ension is that it relates to its actual availability 
and feasibility.  The impracticability could be either a legal one, as postulated in the example given in 
                                                      
226 Brazil's responses to questions from the Arbitrator, question 8, para. 127. 
227 See Decisions by the Arbitrator, US – Gambling (Article 22.6 – US) , para. 4.29 and EC – Bananas 
III (Ecuador) (Article 22.6 – EC) , para. 74. 
228 Brazil's written submission, para. 510. 
229 Brazil's responses to questions from the Arbitrator, question 8, para. 126. 
230 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC) , para. 71. WT/DS267/ARB/2 
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  EC – Bananas III (Ecuador ) (Article 22.6 – EC) , or a factual one, such as might arise if the 
countermeasure exceeds the total amount of the trade available to be countered. 
(ii) "effective" 
5.74 Citing the EC – Bananas III (Ecuador) (Article 22.6 – EC)  arbitrator, Brazil argues that the 
"effectiveness" standard encourages the offending st ate to comply with WTO obligations, in other 
words, to induce compliance231 and allows the party seeking suspensi on to ensure that the impact of 
that suspension is strong and has the desired result,  namely to induce compliance.  Brazil considers 
that "the countermeasures that are best tailored to  provide such a response are those that can maximize 
the likelihood of compliance".232 
5.75 In the United States' view, the likelihood of compliance is not a factor that the DSU provides 
in assessing the appropriate level or nature of the countermeasure.233  The United States considers that 
the DSU authorizes rebalancing of trade concessions in case a Member does not comply with its trade 
obligations.  While the ultimate political goal of the DSU is to promote compliance, the legal 
standards for assessing countermeasures are the effects of nullification and impairment and these are two separate issues in the United States' view.
234  
5.76 The United States considers that the word "eff ective" means that a Member should not be 
prevented from imposing countermeasures of the intende d weight as a result of the limitation of those 
countermeasures to the same sector/agreement.  The in tended "weight" is what is authorized based on 
the applicable standard, including where special or additional rules apply.  Thus, a Member should be 
able to take the "appropriate" amount  of countermeasures with respect to prohibited subsidies and, for 
subsidies causing adverse effects, a Member should be able to take countermeasures commensurate 
with those effects.235 
5.77 Dictionary definitions of the term "effective" include "producing a decided, decisive, or 
desired effect"236 and "powerful in effect; producin g a notable effect; effectual".237  The arbitrator on 
EC – Bananas III (Ecuador) (Article 22.6 – EC)  relied on comparable definitions to conclude that 
"the thrust of this criterion empowers the party seeki ng suspension to ensure th at the impact of that 
suspension is strong and has the desired result, name ly to induce compliance wi th DSB rulings within 
a reasonable period of time".238  That arbitrator further elaborat ed on the types of circumstances in 
which a complaining party might consider that su spension in a given sector or agreement would not 
be "effective": 
"One may ask whether this objective [of i nducing compliance] may ever be achieved 
in a situation where a great imbalance in  terms of trade volume and economic power 
exists between the complaining party seek ing suspension and the other party which 
has failed to bring WTO-inconsistent meas ures into compliance with WTO law.  In 
such a case, and in situations where the complaining party is highly dependent on 
imports from the other party, it may happen th at the suspension of certain concessions 
or certain other obligations entails mo re harmful effects for the party seeking 
suspension than for the other party.29 In these circumstances, a consideration by the 
                                                      
231 Brazil's written submission, para. 511. EC – Bananas III (Ecuador) (Article 22.6 – EC),  para. 72. 
232 Brazil's Methodology Paper, para. 143. 
233 US written submission, para. 337. 
234 US written submission, paras. 339 and 341. 
235 US responses to questions from the Arbitrator, question 137, para. 177. 
236 In Merriam-Webster Online Dictionary . Retrieved 4 June 2009, from http://www.merriam-
webster.com/dictionary/effective. 
237 Oxford English Dictionary , at www.oed.com. 
238 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC) , para. 72.  WT/DS267/ARB/2 
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  complaining party in which sector or under which agreement suspension may be 
expected to be least harmful to itsel f would seem sufficient for us to find a 
consideration by the complaining party of th e effectiveness criterion to be consistent 
with the requirement to follow the principles and procedures set forth in 
Article 22.3."239  
(original footnote)  29 Of course, suspension of concessions or other obligations is always 
likely to be harmful to a certain, limited extent also for the complaining party requesting 
authorization by the DSB. 
5.78 We do not share the view of the arbitrator on EC – Bananas III (Ecuador ) (Article 22.6 – EC)  
that a consideration by the comp laining party of the sector or ag reement in which suspension would 
be "least harmful" to itself would necessarily be pertin ent.  As we read the terms of subparagraphs (b) 
and (c), a consideration of the "effectiveness" cr iterion under these provisions involves an assessment 
of the effectiveness – or lack thereof – of suspension in the same sector or under the same agreement , 
rather than an assessment of the relative effectiven ess of such suspension, as compared to suspension 
in another sector or agreement.  In other words,  the procedures and principles under Article 22.3 do 
not entitle a complaining party to freely choose the most  effective sector or agreement under which to 
seek suspension.  Rather, it entitles the complaining pa rty to move out of the same sector or same 
agreement, where it considers that suspension in that sector or agreement  is not "practicable or 
effective".  
5.79 We agree with the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC),  however, 
that the question of whether "the suspension of certa in concessions or certain other obligations entails 
more harmful effects for the party seeking suspension than for the other party" would be pertinent to a 
consideration of the "effectiveness" of the sai d suspension.  Indeed, as the arbitrator on EC – Bananas 
III (Ecuador) (Article 22.6 – EC)  notes, there may be situations  in which, for example, the 
complaining party is heavily dependent on imports from the other party, to such an extent that it may 
cause more harm to itself than it would to the other party, if it were to suspend concessions or other 
obligations in relation to these imports.  In such a situation, where the complaining party would cause 
itself disproportionate harm, such that it would in fact be unable to use the authorization, there would be a basis for concluding that such suspension would not be "effective".  
5.80 It may well be that the suspension of concessions or other obligations "i s always likely to be 
harmful to a certain, limited extent also for the co mplaining party" applying it.  However, this does 
not, in our view, imply that a consideration of su ch harm may not be relevant for the purposes of 
assessing the "effectiveness" of suspension in a gi ven sector or agreement. In foreseeing that the 
complaining party may consider that same-sector or  same-agreement suspension is "not practicable or 
effective", the drafters of the DSU have preci sely acknowledged and recognized the possibility of 
circumstances in which suspension of certain obligati ons would not be effectiv e, and they have sought 
to allow the complaining party the possibility of ensuring that it nonetheless has at its disposal an 
effective remedy in such circumstances, i.e. a re medy that may produce its intended effects.  This 
includes, in our view, situations in which the harm that may arise from same-sector or same-
agreement suspension would be so significant for the complaining party as to deter it from having  
recourse to it.  
5.81 This is consistent with the objective of inducin g compliance, in that this provision seeks to 
ensure that the complaining party will be in a po sition to actually have recourse to the authorized 
remedy, and thus enable it to contribute to induci ng compliance, as is its legitimate purpose.  At the 
same time, we agree with the United States that the "likelihood of compliance", as such, is not at issue 
                                                     
 
239 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC) , para. 73. WT/DS267/ARB/2 
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  in this determination.  Rather, what is at issue is  the ability of the complaining party to make effective 
use of the awarded countermeasures in order to induce such compliance.   
(b) The second element under subparagraph (c):  a de termination that "the circumstances are 
serious enough"   
5.82 As noted by the arbitrator on US – Gambling (Article 22.6 – US) , the text of Article 22.3(c) 
provides no specific guidance on how the terms "the circumstances are serious enough" are to be 
understood.  The elements of subparagraph (d) do, howe ver, provide useful guidance in this respect.   
5.83 We therefore consider that the trade at issue,  and its importance to the complaining party, as 
well as the broader economic elemen ts relating to the nullification or impairment and the economic 
consequences of the suspension, may all be re levant in assessing whether the "circumstances are 
serious enough" in a given case.   
5.84 At the same time, we consider  that these terms inherently imply a degree of flexibility in 
assessing what "circumstances" may be pertinent in a given case, so that these may not be the only 
relevant considerations in such an assessment.  We agree, in this respect, with the following 
determinations of the arbitrator on US – Gambling (Article 22.6 – US) : 
"We also consider, more generally, that this  aspect of the determination, which relates 
to "circumstances", is of necessity an as sessment to be made on a case-by-case basis, 
and that the circumstances that are relevant may vary from case to case.  We note however, that these circumstances should be serious "enough", which suggests that it 
is only when the circumstances reach a certain degree or level of importance, that 
they can be considered to be serious enough."
240 
(c) The elements under subparagraph (d) of Article 22.3 
5.85 Subparagraph (d) of Article 22.3 directs the complaining party to take into account two 
specific considerations, in applying the pr inciples under the previous subparagraphs: 
(a) the trade in the sector or under the agreem ent under which the panel or the Appellate 
Body has found a violation or other nullifi cation or impairment , and the importance 
of such trade to [the complaining] party; and  
(b) the broader economic elements  related to the nullificati on or impairment and the 
broader economic consequences of the suspension of concessions or other 
obligations.  
5.86 The first element, the "trade in the sector or under the agreement under which the panel or the 
Appellate Body has found a violation" is to be understood with reference to  the definitions of the 
terms "sector" and "agreement" contained in subparagr aph (g) of Article 22.3.  As the arbitrator on 
US – Gambling (Article 22.6 – US)  observed: 
"[I]n order to determine whether suspension is practicable or effective in a certain 
sector, it is appropriate to take into account all the trade in that sector and its importance to the complaining party.  This also appears to us consistent with the 
                                                     
 
240 Decision by the Arbitrator, US – Gambling (Article 22.6 – US) , para. 4.108.  WT/DS267/ARB/2 
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  purpose of this provision, which is to provi de certain objective parameters to guide 
the conduct of such determination."241 
5.87 In the circumstances of this case,  this means that what is to be taken into account is "the 
trade" in all goods under the trade in goods agreem ent, that is, trade in goods generally, and its 
importance to Brazil.   
5.88 The second consideration required to  be taken into account is th e "broader economic elements 
related to the nullification or impairment" and the "broader economic consequences of the suspension.  
We agree with the determinations of the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – 
EC), as endorsed also by the arbitrator on US – Gambling (Article 22.6 – US) , that:  
"The fact that the former criterion relates to 'nullification or impairment' indicates in 
our view that this factor primarily concer ns 'broader economic elements' relating to 
the Member suffering such nullification or impairment, i.e. in this case Ecuador.   
We believe, however, that the fact that the latter criterion relates to the suspension of 
concessions or other obligations is not necessarily an indication that "broader 
economic consequences" relate exclusively to the party which was found not to be in 
compliance with WTO law, i.e. in this case the European Communities.  As noted 
above, the suspension of concessions may not on ly affect the party retaliated against, 
it may also entail, at least to some extent, adverse effects for the complaining party 
seeking suspension, especially where a great imbalance in terms of trade volumes and 
economic power exists betw een the two parties such as in this case where the 
differences between Ecuador and the European  Communities in regard to the size of 
their economies and the level of socio- economic development are substantial."242 
5.89 Accordingly, the "broader economic elements rela ted to the nullification or impairment" to be 
taken into account in this case are those relating to  the nullification or impairment arising for Brazil 
from the subsidies at issue, while the broader ec onomic consequences of the suspension may include a 
consideration of the economic consequences of  the suspension both for Brazil and for the 
United States.   
5.90 The terms of subparagraph (d), which require these elements to be taken into account in 
applying the principles of subparagraph (c), make it clear that an assessment  of whether same-sector 
or same-agreement suspension is "not practicable or  effective" and of whether "the circumstances are 
serious enough" may legitimately, and indeed should , take into consideration not only the trade to 
which the suspension would apply, but also the ec onomic consequences arising from the suspension.   
5.91 With these considerations in mind, we now turn to consider whether a plausible determination 
that it is not practicable or effective to suspend ob ligations in trade in goods alone could be made in 
this case, and that the circumstances are serious enough, so that an authorization to suspend 
concessions or other obligations also under the TRIPS Agreement and the GATS could be given.  
2. Factual assumptions  
5.92 As we have found above, our manda te requires us to consider whether Brazil has followed the 
procedures and principles of Article 22.3 of the DSU,  in determining that it is not practicable or 
                                                      
241 Decision by the Arbitrator, US – Gambling (Article 22.6 – US) , para. 4.34. 
242 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC ), paras. 85-86.  See also  
Decision by th e Arbitrator, US – Gambling (Article 22.6 – US) , para. 4.35. WT/DS267/ARB/2 
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  effective to suspend concessions in trade in goods and in the agreements of Annex 1A and that the 
circumstances are serious enough. 
5.93 In making its determinations, Brazil assumed that the countermeasures would be in the 
amount that it had requested, namely, a total of  US$1.037 billion in relation to the actionable 
subsidies at issue in these proceedings (ML a nd CCPs).  We have determined, however, that 
countermeasures in an amount of US$147.3 millio n annually would be "c ommensurate with the 
degree and nature of the adverse effects determined to exist" in this case.   
5.94 In addition, our determination in these proceed ings takes place against the background of 
another arbitration proceeding c oncerning prohibited subsidies, in which Brazil had requested 
countermeasures in the amount of US$1.294 billi on annually for the GSM 102 programme and 
US$350 million for the Step 2 programme.  The arbitrat or in those proceedings has determined that 
countermeasures in the amount of US$147.4 million243 would be "appropriate" within the meaning of 
Article 4.10 of the SCM Agreement .244   
5.95 These circumstances raise two questions for our consideration.  First, we must consider 
whether, for the purposes of our assessment, we mu st take into account the cumulated amount of 
countermeasures resulting from both proceedings or only the amount arising from this Decision.  Secondly, we must consider what are the implications of the fact that Brazil has assumed, in making 
its determination, an amount of countermeasures si gnificantly in excess of the amount that has been 
determined to be permissible.  
(a) Whether it is appropriate to consider the cu mulated amount of countermeasures arising from 
both proceedings 
5.96 Although the arbitral proceedings relating to  the prohibited and actionable subsidies 
respectively were conducted in parallel, they relate to different aspects of the DSB's findings in this 
dispute and are legally distinct.  In both cases, Br azil has requested an authorization to apply the 
proposed countermeasures in the form of suspen sion of obligations under the GATS and the TRIPS 
Agreement, as well as under trade in goods.  The ques tion therefore arises as to the extent to which 
the Arbitrator in these proceedings must take into ac count the determinations of the arbitrator in the 
other proceedings, in assessing whether Brazil h as followed the principles and procedures of 
Article 22.3 of the DSU.  
5.97 Brazil considers that the amount of counterm easures on prohibited subsidies and the amount 
of countermeasures for actionable subsidies should be  cumulated in considering whether suspension 
of concessions or obligations in the goods sector is practicable or effective.  Brazil observes that the 
total amount of countermeasures is part of the objective reality in which the Member operates  and in 
which it undertakes its consideration of the prac ticability or effectiveness of the countermeasures 
under Article 22.3 of the DSU.
245 
5.98 The United States argues that, since the Arbitrator  should issue two separate reports to reflect 
the two separate arbitration proceedings, sep arate assessments of Brazil's requests for 
countermeasures under the GATS and the TRIPS Agreement would be needed.246  However, the 
United States also considers that the Arbitrator in  each proceeding may consider the circumstances of 
the other proceeding.  Consequently, the Arbitrator in one proceeding may take account of 
                                                      
243 We note that this is not a fixed amount, so it may vary over time.  However, at this stage of our 
analysis, we find it appropriate to rely on the amount that has been calculated in relation to FY 2006. 
244 See WT/DS267/ARB/1, para. 4.278. 
245 Brazil's responses to questions from the Arbitrator, question 9, para. 133. 
246 US responses to questions from the Arbitrator, question 9, para. 47.  WT/DS267/ARB/2 
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  countermeasures awarded in the other proceeding in de termining if the total of the countermeasures in 
the two proceedings together would justify suspending concessions under another sector or 
agreement.247    
5.99 We first take note of the parties' agreement th at, even in the context of separate assessments 
under the two proceedings, the Arbitrator in each pr oceeding would be entitled, in the circumstances 
of this case, to take account of the amount of co untermeasures awarded in the other proceedings.  
5.100  The determinations arising from this Decision are only in relation to the countermeasures 
concerning the subsidies covered by these proceedi ngs, namely Brazil's proposals in relation to the 
marketing loan and countercyclical payments.  At the same time, we ag ree that it is appropriate for us 
to take into account the amount of countermeasur es to which Brazil is entitled to under the other 
proceedings.  As Brazil has expressed it, the amou nt of countermeasures determined in the other 
proceedings is "part of the objective reality in wh ich the Member operates".  We assume that both 
amounts would be applicable at the same time a nd that the two amounts of countermeasures would 
potentially be applied cumulatively by Brazil.  This circumstance may have an impact on an 
assessment of whether it is "practicable or effective"  to seek countermeasures in the same sector or the 
same agreement and whether "the circumstances are serious enough".  As observed above, the parties 
agree that we can adopt a cu mulative approach in this case.248   
5.101  We will therefore take into account the cumula ted level of countermeasures arising from both 
decisions, which amounts to US$294.7 million annually, in reviewing whether Brazil has followed the 
principles and procedures of Article 22.3 of the DS U in determining that it is not practicable or 
effective to seek to suspend concessions or other ob ligations in trade in go ods alone and that the 
circumstances are serious enough.   
(b) Implications of the difference between the le vel of countermeasures requested by Brazil and 
the level determined to be permissible 
5.102  The amount of the countermeasure is a central aspect, possibly the most critically important 
aspect, of the consideration required to be undert aken by a complaining Member in following the 
principles and procedures of Article 22.3 of the DSU.   
5.103  In these proceedings, Brazil has assumed, in  applying the procedures and principles of 
Article 22.3, that it would be entitled to a to tal amount of countermeasures in the amount of 
US$2.681 billion (US$1.644 billion in relation to the prohibited subsidies plus US$1.037 billion in 
relation to the actionable subsidies).  However, as we have determined a bove, the cumulated amount 
of countermeasures to which Brazil is entitled to is US$294.7 million.   
5.104  In this case, the amount of countermeasures that  we have determined to be permissible is 
significantly lower than the amount assumed by Brazil in its request, and this fact alone compels a 
finding that the complaining party has not followed the principles and procedures of Article 22.3.  We 
must therefore find that in adopting the assumption of a total of US$2.681 billion of countermeasures as the central "fact" underlying its consideration of Ar ticle 22.3, it did not properly consider, or cannot 
be taken to have properly considered, "the necessar y facts objectively".  Consequently, it cannot have 
properly applied the princi ples and procedures of Article 22.3 on the basis of these facts.  Therefore 
our finding must be that Brazil has not followed the principles and procedures as laid out in that 
Article. 
                                                     
 
247 US responses to questions from the Arbitrator, question 9, para. 48. 
248 See para. 5.99. WT/DS267/ARB/2 
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  5.105  It is not possible to go "back in time" for Braz il to rectify its request for the purposes of these 
proceedings, taking into account our determina tion relating to the permissible amount of 
countermeasures.249  However, Brazil will have the right to  present a request for countermeasures to 
the DSB at the level determined in this Decision.  Thus it would be both unreasonable and uninstructive to say nothing more about the way in which the principles and procedures should be applied to the lower countermeasure calculated by the Arbitrator.   
5.106  We recall in this context our de termination in paragraph 5.52 above that, should we determine 
that Brazil has not followed these procedures or pr inciples, we should articulate how the analysis 
could properly take place to the extent necessary to en sure that Brazil is in a position to apply these 
procedures and principles "consistent with paragra ph 3" and present a request  "consistent with the 
decision of the arbitrator" in a subsequent phase of  these dispute settlement proceedings, as foreseen 
in Article 22.7 of the DSU.   
5.107  In light of these considerations, and notwithst anding our determination that Brazil has not 
followed the principles and procedures of Article 22.3 because it based its determination on an amount of countermeasures which is significantly in  excess of the amount we have authorized, we 
thus now proceed to describe how, in our view, Artic le 22.3 should be applied in the context of a 
countermeasure in the amount of US$294.7 million. 
5.108  In conducting this analysis, we will take into consideration the elements and arguments that 
have been presented to us by Brazil and the Unite d States in these proceedings.  We recognize that 
Brazil applied these arguments to a significantly larg er amount of countermeasures.  What we aim to 
determine in our examination of this issue, is whether the considerations that Brazil has brought 
forward to explain why it considered that it is not  practicable or effective to suspend concessions or 
other obligations solely in trade in goods to th e level that it assumed it w as entitled to, would justify 
the same conclusion when applied to the level of co untermeasures that we have determined would be 
"commensurate with the degree and nature of the adverse effects determined to exist".  
3. Whether it is practicable or effective for Brazil to suspend concessions in trade in goods 
5.109  Although Brazil considers that the countermeasures must be assessed exclusively against the 
requirements of Article 7.9 of the SCM Agreement , Brazil claims that it h as, in any event, followed 
the principles and procedures of Article 22.3 of the DSU.  Specifically, Brazil considers that it is not 
practicable or effective to suspend concessions or other obligations exclusively under trade in goods, 
and that the circumstances are serious enough to jus tify suspension of concessions or other obligations 
under TRIPS and GATS.
250  Brazil also argues that it considered the elements under Article 22.3(d) of 
the DSU.251   
5.110  The United States argues that the text of the DSU does not explicitly define what 
countermeasures are "practicable or effective", but th e negotiators were clear in their intention that 
this be a high bar.  Brazil does not reach this bar.  In the United States' view, Brazil advances a claim 
for cross-agreement and sector suspension of con cessions that is contrary to the Article 22.3 
disciplines.252  The United States therefore requests the Arbitr ator to reject Brazil's request to suspend 
                                                      
249 This is not to say that a Member could not base its consideration on a range of possible 
countermeasure amounts, in order to come before an arbitrat or in Article 22.6 proceedin gs and validly say that it 
did use a range of assumed facts, and arrived at the same or different outcomes in relation to cross-retaliation.  
In these proceedings that did not happen.  
250 Brazil's Methodology Paper, para. 144;  Brazil's written submission, para. 499. 
251 Brazil's written submission, para. 506. 
252 US written submission, para. 329.  WT/DS267/ARB/2 
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  concessions with respect to TRIPS and GATS for the reason that Brazil does not meet the 
requirements of Article 22.3.253 
(a) Main arguments of the parties 
5.111  Brazil states that it does not consider it adequa te to suspend concessions "by creating barriers 
to Brazilian imports of US goods  and thereby imposing additional costs on the Brazilian economy in 
general."254   
5.112  The United States  considers that this claim runs head long into the thoughtful and purposeful 
design of the DSU system.  According to the United States, the treaty negotiators specifically created 
a system where Members had to first resort to  suspension of concessions within the relevant 
agreement.  Suspension of concessions with respec t to goods always entails creating barriers to 
another Member's goods and thereb y imposing additional costs on the sanctioning state's economy.  
The United States argues that the negotiators of  the DSU were well aware that suspension of 
concessions with respect to goods would be pain ful for both the sanctioned government and the 
sanctioning government.255  In the United States' view, if the me re fact of additional costs on Brazil's 
domestic economy were sufficient for suspension of c oncessions in the same sector to be not practical 
or effective, it could be argued th at any and all violations with re spect to goods would warrant cross-
agreement suspension of concessions.  The United Stat es argues that this approach is not compatible 
with the fact that designers of the DSU chose to impose disciplines on suspension of concessions.256 
5.113  The United States considers that it can demonstrate that Brazil can effectively and practicably 
suspend concessions with respect to goods, and that  any request by Brazil to suspend concessions 
across sectors or across agreements is not a reas onable and objective assessment of the conditions 
established by Article 22.3.257 The United States points out that Brazil imports a sufficient amount of 
goods from the United States to provide practicab le and effective suspension of concessions.  
Between 2005-2007, Brazil importe d between US$15.3 billion to US$24.6 billion annually in 
US goods.258  In consumer goods, excluding food a nd automotive goods, Brazil imported between 
US$1.125 billion and US$1.676 billion annually in  the same time period.  Including food and 
automotive goods in the consumer goods categor y, the level of imports jumps to between 
US$1.826 billion and US$2.717 billion annually.   
5.114  According to the United States, the level of bilateral trade between the United States and 
Brazil is thus sufficient to provide for suspensi on of concessions with respect to goods alone.  
Moreover, given Brazil's large and diverse ec onomy and the actual level of nullification and 
impairment incurred by the US policies at issu e, suspension in consumer goods alone should be 
effective and practicable.259  In the United States' view, the ec onomic size and the diversity of the 
economy makes it possible for Brazil to suspend con cessions in the goods sector without resort to 
exceptional cross-sector countermeasures.260 In the past, Brazil has proposed suspension of 
concessions in the amount of US$3.36 billion only in the goods sector in the Canada – Aircraft 
Credits and Guarantees (Article 22.6 – Canada)  dispute.  In the United States' view, it is difficult to 
understand why it was practicable and effective to suspend concessions in the goods sector in that 
                                                      
253 US written submission, para. 342. 
254 Brazil's Methodology Paper, para. 143. 
255 US written submission, para. 329. 
256 US written submission, para. 330. 
257 US written submission , para. 335. 
258 Exhibit US-62, US-ITC Export Data to Brazil. 
259 US written submission, para. 336.  The Arbitrator takes note that these US arguments are made in 
the context of Brazil's requested amount of countermeasur es, i.e., US$1.644 billion, for prohibited subsidies and 
US$1.037 billion for actionable subsidies respectively.    
260 US responses to questions from the Arbitrator, question 135, paras. 168-170. WT/DS267/ARB/2 
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  dispute while Brazil considers it is not practicable  or effective to suspend concessions in the goods 
sector in this case.261  
5.115  Citing the EC – Bananas  III (Ecuador) (Article 22.6 – EC)  arbitration, the United States 
argues that if a developing country, even one with  a relatively small and undiversified economy such 
as Ecuador, has sufficient bilateral trade in consum er goods to impose suspension of concessions, then 
it must do so.  Only where the government lacks the capacity to suspend concessions in the same 
agreement does the DSU permit the cros s agreement suspension of concessions.262 
5.116  Brazil  explains that it would not be feasible or reasonable to apply countermeasures on capital 
goods, intermediate goods and other essential inputs to  the Brazilian economy, which it says comprise 
95 per cent of Brazil's imports from the United States .  The costs involved in switching suppliers are 
normally prohibitive for capital goods and intermediate  goods.  In addition to prices, decisions on the 
purchase of capital or intermediate goods are conditione d by several factors that severely constrain the 
ability of producers to switch suppliers.  These f actors include:  (i) long-term contracts cannot be 
terminated easily or without heavy pecuniary penaltie s;  (ii) capital goods in particular are tailor-made 
to respond to the specific needs of the producer and are ordered many months or even years in advance;  (iii) in most industries, inputs must have the exact technical specifications that match the requirements of the machinery in place.  These specifications will be di fferent depending on the 
brand, origin, age etc. of the machinery that equips  assembly lines.  As a result, theoretically similar 
products are not substitutable;  (iv) intellectual pr operty protection and intra-company trade determine 
purchase decisions and curb the ability of producers to change suppliers.
263 
5.117  Moreover, Brazil says that its imports of c onsumer goods from the United States amount to 
US$1.27 billion.  Of that amount, almost US$1.1 b illion, or 86 per cent, correspond to medical and 
educational supplies, food, automotive goods and arms, sectors where, according to Brazil, any 
raising of barriers would entail serious a nd unreasonable costs to the Brazilian economy.264  In Brazil's 
view, the profile of Brazilian imports of consum er goods from the United States leaves very little 
room of manoeuvre for Brazil to adopt countermeasures that target such goods.265    
5.118  However, Brazil also considers that of the US$1.27 billion of  annual imports of consumer 
goods from the United States (in 2007), approximately US$28.5 million, or 2.2 per cent, can be 
considered as luxury goods, in relation to which,  arguably, the imposition of countermeasures would 
not be disproportionately costly to Brazil.  In Brazil's view, these luxury goods are consumed by a 
very small share of Brazil's population and an increa se in the costs of their importation is likely to 
generate limited impacts on th e Brazilian economy in general.266  
5.119  The United States observes that Brazil has failed to explain why, given the availability of 
alternative sources of supply, the suspension of co ncessions in the goods sector is not practicable or 
effective.  Rather, the United States argues, Braz il simply takes a broad category of goods out of 
consideration based on mere assertion.267  The United States considers that the goods sector is "all 
goods", and that while it may be appropriate to ex amine the negative impact on particular goods that 
are necessities, where goods are not necessities or wh ere alternative sources of supply are available, 
                                                      
261 US oral statement, para. 71. 
262 US written submission, para. 333. 
263 Brazil's responses to questions from the Arbitrator, question 140, para. 334. 
264 Brazil's responses to questions from the Arbitrator, question 140, para. 336. 
265 Brazil's written submission, para. 516. 
266 Brazil's written submission, para. 523. 
267 US responses to questions from the Arbitrator, question 135, para. 171.  WT/DS267/ARB/2 
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  there is no basis to assert that suspension of concessions for those goods is not practicable or 
effective.268 
5.120  Brazil considers that the United States bears th e burden of proving that it is practicable and 
effective for Brazil to change suppliers when ta king countermeasures in the goods sector alone, and 
that merely identifying that alternative sources of  supply exist for some products is not sufficient.269  
In this regard, Brazil considers that the United St ates failed to demonstrate that countermeasures in 
the goods sector alone is "practicable" and "effective".270 
5.121  Brazil considers that the crucial question is not  whether alternative sources of supply exist, 
but whether it would be feasible and sensible for Braz il, in practice, to force its economic agents to 
switch to other suppliers.  Such analysis would ha ve to take into account, among other factors, the 
US share in Brazil's total imports; the price levels of alternative suppliers; technical specifications and 
product differentiation; intellectual property and in tra-company trade restrictions; and the economic, 
welfare and inflationary costs resulting from the disruption of production and supply chains.271  Brazil 
considers that the burden is on the United States to explain why and how the US imports can be 
replaced by imports from other sources, so that it is practicable for Brazil to take countermeasures 
only in the goods sector.272 
5.122  The United States comments that Brazil focuses on an even narrower scope of products than 
the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC)  did.  In that dispute, the arbitrator 
looked at the category of consumer goods because the suspension of concessions on these goods could 
not cause any direct adverse effects on Ecuador's domestic manufacturing and processing industries.  
The United States says that there is no reason to ex clude such end use products as "books" and "food" 
(which Brazil indicates as necessity commodities) fr om the products for applying countermeasures.  
Also, the United States considers that the potential co st of changing suppliers is not unusual, but an 
expected result of suspension of concessions.  The United States' main point is that Brazil is not 
constrained to the narrow range of choices of goods as it suggests given that it is one of the world's 
largest economies and it has many sources of supply.273  
5.123  Brazil further argues that within the very lim ited scope of consumer goods that Brazil has to 
target, the costs and welfare-reducing effects resulting from the adoption of countermeasures 
exclusively in that sector would render such an a lternative not practicable.  In Brazil's view, the 
additional costs generated by these measures would a dd to inflationary pressures – at a time when 
increasing prices have pointed to a worrying inflationary scenario – and would limit access of Brazilian consumers to these impor ted goods, negatively affecting Brazil's economy and the welfare 
of its population.
274 
5.124  Furthermore, in Brazil's view, any measures that are contrary to the objectives of a developing 
country to ensure steady and sustainable development; to pursue high growth rates; to fight poverty; 
and to promote the increased welfare of its popul ation within a stable macroeconomic environment 
will necessarily be costly and impracticable by definition.275  Brazil also contends that the 
significantly unbalanced nature of the trade relati ons between Brazil and the United States, and the 
considerable economic differences between the tw o countries, render the suspension of concessions 
                                                      
268 US responses to questions from the Arbitrator, question 135, para. 166. 
269 Brazil's responses to questions from the Arbitrator, question 140, para. 337. 
270 Brazil's responses to questions from the Arbitrator, question 140, para. 349. 
271 Brazil's responses to questions from the Arbitrator, question 140, para.  337. 
272 Brazil's comments on US responses to questions  135 from the Arbitrator, Paras 394.. 
273 US comments on Brazil's responses to questions from the Arbitrator, question 140, paras. 179-181. 
274 Brazil's written submission, paras. 517-519. 
275 Brazil's written submission, para. 520. WT/DS267/ARB/2 
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  and other obligations under trade in goods alone ne ither practicable nor effective as a response to the 
United States' failure to comply with its obligations.276  
5.125  In Brazil's view, countermeasures that are simply most likely to add to those costs and effects 
are not practicable, as the Brazilian Government does not consider that they could be employed in 
practice.277  
5.126  Brazil also considers that countermeasures restri cted solely to trade in goods may not have 
sufficient political influence to press for the United St ates' withdrawal of the billions in US dollars 
annually paid subsidies or to remove their adverse effects.  Therefore, such  countermeasures are not 
"effective" for the purpose of encouraging compliance.278 
5.127  Brazil submits that, at the very least, it "could plausibly arrive at the conclusion that it was not 
practicable or effective for it to suspend con cessions and other obligations" in respect of the 
importation of goods alone.279  Brazil reiterates that, besides being authorized to take countermeasures 
under trade in goods, it needs to have the option to suspend concessions or  other obligations under 
TRIPS and GATS.  In this regard, Brazil is seeking to take counter measures that "produce the greatest 
likelihood of compliance with minimal damage to its own economy", as commented by the United 
States itself in a DSB meeting adopting the arbitration report in EC – Bananas III (Ecuador) 
(Article 22.6 – EC) .280  
(b) Analysis by the Arbitrator  
5.128  We recall our determination above that Braz il cannot be taken to have applied a proper 
consideration of the principles and procedures of Article 22.3, because the amount of the countermeasure it assumed was much greater than the countermeasure determined by the Arbitrator.  
Nonetheless we have proceeded further, to give gui dance whether, on the basis of the level of the 
countermeasures authorized under this Decision, and in the circumstances of the trade between the 
two Members involved, an objective and plausible conclusion could be reached that it is "not 
practicable or effective" to seek suspension in tr ade in goods alone and that "the circumstances are 
serious enough".   
5.129  We also recall that, as we have explained in our preliminary observations above, we will take 
into account in our review of Brazil's determinati ons the amount of countermeasures that we have 
determined that Brazil is entitled to, in relation to the ML and CCPs (US$147.3 million), as well as 
the amount of countermeasures determined to be "app ropriate" in the separate proceedings relating to 
the prohibited subsidies at issue in the underlying dispute (US$147.4 million).  The total amount of countermeasures in relation to which we cons ider Brazil's determinations is therefore 
US$294.7 million.  
(i) Initial observations 
5.130  Brazil observes at the outset that it would not be adequate to suspend concessions "by 
creating barriers to Brazilian imports of US goods and thereby imposing additional costs on the 
Brazilian economy in general".  The United States  responds that suspension of concessions with 
respect to goods always entails creating barrier s to another Member's goods and thereby imposing 
additional costs on the sanctioning state's economy, and that the DSU negotiators were "well aware 
                                                     
 
276 Brazil's written submission, para. 521. 
277 Brazil's written submission, para. 522. 
278 Brazil's written submission, para. 524. 
279 Brazil's written submission, para. 526. 
280 Brazil's written submission, para. 52 7;  WT/DSB/M/78, paras. 44-45.  WT/DS267/ARB/2 
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  that suspension of concessions with respect to  goods would be painful for both the sanctioned 
government and the sanctioning government".  If the me re fact of additional cost on Brazil's domestic 
economy were sufficient for suspensi on of concessions in the same sector not to be practical or 
effective, the United States observes, then it could be argued that "any and all violations with respect 
to goods would warrant cross-retaliation".   
5.131  We agree with the United States that "the mere  fact of additional cost on Brazil's domestic 
economy" would not be sufficient, in and of itself, to conclude that suspension of concessions or other 
obligations is "not practicable or effective" within  the meaning of Article 22.3 of the DSU.  To the 
extent that the imposition of a barrier to trade on certain imports inherently  generates economic costs 
on the Member imposing them, the suspension of co ncessions on trade in goods may always have the 
potential to cause some harm to the economy of th e Member imposing the barriers.  To assume that 
this inherently would justify recourse to cross-re taliation would amount to reading out of Article 22.3 
the principle contained in subparagraph (a).  Rather , subparagraphs (b) and (c ) of Article 22.3 set out 
the specific circumstances in wh ich a complaining Member may be entitled to seek to suspend 
concessions in another sector or another agreement,  whatever the sector in which the violation was 
found.   
5.132  At the same time, as we have observed in our analysis of the terms "not practicable or 
effective" above, it is quite possible that the pot ential costs associated with the suspension of 
concessions or other obligations in a given sector or  under a certain agreement would precisely be of 
such an extent and magnitude that such suspension is  "not practicable or effective".  The fact that 
subparagraph (d) requires a consideration of the "b roader economic consequences of the suspension" 
further confirms, in our view, that it is appropriate  and legitimate for the complaining party to take 
into account the potential costs that may be associated  with the suspension, and not simply the legal 
feasibility of that suspension, in a determination of whether it is "practicable or effective".  
5.133  In short, a consideration of the economic costs associated with the suspension is legitimate, 
but it is not just any economic costs associated with the suspen sion of concessions or other obligations 
in a given sector or agreement that would justify a conclusion that such suspension would be "not 
practicable or effective".  Rather, the costs at issue would have to be of such extent and magnitude as 
to render the suspension "not practicable or effective".  
5.134  In these proceedings, Brazil has provided general explanations as to the profile of its trade 
with the United States, which in its view affect its ability to suspend concessi ons or other obligations 
in trade in goods, as well as specific explanations wh y it considers that it would not be practicable or 
effective to seek to suspend obligations with respect  to certain categories of imports of goods from the 
United States, so that the range of imports that it can actually target is very limited.  Finally, Brazil 
also argues that, even within the range of produc ts that it could target, suspension would not be 
"practicable or effective", for various reasons .  We consider these three aspects in turn.   
(ii) Overall profile of US imports of goods to Brazil 
5.135  Brazil argues that there is a great imbalance of trade between Brazil and the United States, 
and that its imports account for only a small sh are 1.7 per cent (or US$18.7 billion) of total 
US exports (US$1.16 trillion)  Hence an increase  in tariffs imposed on this trade would not 
sufficiently affect the United States and therefore w ould be an ineffective response to the continued 
violation of its obligations in this dispute.281  
5.136  In Brazil's view, it would be much easier for the United States to redirect 1.7 per cent of its 
exports to other destinations than for Brazil to fi nd suitable alternative sources for its imports.  Brazil 
                                                      
281 Brazil written submission, para. 514. WT/DS267/ARB/2 
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  is much more dependent on imports from the Un ited States.  Brazil indicates that among the top 
20 products in the list of Brazil's imports from th e United States, the United States accounts for more 
than 50 per cent of total Brazilian imports in 12 cases, and greater than 90 per cent of Brazilian 
imports in five of these products.282  Brazil also presented an exhibit showing that out of the 
30 HS chapters in value of imports that represen ts 96 per cent of total Brazil's imports from the 
United States in 2007, the US share was above 10 pe r cent in 26 cases.  This share was higher than 
20 per cent in 20 cases and above 30 per cent in eight cases.283 
5.137  The United States responds that the difference be tween the percentage of US imports into 
Brazil and the percentage of Brazil's imports into th e United States is not the question.  The question 
is whether, within trade from the Un ited States that does occur, it would be practicable or effective to 
impose countermeasures in goods.  The United Stat es considers that Brazil, in fashioning its 
countermeasures, could take into account the difficu lty of finding substitute goods from other sources 
(e.g., focusing on luxury goods to the extent possibl e, where increased costs would have little impact, 
and then exploring other goods wher e substitute goods are available).284 Given the size and diversity 
of the Brazilian economy, and the availability of goods from other countries or from Brazil itself, 
Brazil has many tools at its disposal to apply countermeasures within the goods sector.285 
5.138  The United States further observes that Brazil is  an important market for the United States, 
which exported between US$15.3 a nd US$24.6 billion annually to Br azil between 2005 and 2007.  If 
Brazil suspends concessions in the goods sector, it would deprive the United States of access to the 
important Brazilian market.  At a time of economic ch allenges, loss of this large market would lead to 
a serious economic cost.286 
5.139  We take note of the fact that the total annua l value of trade in goods from the United States 
represents more than 15 per cent of Brazilian impor ts overall, and that this represents less than 
2 per cent of total US exports of goods.  We are no t persuaded, however, that this "imbalance" that 
Brazil describes in its trade in goods from the Unite d States would in itself be a sufficient basis to 
conclude that a suspension of c oncessions or other obligations in re lation to such goods would be "an 
ineffective response", as Brazil argues.  In order to arrive at the conclusion that suspension in a given 
sector or agreement is not "practicable or effectiv e", a more detailed consideration of the possibilities 
for suspension of concessions or obligations within the range of imports that could potentially be 
targeted is appropriate, especially where the total level of imports is not insignificant and greatly 
exceeds the level of permissible countermeasures to which the complaining party is entitled.  
5.140  We note that the total value of Brazil's impor ts of goods from the United States, as estimated 
by Brazil, is US$18.7 billion.  The United States estimates these imports at between US$15.3 and US$24.6 billion annually.  Brazil's estimation of th e value of its total imports of goods from the 
United States is therefore within th e range cited by the United States.  
5.141  These figures suggest that, in principle, Braz il has at its disposal a total value of 
US$18.7 billion of US exports that could potentially be subjected to suspension of concessions or 
other obligations.  The question we must now c onsider is whether Brazil could plausibly have 
considered that, from those imports, it is not practic able or effective to suspend concessions or other 
obligations under the agreements on trade in goods  alone, to a level of US$294.7 million.  We are 
aware that Brazil, in making its determination, w as assuming that it would be entitled to a total level 
of suspension significantly in excess of this figure an d we have already outlined why it is that we are 
                                                     
 
282 Brazil's written submission, para. 515. 
283 Brazil's oral statement para. 124. 
284 US responses to questions from the Arbitrator, question 68, paras. 202-203. 
285 US responses to questions from the Arbitrator, question 68, para. 206. 
286 US oral statement, para. 69.  WT/DS267/ARB/2 
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  reviewing the application of the principles and pr ocedure of Article 22.3 despite that supervening 
obstacle to Brazil's claim in the circumstances of this  case (i.e. that it did not actually undertake the 
consideration that it would have had to have done in order to argue its position before the Arbitrator).   
5.142  We recall our determination above that whether suspension in a given sector or agreement is 
"practicable" essentially relates to whether it is availa ble or feasible in practice.  This question is in 
part answered by a consideration of the total leve l of trade, to which suspension of concessions or 
other obligations could be applied.  To the extent th at the total level of imports from the United States 
exceeds the total value of imports to which suspen sion could apply, such suspension is at least 
available in principle.  We also recall our determin ation that whether suspension in a given sector or 
agreement is "effective" relates more directly to the question of whether the complaining party could 
effectively make use of the authorization, and that  this may in particular depend on the extent to 
which that party would cause itself significant harm in suspending concessions on the imports 
concerned, to such an extent that th e suspension would not be effective.   
5.143  Bearing in mind these general considerations, we now consider Brazil's arguments to the 
effect that it only has, in fact, limited scope to seek suspension in relation to its imports of goods from 
the United States. 
(iii) Detailed profile of US imports to Brazil and ava ilability of suspension in relation to various 
categories of imports 
5.144  Among its US$18.7 billion of annual imports from the United States, Brazil indicates that 
95 per cent is composed of imports of intermed iate goods, capital goods, and other essential inputs 
into Brazil's economy.  Brazil argues that the costs involved in switching suppliers are normally 
prohibitive for capital goods and intermediate  goods.  Brazil further argues that, of the 
US$1.27 billion of annual imports of  consumer goods from the United States, almost US$1.1 billion, 
or 86 per cent, correspond to medical and educa tional supplies, food, automotive goods and arms, 
sectors where any raising of barriers would enta il serious and unreasonable costs to the Brazilian 
economy.287 We consider in turn Brazil's determinatio n relating to capital, intermediate and other 
input goods, and its determination in relation to consumer goods.  
Capital goods, intermediate goo ds and other goods constituting inputs into Brazil's economy  
5.145  Brazil observes that in addition to prices, decisi ons on the purchase of capital or intermediate 
goods are conditioned by several factors that sever ely constrain the ability of producers to switch 
suppliers, including long-term cont racts that cannot be terminated easily or without heavy pecuniary 
penalties, the fact that capital goods in particular are tailor-made to respond to the specific needs of 
the producer and are ordered many months or even year s in advance, the fact that in most industries, 
inputs must have the exact technical specifications that match the requirements of the machinery in 
place, as well as the fact that intellectual prope rty protection and intra-company trade determine 
purchase decisions and curb the ability of producers to change suppliers.288  
5.146  The United States does not specifically comment on Brazil's assessment that suspension of 
concessions in relation to capital, intermediate or  other input goods would not be practicable or 
effective.  The United States generally considers, however, that Brazil takes a broad category of goods 
out of consideration based on mere assertion, and th at "while it may be appropriate to examine the 
negative impact on particular goods that are ne cessities, where goods are not necessities or where 
alternative sources of supply are available, there is no basis to assert that suspension of concessions 
for those goods is not practicable or effective".  
                                                      
287 Brazil's responses to questions from the Arbitrator, question 140, para. 336. 
288 Brazil's responses to questions from the Arbitrator, question 140, para. 334. WT/DS267/ARB/2 
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  5.147  We note that the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC)  considered a 
comparable argument in relation to "primary goods  and investment goods".  In approaching this 
question, the arbitrator made the following assumption: 
"[W]e presume that the suspension of c oncessions on imports by Ecuador from the 
European Communities of those types of  goods and the imposition of additional 
tariffs would increase the cost of domestic production in the absence of alternative 
sources of supply at a similar price".289 
5.148  The arbitrator in that dispute then cons idered whether the European Communities had 
provided sufficient information and evidence to dem onstrate that alternative sources of supply existed 
for these products at a similar price.  It ultimatel y concluded that the European Communities had not 
succeeded in rebutting Ecuador's argument that switching to other than EC sources of supply would involve transitional costs of adjusting to those sources of supply, which Ecuador considered were 
relatively significant for it as a developing country. 
5.149  We first note, as the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC) did in 
relation to "primary goods and investment goods",  that suspension of concessions in relation to 
capital, intermediate or other input  goods, which constitute direct input s into domestic production, has 
the potential to be damaging to economic operato rs domestically.  We also note the arguments 
presented by Brazil to explain why, in relation to such goods specifically, it may be especially 
difficult to have recourse to alternative suppliers without significantly upsetting the supply chain.   
5.150  We see merit in this argument particularly in relation to capital and intermediate goods, 
although we consider it may have less force in re lation to primary goods which are more homogenous 
in character.  It could be expected that a signi ficant proportion of imports of goods constituting inputs 
for manufacturing or processing are in the form of such primary goods, for which alternative sources of supply may be more readily available than for certain other more differentiated products.
290   
5.151  However, the United States has not specifically addressed this question or attempted to rebut 
Brazil's arguments by identifying such imports.  Although the United States has presented a number 
of examples of products in relation to which Brazil could, in the view of the United States, easily find 
alternative suppliers, none of these examples appear to  relate to capital, inte rmediate or input goods 
(except arguably computers, discussed below).291  We also note the acknowledgement, by the United 
States, that it could be appropriate to consider the negative impact of suspension of concessions in 
relation to goods that are "necessities".  
5.152  There remains a question of definition of the scope of capital goods, as far as computers are 
concerned.  Brazil considers that computers, in relation to which the United States argues that Brazil 
has the opportunity to import from other sources than the United States, are capital goods, in relation 
to which it would be harmful to retaliate.  The United States has not specifically responded to this 
assertion. The United States has also not indicated what level of imports computers represent.292 
                                                      
289 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC) , para. 91. 
290 We note, in this context, that with respect to  agricultural goods specifica lly, Brazil's experts state 
that: "Agricultural goods are largely undifferentiated,  relatively homogeneous and therefore highly fungible." 
(Annex 1 to Brazil's written submission (the  "Sumner-Sundaram Statement", para. 8). 
291 See US oral statement, para. 70.  The United Stat es identifies the followi ng product categories as 
examples of goods for which alterna tive sources of supply can be found easily: passenger cars, antibiotics, 
computers, salmon. See also Brazil's responses to questions from the Arbitrator, question 140, para. 344. 
292 We note in this respect that Exhibit US-109, presented by the United States for the purposes of 
illustrating the US share of imports to Brazil in various product categories, was contested by Brazil, who stated 
that this table was in fact erroneous and represented th e share of that HS chapter in Brazil's imports from the  WT/DS267/ARB/2 
 Page 81 
 
 
  5.153  In light of the elements presented to us, a nd in the absence of any sufficiently specific 
argument of the United States to the effect that suspension in relation to capital goods, intermediate 
goods or other inputs into the Brazilian economy would be  practicable or effectiv e, we accept, for the 
purposes of our determination, Brazil's position that it would not be practicable or effective to seek to 
suspend concessions or other obligat ions in relation to imports of capital, intermediate and other 
essential inputs into Brazil's economy.   
Consumer goods  
5.154  Brazil further argues that, of the US$1.27 billi on of annual imports of  consumer goods from 
the United States, almost US$1.1 billion, or 86 per cent, correspond to medical and educational supplies, food, automotive goods and arms, sectors wh ere any raising of barriers would entail serious 
and unreasonable costs to the Brazilian economy.
293  
5.155  The United States provides different figures fo r Brazilian imports of consumer goods from the 
United States.  It states that, including food a nd automotive goods in the consumer goods category, 
Brazil imported between US$1.826 billion and US$2.717 billion annually from the United States 
between 2005-2007.294  Excluding food and automotive goods, the United States estimates that Brazil 
imported between US$1.125 billion and US$1.676 billi on in consumer goods annually in the same 
time period.  In the United States' view, given Brazi l's large and diverse economy and the actual level 
of nullification and impairment incurred by the US  policies at issue, suspension in consumer goods 
alone should be effective and practicable.295 
5.156  Neither party provides an explanation for th e significant differences in values that they 
present concerning Brazil's imports of consumer goods from the United States.  Apart from the fact that Brazil uses import data and the United States re lies on export data, the most likely explanation for 
the difference is that the parties do not have the same definition of consumer goods.  However, it is 
not possible to confirm this since the United States has provided only an aggregate figure and does not 
provide a listing of the individual tariffs lines (as Br azil does) of what it cons iders to be consumer 
goods.
296  
5.157  In light of these elements, and given that th e United States has not explained why Brazil's 
classification of consumer goods would be incorrect  and provides no detailed list of its own, the 
Arbitrator assumes, for the purposes of its analysis, that Brazil's figures in respect of consumer goods 
(as found in Exhibit Bra-754) reflect an adequate classification of such goods (see Table 3).  At the same time, we take note of the fact that there is a very significant difference between the two sets of 
figures presented, and that Brazil's total figure for imports of consumer goods from the United States 
is more than 50 per cent lower than those presente d by the United States, for the same categories of 
products.   
                                                                                                                                                                    
 
United States, rather than the US share in Brazil's total imports. See Brazil's oral statement, paras. 122-123. The 
United States did not present alternative figures.  
293 Brazil's responses to questions from the Arbitrator, question 140, para. 336. 
294 US written submission, para. 336 and Exhibit US-62. 
295 US written submission, para 336. 
296 The only specific product category, the classification of which the parties have discussed, is 
"computers".  In response to an argument that Brazil has alternative sources of supply  for computers,  Brazil has 
responded that computers are "capital goods", in relation to which it would not be appropriate to suspend 
obligations.  It is therefore possible that the United States classifies computers as "consumer goods", while 
Brazil has classified them as "capital goods".  However, we are not in a position to determine what impact this difference in classification has, in the absence of fu rther information on the level of Brazilian imports of 
computers from the United States.  WT/DS267/ARB/2 
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  5.158  This means that, in principle, assuming that Braz il's figures are accurate, it has at its disposal 
a total value of at least US$1.127 billion worth of US imports of consumer goods to which suspension 
of concessions or other obligations c ould in principle be applied.   
5.159  We also note at the outset the followi ng observations of the arbitrator on EC – Bananas III 
(Ecuador) (Article 22.6 – EC) :  
"Suspension of concessions with respect to  consumer goods cannot cause any direct 
adverse effects on Ecuador's domestic manuf acturing and processing industries.  Thus 
Ecuador's main argument with respec t to investment goods and primary goods 
referred to above cannot apply with respect to  consumer goods.  It is also true that 
resulting price increases resulting from the suspension of concessions on consumer 
goods could cause welfare losses to end-c onsumers in the country suspending 
concessions."297   
5.160  Similarly, in these proceedings, it cannot be assu med that the types of economic costs that we 
have accepted would be likely to arise as a result of  a suspension affecting capital goods, intermediate 
goods and other goods constituting inputs into Brazi l's economy would be e qually relevant to 
consumer products.  While some welfare costs to end-consumers might arise in the event that the 
suspension leads to price increases, this would only o ccur if no alternative substitute is available at a 
comparable price.   
5.161  In light of the fact that the value of Br azil's annual imports of consumer goods from the 
United States (at least US$1.273 billion) significan tly exceeds the total level of countermeasures that 
it is entitled to take (US$294.7 million), it would th erefore in principle be possible for Brazil to 
suspend concessions or other obligations entirely in  relation to imports of  consumer goods from the 
United States.  
5.162  However, Brazil suggests that, out of the US $1.273 billion of consumer  goods that it imports 
from the United States, a total of only US$182.8 m illion would potentially be available for suspension 
of concessions or other obligations, once the sectors where raising of barriers would entail "serious 
and unreasonable costs to the Brazilian economy" are deducted.   
Table 3: Total Consumer Goods imports from the United States 
 
(in US$millions) 2007 
Total Consumer Goods Imports from the United States   1,273.1 (=)  
Tag*  Description  
Medical Medicines and other medical or safety products   909.5 (-) 
Food Food Products   88.7 (-) 
Books Books, teaching material and related products   28.9 (-) 
Arms Arms and ammunition   0.6 (-) 
Autos Automobiles and related goods   62.6 (-) 
Total minus selected groups of products   182.8 (=)  
Source : Exhibit Bra-754 
 
5.163  The United States considers, however, that Braz il has simply taken broad categories of goods 
out of consideration based on mere assertion, and that, while it may be appropriate to examine the 
negative impact on particular goods that are ne cessities, where goods are not necessities or where 
alternative sources of supply are available, there is no basis to assert that suspension of concessions 
                                                      
297 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC) , para. 100.  WT/DS267/ARB/2 
 Page 83 
 
 
  for those goods is not practicable or effective.  The United States observes that Brazil's economy is 
sufficiently diversified, that it could easily turn to other sources of supply, and that the key question is 
whether alternative sources of supply exist.  
5.164  Brazil considers that the crucial question is not  whether alternative sources of supply exist, 
but whether it would be "feasible and sensible for Braz il, in practice, to force its economic agents to 
switch to other suppliers".  Brazil identifies a number of considerations that would be relevant to such 
an assessment: "the US share in Brazil's total im ports; the price levels of alternative suppliers; 
technical specifications and product differentiati on; intellectual property and intra-company trade 
restrictions; and the economic, welfare and inflat ionary costs resulting from the disruption of 
production and supply chains".298    
5.165  We agree that the question of whether suspensi on of concessions or other obligations is 
"practicable or effective" is not strictly limited to whether alternative sources of supply exist, but 
involves a broader consideration of whether it would be  feasible, in practice, for Brazil to require its 
economic agents to switch to other operators, taking into account the ra nge of factors that may have a 
bearing on this question.   
5.166  Bearing this general observation in mind, we now  consider Brazil's arguments to the effect 
that suspension of concessions or other obligati ons on imports of medica l and food products, books, 
arms and automobiles would entail "serious and un reasonable costs".  In doing so, we recall that 
Brazil accepts that in relation to "other" cons umer goods, the costs of suspension would not be 
excessive.  This represents an amount of US$182.8 million of imports of consumer goods from the 
United States, in relation to which it is undisputed th at it would be practicable or effective to suspend 
concessions or other obligations. The margin betw een this figure and the amount of authorized 
countermeasures is small, in relative terms. 
5.167  The first category of consumer goods for which Br azil considers that the costs of suspension 
concessions would be "serious and unreasonable" is " medicines  and other medical or safety 
products."  This category, according to Brazil, represents a value of US$909.5 million in annual 
imports (2007).299  The United States observes that medical sterilizers exported by Brazil exceed the 
imported amount from the United States in 2007 (US$4.6 million in imports, US$1.5 million in 
exports).  The United States further notes that both China and Korea exported about twice as much 
antibiotics into Brazil as the United States in 20 08, by value, and that China and Korea both 
substantially increased their share of exports to Br azil from the prior year (19.4 per cent to 33 per cent 
for China and 13 per cent to 31 per cent for South Korea).  Brazil responds that a "big share" of 
purchases of antibiotics is made by the Ministry of Health after arduous price negotiations and following the rules of public procurement.  Theref ore, Brazil argues, finding other suppliers is not 
easy, and there are sometimes no alternatives at all.   Moreover, Brazil argues, increasing the costs of 
health care provision will affect the welfare of the people.   
5.168  We see merit in Brazil's argument with respect  to the specificities of the market and 
purchasing practices for certain pharmaceutical produc ts, which may make it difficult to freely switch 
suppliers with respect to such products.  We also note that, even within a given category of medicines, 
such as "antibiotics", products are not necessarily freely interchangeable.  Brazil has not provided 
exact indications, however, as to what proportion of its imports of "medicines and other medical or 
safety products" is subject to such purchasing practi ces or requirements, such that would allow us to 
                                                     
 
298 Brazil's responses to questions from the Arbitrator, question 140, para. 337. 
299 See Exhibit Bra-754, repro duced above as Table 3. WT/DS267/ARB/2 
Page 84 
 
 
  ascertain what proportion of such imports would be a dversely affected in the event of a suspension of 
concessions in this sector.300    
5.169  Brazil also excludes imports in the "food" and "books" categories from the range of consumer 
products that could be considered for suspension of  concessions.  The United States considers that 
there is no reason to exclude such end use pr oducts from the range of products to which 
countermeasures could be applied.   
5.170  With respect to food products , where US imports represent a total value of US$88.7 million, 
the United States notes for example that US$1.8 million of sugarless chewing gum is imported.  The United States also indicates that under the "food" category, US$10.071 million of pears and quinces were imported from the United States in 2007, but imports from Argentina jumped from US$73 million in 2007 to US$98 million in 2008. Brazil argues that more Brazilians have sufficient 
income today to buy food items than before and th at such social and econom ic development should be 
preserved at all costs.  However, Brazil accepts that certain items classified as food, could be 
considered luxury products, though the amount and va lue of such products is rather limited.   
5.171  Brazil therefore essentially argu es that, except for a limited range of foods that can be 
considered as luxury products, food products as a whole should not be targeted because "more 
Brazilians have sufficient income" than in the p ast to buy food and this  should be preserved.  
Naturally, if the suspension of concessions or othe r obligations were to deprive consumers of the 
opportunity to purchase food, it could legitimately be  concluded that such suspension would not be 
"practicable or effective".  However, this would only be the case if there was no opportunity to source 
the same or substitutable goods from other domestic or imported sources.  Brazil has not explained, 
however, why this would be the case with resp ect to the entire category of food products.
301   
5.172  With respect to books , for which it estimates the total value of imports from the United States 
at US$28.9 million, Brazil observes that increased ta riffs would be highly detrimental to the policy 
goal of increased access to education and the improvement of education standards.  Also, Article 150 VI (d) of the Federal Constitution exempts printed publications from import taxes, so that 
it is not practicable to take countermeasure on books .  We note that books, almost by definition, are 
totally differentiated products, such that it may not be  possible to assume that one title could easily be 
substituted for another. However, we also note that  many books have a primarily entertainment rather 
than educational purpose. 
5.173  Brazil also considers that the automotive sector  (for which imports from the United States 
amount to US$62.6 million annually) should not be targeted.  The United States observes that it accounts for less than 2 per cent of imports to Br azil of passenger cars in 2007-2008, and that auto 
parts, similarly, range from about 6 to about 8 per cent.  Brazil responds that many limitations, 
including intra-company restrictions, apply to auto parts, making it virtually impossible or extremely 
costly for this industry to change suppliers.  With respect to passenger cars, the main characteristic of 
                                                     
 
300 We observe that even within this sub-category of consumer go ods, there are items where the 
US share of imports is less than 20 per cent.  If one adds up the value of these imports of medical goods, where the US share was below 20 per cent in 2007, the total amounted to US$193.7 million. The import share is not 
the only relevant consideration in evaluating the ease of  sourcing alternative supplies, as domestic producers 
may also be potential suppliers. However, neither party has given us information on the US share of the market 
including domestic products. 
301 We note that Brazil's imports of food from the United States in 2007 accounted for only 10 per cent 
of its entire imports of food.  Adding up the value of those food imports where the US share was below 
20 per cent in 2007 gives an amount of US$33.2 million.  As noted above, the impot share is not the only 
relevant consideration in evaluating the ease of sourcing alternative supplies, as domestic producers may also be potential suppliers.  However, neither party has given us information on the US share of the market including 
domestic products.  WT/DS267/ARB/2 
 Page 85 
 
 
  trade in this sector, Brazil argues, is intra-comp any trade.  Countermeasures on cars of "General 
Motor do Brasil", and "Ford do Brasil", for exampl e, are unlikely to be well received by these 
subsidiaries and will affect their operations in Br azil.  Moreover, imports of vehicles from the 
United States rely on long-established networks of  authorized retailers and maintenance services, 
which make it virtually impossible for importers to  easily switch suppliers.  In addition, Brazil 
observes, car sales in Brazil fell more than 40 pe r cent in December 2008, and given the present crisis 
affecting the car industry worldwide, the Brazilia n Government has adopted several measures to 
improve the car market conditions including reduc ing the rates of federal tax on industrialized 
products.  Brazil considers that it is therefore not viable to adopt measures that will distort the car 
market and prevent consumers from reaping the bene fits of such incentives.  Finally, Brazil notes that 
it wishes to maintain the conditions of competiti on and prices prevailing in Brazilian car market.302  
We note that the US share of Brazil's imports in  the automotive sector is only 2 per cent, which 
suggests that only limited competitive pressure could be exerted through such imports.  However, we 
see merit in Brazil's arguments relating to the struct ure of trade in the automotive sector being such 
that a suspension could be harmful to Brazilian subs idiaries importing the cars.  We also agree that 
auto parts from different manufacturers are not necessar ily substitutable for each other.  In light of 
these elements and in the absence of specific ar guments from the United States disputing Brazil's 
description of the situation on the automotive market in Brazil, we accept Brazil's position that 
suspension in this sector would entail "serious and unreasonable costs".   
5.174  In the arms  category (annual value of imports from the United States estimated at 
US$0.6 million), the United States observes that Braz il has not indicated the extent to which these 
imported goods are to be used by the police, military , or others in the public service.  In response, 
Brazil indicated that "a very high percentage" of imports are to be used by the police or military and 
the level of imports of these products is  very low as shown by Exhibit Bra-754.303  This very general 
indication, however, expressed only in terms of "a very high percentage" does not allow us to 
ascertain exactly what amount of imports would fall into this category.  The total annual value of 
imports from the United States is in any event very small.   
5.175  The United States also observes that exports of computers from China to Brazil continue to 
outpace those from the United States, at 36.7 per cent in 2008 compared to 18.5 per cent.  Brazil 
considers, however, that computers are in the category of "capital goods", and that it would be unreasonable and very costly to impose additi onal hurdles on the importation of information 
technology products, as increased costs of informat ion technology products would have widespread 
effects on the whole economic structure and would have a direct negative impact on the welfare of Brazil's population.
304  Since the United States has not sufficiently rebutted Brazil's classification of 
consumer goods, we do not consider the treat ment of computers under this category.  
Conclusion  
5.176  Overall, in light of the above, we are not convi nced that Brazil could plausibly conclude that 
suspension of concessions or other obligations woul d entail "serious and unreasonable costs" in the 
entirety of these various sectors.  At best, Brazil ha s plausibly explained why suspension in relation to 
some imports within these categories of consumer goods might not be practicable or effective.   
5.177  We are therefore not convinced that Brazil c ould plausibly determine, on the basis of the 
elements presented to us in these proceedings, that it is not practicable or effective to seek to suspend 
concessions or other obligations in relation to the entirety of the broad range  of consumer products 
                                                      
302 Brazil's responses to questions from the Arbitrator, question 140, paras. 345-347. 
303 Brazil's comments on US responses to questions from the Arbitrator, question 135, paras. 395-397. 
304 Brazil's responses to questions from the Arbitrator, question 140, paras. 342-344. WT/DS267/ARB/2 
Page 86 
 
 
  that it proposes to exclude from consideration, in pa rticular in the areas where the US share of imports 
is relatively small. 
5.178  In light of the elements presented to us  as discussed above, we can accept Brazil's 
determinations, on the whole, in re lation to books and the automotive sector.  However, in relation to 
the categories of medical products, food and arms, we are not persuaded that Brazil could plausibly 
determine, on the basis of the elements that it has presented to us alone, that suspension would entail 
"serious and unreasonable costs" in relation to th e entire range of products in these sectors.   
5.179  We find it useful, in this context, to consider  the extent to which it may be expected that 
Brazil would in fact have alternative sources of supply at its disposal for these remaining product 
categories, as a further indication of whether Brazil could plausibly determine that it is not practicable 
or effective to suspend concessions or other obligations on such imports.   
5.180  We recognize that within the broad categori es of "medicines" and "food", certain products 
may not be readily substitutable.  In particular, we recognize that some medicines, including those 
that are subject to proprietary rights, may need to be sourced from a specific supplier.  We also recall 
our determination above that we see merit in Braz il's argument that certain medicines, such as 
antibiotics, are sourced through public procurement in  such a manner that a change in supplier may be 
impracticable.  We also note, however, that medical  products and food, as a whole and taken together, 
represent the vast majority of Brazil's consumer goods imports from the United States and that they 
both contain a very broad range of products.  Th e category "[m]edicines and other medical or safety 
products" thus include, for example, items such as  "[t]ooth brushes, incl. dental-plate brushes".305  In 
these circumstances, we find that the US share of imports in these product categories as a whole may 
provide a useful indicator of the likelihood of other sources of supply being available, and thus of the 
level of substitutability on the market , for these product categories.   
5.181  While there is no exact mathematical precision to this determination, we consider that, for the 
purposes of our assessment in these proceedings, a US  share of imports of 20 per cent constitutes a 
reasonable threshold by which to estimate the extent to which Brazil may be able to find alternative 
sources of supply for these three remaining categories of consumer goods imports.  This does not take 
into account the fact that the actual market shar e of US products might be smaller if domestic 
competition were to be included also, but we have  not been provided any figures that would have 
allowed us to estimate that.  In selecting this indi cative threshold, we also bear in mind our earlier 
determinations in relation to other categories of imports.  In particular, we recall that we have 
accepted Brazil's broad assertion that all capital goods, intermediate goods and other inputs in to the 
Brazilian economy should be excluded from considera tion.  We have also accepted Brazil's overall 
classification of consumer goods, including the excl usion of computers from this category. At the 
same time, in future arbitrations of this nature , a Member arguing against the plausibility of another 
Member's determination of the practicality and e ffectiveness of taking countermeasures only within 
the goods sector might present a more detailed and sci entific rebuttal of the determination made by 
that other Member.  In applying a benchmark of 20 per cent, this Arbitrator is not intending to signal that this is the appropriate percentage to  use in this kind of analysis in all cases. 
5.182  The table below (Table 4) reflects the results of this assessment.  It calculates the amount of 
Brazil's imports of consumer goods from the Un ited States that could be the subject of 
countermeasures.  It is based on data at the 8-digi t level of the tariff headings within the relevant 
consumer good categories, as reflec ted in Brazil's own submission.
306  The calculations proceed as 
follows.  First, it excludes the value of imports of books and autos from the United States reflecting 
Brazil's determination that suspension of con cessions in these sectors would entail "serious and 
                                                      
305 Tariff line 9603.21.00, Exhibit Bra-823. 
306 Exhibit Bra-823.  WT/DS267/ARB/2 
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  unreasonable costs".  Second, it includes imports  of "other" consumer goods, which amount to 
US$182.8 million, reflecting Brazil's acceptance that in relation to "other" consumer goods, the costs 
of suspension would not be excessive.  Finally, for food, pharmaceutical products and arms, it 
includes only the import value of those tariff lines wher e the US share in Brazil's imports is less than 
20 per cent.  For illustrative purposes, the table also includes the results of the same calculation for a 
10 per cent and 30 per cent threshold.  
Table 4: Amount of Brazil's imports of  consumer goods from the United States 
that could be the subject of countermeasures 
(Millions of dollars) 
 
Threshold Applicable to Food, Medical Products and Arms 
Item 
10% 20% 30% 
 - Food $11.0 $33.2 $48.8
 - Medical products $15.3 $193.7 $333.1
 - Arms $0.0 $0.0 $0.0
 
 - Books $0.0* $0.0* $0.0*
 - Autos $0.0* $0.0* $0.0*
 
 - Others $182.8** $182.8** $182.8**
All Consumer goods $209.1 $409.7 $564.6
 
 * In respect of Books and Autos, no amount is included, to take into account our determination that we 
accept Brazil's pos ition that suspension in thes e sectors would entail "serious and unreasonable costs".  
 
 ** In respect of the "Others" category, the total amount of imports from the United States is included, 
as Brazil accepts that suspension in these sectors would not entail "serious and unreasonable costs". 
 
 Sources :  Exhibit Bra-754 and Exhibit Bra-823.  
 
5.183  Using the 20 per cent benchmark for the shar e of the US imports (and not taking into 
consideration the availability of dom estic products that also can substitu te imports), the results of this 
calculation suggest that, even if we were to assume that Brazil would choose not to suspend 
concessions in any category of imports of capital go ods, intermediate goods and other inputs into its 
economy, and that it would also not suspend concess ions in books or the automotive sector, it would 
still have at its disposal imports  of other consumer goods from the United States amounting to a total 
value of at least US$409.7 million, from which to su spend concessions or other obligations.  This 
would therefore still leave a value of US imports of consumer goods significantly in excess of US$294.7 million, to which suspension could be applied.
307  
5.184  We also recall that, of these US$409.7 m illion of consumer goods imports from the 
United States, Brazil itself concedes that the costs would not be "serious and unreasonable", up to a 
                                                      
307 We also note that Brazil accepts that suspension of concessions in relation to certain items that 
could be considered luxury products, amounting to a total of US$28 million, would probably not lead to excessive costs on the Brazilian economy.  This amount may partially overlap with othe r categories, so we have 
not added it to the figures considered in this section.   WT/DS267/ARB/2 
Page 88 
 
 
  level of US$182.8 million.  This means that Brazil would only in fact need to find an additional 
amount of imports of other goods from the United States to a total value of US$112.1 million to 
which to apply the suspension of concessions or othe r obligations, in order to apply the full level of 
suspension that it is entitled to, on imports of goods from the United States.   
5.185  We further observe that the above calculation is made on the basis of the arguments and 
information provided by the parties.  For the purposes of the calculation, we have accepted Brazil's 
determinations in relation to cap ital goods, intermediate goods and other inputs into the economy, and 
also in relation to various categories of consumer  goods.  However, our analysis does not imply that 
Brazil necessarily has to retaliate in the categories in question.  It would in fact remain entitled to 
apply the suspension to any imports of goods that it chooses to target for suspension.  Keeping in 
mind that the overall amount of imports from the Un ited States to Brazil is US$18.7 billion, and that 
imports of consumer goods alone represent at leas t US$1.273 billion in total, we are confident that, on 
the basis of what was put before us in these proceedi ngs and at current levels, Brazil has at its disposal 
a sufficient level and variety of imports from the United States, to which it could apply the suspension 
that it is entitled to, without incurring "seri ous or unreasonable costs" to its economy.  
(iv) General considerations 
5.186  Even in relation to the range of imports in re lation to which Brazil considers that it could in 
principle be practicable to retaliate  (which it estimates at US$182.8 million)308, Brazil also argues that 
such suspension would not be practicable or effective,  due to its potential adverse welfare effects in an 
inflationary environment and also because any meas ures contrary to Brazil's development objectives 
should be avoided.  Brazil also generally argues th at the trade imbalance between the parties would 
render such suspension ineffective.  We  therefore now consider these aspects. 
General economic and welfare costs  
5.187  Brazil considers that "within the very limited scope of consumer goods that it has to target, 
the costs and welfare-reducing effects resulting fro m the adoption of counter measures exclusively in 
that sector would render such an alternative not practicable".   
5.188  As we have observed in para graph 5.133 above, a consideration of the economic costs 
associated with the suspension is legitimate, but it is not just any economic costs associated with the 
suspension of concessions or other obligations in a given sector or agreement that would justify a 
conclusion that such suspension would be "not practi cable or effective".  Rather, the costs at issue 
would have to be of such extent and magnitude as to render the suspension "not practicable or 
effective". We have also already considered in  detail Brazil's specific arguments relating to the 
economic and welfare costs of the suspension of  concessions and other obligations on various 
categories of US imports.  Even considering cons umer goods alone, our determ inations above suggest 
that, at current levels, Brazil has at  its disposal a total value of at least US$409.7 million of imports of 
goods from the United States, to which it could apply a suspension.   
5.189  This confirms to us that, in principle, Brazil has at its disposal sufficient imports of goods 
from the United States and elsewhere in order to allow it to suspend concessions on a total value of 
US$294.7 million of imports from the United States without incurring significant costs to its 
economy.  We further emphasize that nothing w ould compel Brazil to apply the suspension of 
concessions or other obligations "exclusively in that sector".  As we have ob served in paragraph 5.185 
above, Brazil would be entitled to apply the suspensi on to any imports of US goods that it chooses to 
target for suspension.  As we also observed above, keeping in mind that the overall amount of imports 
from the United States to Brazil is of US$18.7 billi on, and that imports of  consumer goods alone 
                                                      
308 Based on Exhibit Bra-754.  WT/DS267/ARB/2 
 Page 89 
 
 
  represent at least US$1.273 billion, we are confident th at, on the basis of what was put before us in 
these proceedings and at current levels, Brazil has at  its disposal a sufficient level and variety of 
imports from the United States, to which it could apply the suspension that it is entitled to, without incurring "serious or unreasonable costs" to its economy.  
Inflationary pressure
 
5.190  Brazil also argues that the adoption of counter measures exclusively in the small range of 
consumer goods that it has to target would add to  inflationary pressures at a time when increasing 
prices have pointed to "a worrying inflationary scenario" and would limit access of Brazilian consumers to these imported goods, negatively affec ting Brazil's economy and the welfare of its 
population.
309  
5.191  As evidence of the threat of inflation, Brazil, points out that all its price monitoring agencies 
have recorded rising inflation in 2008, whichever measuring standard is used.  As an example, it 
claims that the annualized change in the Broad C onsumer Price Index (IPCA), which is used as the 
standard inflation index by the Brazilian Central Bank, reached 5.9 per cent in 2008.310  Brazil 
contends that this surpassed the inflation target  of 4.5 per cent set by the Central Bank.   
5.192  As a result of these strong inflationary pressures,  it claims that the Brazilian Central Bank has 
been compelled to consistently raise basic interest  rates since the beginning of 2008.  After four 
consecutive increases, yearly basi c interest rates reached 13.75 per cent in September 2008, making 
Brazil one of the countries with the high est real interest rates in the world.311 
5.193  The United States does not dispute that there are co sts, including the risk of inflation, from 
imposing countermeasures on merchandise goods.  But it argues that countermeasures are by 
definition counter to WTO disciplines.  Furthermore,  given the size and diversity of Brazil's economy, 
and the availability of goods from other sources or from Brazil itself, it claims that Brazil has many 
tools at its disposal to apply countermeasures within the goods sector.312 
5.194  Brazil has provided sufficient evidence to show that  the threat of inflation seriously concerns 
Brazilian policymakers.  The United States has not dis puted the magnitude of the inflation rate in the 
country nor of the successive steps taken by the Ce ntral Bank to increase the interest rate.  However, 
we believe that while the risk of price incr eases from applying countermeasures on merchandise 
goods exist, it does not rise to a level where Br azil has no room to apply countermeasures on 
merchandise goods.   
5.195  The size of the countermeasures, at current le vels, is not large relative to the value of 
consumer goods imports from the United States.  We also note that the inflation index is based on 
domestic consumption, which is  made up predominantly of dom estically-produced goods. This 
suggests that countermeasures on merchandise goods imports may only have a limited impact on 
inflation given the composition of the basket of good s that enter into the calculation of the inflation 
index. 
Development objectives, imbalance in trade relations and political influence  
5.196  Brazil further argues that any measures that are contrary to the objectives of a developing 
country to ensure steady and sustainable developmen t will necessarily be costly and impracticable by 
                                                      
309 Brazil's written submission, para. 487. 
310 Brazil's written submission, para. 488. 
311 Brazil's written submission, para. 489. 
312 US responses to questions from the Arbitrators, question 68, para. 206. WT/DS267/ARB/2 
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  definition, and that the significantly unbalanced na ture of the trade relations between Brazil and the 
United States, and the considerable economic di fferences between the tw o countries, render the 
suspension of concessions and other obligations un der trade in goods alone neither practicable nor 
effective as a response to the US failu re to comply with its obligations.  
5.197  Finally, Brazil also argues that suspension in the area of trade in goods alone may not have 
sufficient political influence to press for the United States' withdrawal of the billions of dollars it pays 
annually in subsidies or to remove their adverse effe cts, and that, therefore, they are not "effective" 
for the purpose of encouraging compliance.   
5.198  We agree that a complaining Member seeking to suspend concessions or other obligations 
should not be required to act against its own intere sts in applying such suspension.  However, our 
findings above suggest to us that Brazil has at its disposal a sufficient range of imports of goods, including consumer goods, from the United States, so  as to enable it to suspend concessions in the 
area of trade in goods alone, without causing itself such economic harm as to render such suspension 
"not practicable or effective".  In the absence of  other specific detailed arguments as to why such 
suspension would otherwise adversely affect Brazil's interests, we conclude that, on the basis of the 
elements presented to us and at current levels, Br azil could not conclude that suspension in trade in 
goods alone would not be "practicable or effec tive".  Further, Brazil's insistence that its 
countermeasures must have "sufficient political infl uence" from the perspective of the United States 
to press for the withdrawal of the subsidies and the removal of their adverse effects is misplaced.  "Effectiveness" relates to the ability of a Member to have recourse to the authorized remedy, such that 
it can serve to induce compliance.  However, the pr eference of a Member for a particular type of 
countermeasure, because it would constitute a more powerful form of persuasion in a political sense, 
is not a relevant consideration for an arbitrator in these proceedings.  
5.199  Our conclusion is not modified by the "signifi cantly unbalanced nature of the trade relations 
between Brazil and the United States".  As we have  observed above, the elements presented to us do 
not suggest that Brazil's dependence on US imports  is such that it could not find at least 
US$239.6 million worth of imports of goods from the Un ited States in relation to which it would have 
sufficient alternative domestic or imported sour ces of supply at its disposal, so as to suspend 
concessions effectively.  In addition, the fact that exports to Brazil only represent a very small 
proportion of US exports generally does not, in itsel f, necessarily imply that countermeasures applied 
to some of these goods would not be "effective" for the purposes of inducing compliance.  It would be 
up to Brazil to identify those US exports in relation to which it would apply the suspension, and to do 
this in a manner that would make such measures as effective as possible within the limits of the 
permissible level of countermeasures.  In light of th e fact that the total value of imports to Brazil from 
the United States, at current levels, significantly ex ceeds the level of permissible countermeasures, we 
see no reason to assume that this would not provide a sufficient margin or discretion for Brazil to 
target accordingly the specific products to which suspension would be applied.  
(v) Overall conclusion 
5.200  In light of all the above, we conclude that, on th e basis of the elements presented to us and at 
current levels, Brazil could not plausibly have reac hed the conclusion that it is not practicable or 
effective to suspend concessions or other obligations in trade in goods alone, even if it had considered 
the "necessary facts", i.e. taking into account a level of permissible countermeasures not exceeding 
US$294.7 million.   
5.201  We note, however, that the level of counterme asures that was determined to be permissible 
under the Decision contained in WT/DS267/ARB/1 is variable.  We have ba sed our determinations 
above on the level of those countermeasures as calcu lated on the basis of FY 2006 and on the basis of 
Brazil's imports of consumer goods in the year 200 7.  Given the volume and composition of Brazil's  WT/DS267/ARB/2 
 Page 91 
 
 
  imports of consumer goods in the year 2007, we de termined that there was at least US$409.7 million 
worth of Brazil's imports of consumer goods from the United States that could be the subject of 
countermeasures ("threshold").  However, in the ev ent that the level of countermeasures that Brazil 
would be entitled to in a given year313 should increase to a level that would exceed this threshold, 
updated for the same  year in a manner described in Section V.C.6 below to account for the change in 
Brazil's total imports from the United States, then, we find that it would be concluded, on the basis of 
the elements presented to us, that the suspension of  concessions or obligations applied to trade in 
goods alone would not be "practicable or effective" within the meaning of Article 22.3(c) of the DSU.  
5.202  In light of this determination, we must cons ider further Brazil's determination that "the 
circumstances are serious enough" within the mean ing of Article 22.3 and its consideration of the 
elements of subparagraph (d) of Article 22.3.   
4. Whether "the circumstances are serious enough"   
(a) Main arguments of the parties 
5.203  Brazil says that, with respect to prohibited s ubsidies, the granting or maintenance of such 
subsidies constitutes in itself, at the very least, a strong indication that "circumstances are serious 
enough".  In addition, the seriousness of the breach  in the present case is compounded by the specific 
characteristics of the subsidy at issue.  Th e GSM 102 programme and the guarantees granted 
thereunder constitute recurrent export subsidies, granted year after year in connection with billions of 
dollars in agricultural exports in violation of US WTO obligations.  Brazil notes that these subsidies 
have been granted since 1981 and have been dist orting international markets on a continuous and 
cumulative basis for the whole period covered by this dispute (from 1999 up to 2009).  The statutory framework of the programme ensures that it is of fered continuously and requires that billions of 
dollars in guarantees be made available every year.  Brazil argues that the subsidies are particularly 
pernicious in light of their stated objective and pe rformance measure, to open high risk markets to US 
commodities and establish the dominance of US exporters by means of prohibited export subsidies, to the detriment of competing exporters.  In a single day, on 6 October 2008, the USDA received applications for ECGs worth US$3.5 billion.  Acco rding to a director of CoBank, this enormous 
amount of applications is a result of "the credit markets seizing up".
314 
5.204  With respect to the actionable subsidies, Br azil considers that the sheer amount of the 
subsidies granted under the ML and CCP progra mmes, which have been found to cause adverse 
effects in the form of significant price suppression in the world market; the repeated refusal of the 
United States to comply, since 2005, with the ruli ngs and recommendations adopted by the DSB; and 
the concrete expectation, confirme d in the 2008 Farm Bill, that the same design and structure for the 
granting of the same subsidies will be maintain ed in the future also demonstrate that the 
circumstances are serious enough to justify th e types of countermeasures proposed by Brazil.315  
5.205  Brazil says that these subsidies provide a pern icious predictability for US producers and 
exporters – who may take for granted that they will enjoy an artificial competitive advantage vis-à-vis 
other competitors every year – and for producers of the other Members – who have their production 
and investment decisions negatively affected in the long term by the chilling effect caused by the 
permanent availability of the US subsidies.  Braz il argues that these subsidies constitute a structural 
element of the world markets for the wide range of  products they support, and that the current credit 
                                                      
313 It is understood that this amount is to be calcu lated taking into account the entirety of the level of 
countermeasures that Brazil is entitled to at that point in time, arising both from this Decision and from the 
Decision by the Arbitrator contained in WT/DS267/ARB/1. 
314 Brazil's written submission, para. 530. 
315 Brazil's written submission. para. 530. WT/DS267/ARB/2 
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  crisis only heightens their distorting effects.  Producers and exporters all over the world, who are 
struggling to find credit for their operations, have to compete with US producers and exporters that 
are cushioned from the effects of the crisis by the unlawful subsidies, as the US$5.5 billion worth of 
ECGs under the GSM 102 available in FY 2008 strikingl y reminds us.  In Brazil's view, these features 
render the circumstances certainly no less than serious enough.316  
5.206  In Brazil's view, the fact that the United St ates has revived in the 2008 Farm Bill, under a 
slightly different disguise, the only subsidy it had eliminated as part of its implementation of the 
recommendations and rulings of the DSB in the pr esent case – the "Step 2" programme – constitutes 
additional indication that the circumstances are serious enough.317  
5.207  The United States argues that "'circumstances ar e serious enough' may refer to the potential 
consequences for the Member of suspending concessi ons in the same sector and agreement, or the 
potential consequences of forgoing the right to suspend concessions".318  In the circumstances of this 
dispute, where Brazil's proposal for countermeasur es does not substantiate any adverse effect on 
Brazil from the measure at issue, it is not clear, in the United States' view, what consequences these 
would be or whether they would be serious at all.319  In the United States' view, Brazil's agricultural 
sector, and its cotton producers in par ticular, have been effective comp etitors worldwide even with the 
existence of GSM 102, marketing loan payments and countercyclical payments and without any 
countermeasures, and Brazil's cotton exports ha ve reached record levels in recent years.320  
5.208  Brazil responds that the United States' erroneous legal analysis first equates the meaning of 
"circumstances" with that of "potential conseque nces" and then moves on to argue that "potential 
consequences" means trade damage to Brazil.  In Brazil's view, however, there is no legal basis to argue that in selecting the type of countermeasures Brazil must show "any adverse effect on Brazil 
from the measures at issue" to enab le an assessment of whether circ umstances are serious enough.  In 
any event, Brazil argues, as regards actionable subs idies, the existence of adverse effects of the 
measures at issue has already been determined by two panels and the Appellate Body.  Brazil notes 
that, with respect to the GSM 102 subsidies, the tw o panels and the Appellate Body found that they 
constitute prohibited  subsidies – arguably the most egregious violation of WTO disciplines, as can be 
inferred from the special rules app licable to them – and that they should have been withdrawn without 
delay .  Hence, Brazil argues, even under the US flawed  and convoluted logic, circumstances would be 
serious enough because the consequences of maintaini ng the subsidies in place could not be anything 
less than serious, as is made clear by the findings, rulings and recommendations of the panels and the 
Appellate Body in this dispute.
321 
5.209  Brazil considers that Article 22.3(c) of the DSU can encompass the impact on Brazil of 
applying countermeasures under trade in goods  alone, as well as broader circumstances which 
surround Brazil's consideration of retaliatory action ag ainst the United States' failure to comply with 
the DSB's recommendations and rulings in this disp ute, such as the demonstrated lack of willingness 
of the United States to comply.322   
5.210  In the view of the United States, the circum stances surrounding potential countermeasures in 
services and intellectual property are also a factor .  Brazil has not detailed how it might impose such 
countermeasures; and in fact it is not obligated to do so at this time.  Effectively, the United States 
                                                      
316 Brazil's written submission, para. 531. 
317 Brazil's written submission, para. 532. 
318 US responses to questions from the Arbitrator, question 136, para. 174. 
319 US responses to questions from the Arbitrator, question 136, para. 174. 
320 US responses to questions from the Arbitrator, question 136, para. 175. 
321 Brazil's comments on US responses to questions from the Arbitrator, question 136, paras. 401-402. 
322 Brazil's comments on US responses to questions from the Arbitrator, question 136, para. 403.  WT/DS267/ARB/2 
 Page 93 
 
 
  argues, if Brazil is authorized to impose c ountermeasures under these other Agreements it would 
cause an additional layer of uncertainty fo r these sectors, with potentially devastating 
consequences.323 
5.211  Brazil welcomes the United States' acknowledgement  that Brazil "is not obligated" to detail 
how it might impose countermeasures with respect to services and intellectual property rights.324  
Brazil also notes that the United States, by refe rring to "potentially devastating consequences",325 
seems to agree with Brazil's view that count ermeasures under the TRIPS Agreement and the GATS 
would be much more effective within the meaning of Article 22.3 of the DSU than countermeasures 
under trade in goods alone.326 
(b) Analysis by the Arbitrator 
5.212  Under Article 22.3(c) of the DSU, in order for su spension of obligations to be permissible, the 
complaining party is required to have determined  that "the circumstances are serious enough", in 
addition to having determined that suspension unde r the same agreement is "not practicable or 
effective".   
5.213  We recall our determination in paragraph 5.84 above that an assessment of whether "the 
circumstances are serious enough" is necessarily a case-by-case assessment depending on the specific 
circumstances of the case.   
5.214  The United States argues that "'circumstances ar e serious enough' may refer to the potential 
consequences for the Member of suspending concessi ons in the same sector and agreement, or the 
potential consequences of forgoing the right to suspend concessions".327  In Brazil's view, 
Article 22.3(c) of the DSU can encompass the impact on Brazil of applying countermeasures under trade in goods alone, as well as broader circum stances which surround Brazil's consideration of 
retaliatory action against the United States' failure  to comply with the DSB's recommendations and 
rulings in this dispute, such as the demonstrated  lack of willingness of the United States to comply. 
5.215  As we have determined in paragraph 5.83 a bove, an assessment of whether circumstances are 
"serious enough" would legitimately include a c onsideration of the elements identified in 
subparagraph (d) of Article 22.3, namely the trade in the sector in which a violation has been found 
and its importance to the complaining party (in th is case, trade in goods, including trade in cotton and 
other products affected by the measures at issue), as  well as "the broader econom ic elements related to 
the nullification or impairment and the broader ec onomic consequences of the suspension".  At the 
same time, the assessment is not limited to these factors, and may include other elements, depending on the specific "circumstances" of the case.  We ther efore agree with Brazil that a determination of 
whether "the circumstances are serious enough" may in principle encompass both the impact on Brazil 
of applying countermeasures under trade in goods (i.e . "the broader economic consequences of the 
suspension") and "broader circumst ances which surround Brazil's consid eration of retaliatory action" 
against the US failure to comply with the DSB's recommendations and rulings.   
5.216  Brazil considers that a number of elements rende r the circumstances "serious enough" in this 
case, including the granting or maintenance by the United States of the prohibited subsidies, the 
fourfold increase in the transactions supported by  the GSM 102 programme in 2009; the continued 
granting of actionable subsidies and the enactment of 2008 Farm Bill.  In Brazil's view, these facts 
                                                     
 
323 US responses to questions from the Arbitrators, question 136, para. 176. 
324 US response to questions from the Arbitrators, question 136, para. 176. 
325 US response to questions from the Arbitrators, question 136, para. 176. 
326 Brazil's comments on US responses to questions from the Arbitrator, question 136, para. 399. 
327 US responses to questions from the Arbitrator, question 136, para. 174. WT/DS267/ARB/2 
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  show that the United States has no intention of  complying with the DSB recommendations and 
rulings.  Brazil further argues that the design and struct ure of the subsidies at issue is such as to create 
"an artificial competitive advantage for US operators  vis-à-vis other competitors every year" to the 
detriment of producers of other Members "who ha ve their production and investment decisions 
negatively affected in the long term by the chilling effect caused by the permanent availability of the 
US subsidies".  Brazil argues that these subsidies c onstitute "a structural element of the world markets 
for the wide range of products they support", and that the current credit crisis only heightens their 
distorting effects.  Brazil further considers that th e conditions that render the circumstances "serious 
enough" also include the potential effects on Braz il if countermeasures are confined to the goods 
sector, which will lead to disproportionate costs to the Brazilian economy and to the welfare of its population.
328 
5.217  In our view, Brazil's determination that the circumstances are serious enough within the 
meaning of Article 22.3(c) of the DSU is reasonable in light of the circumstances of the case.   
5.218  In this regard, we recall some salient aspects of the findings of the original and compliance 
panels and of the Appellate Body in relation to the subsidies concerned:  
"As we have just indicated, several of the United States subsidies are directly linked 
to world prices for upland cotton, thereby numbing the response of United States 
producers to production adjustment decisions when prices are low .  We have readily 
available information on the record showing us  that the price-contingent subsidies in 
question involve very large amounts of Un ited States government money benefiting 
United States upland cotton.  In our view, the collective operation of these subsidies 
was akin to a very large, counter cyclical, deficiency payment laced with additional 
enhancements.   We believe that the structure, d esign and operation, particularly of the 
price-contingent subsidies, constitutes st rong evidence supporting a finding of price 
suppression."329 (emphasis added) 
"Given that in most recent years actual mark et prices have been lower than expected 
market prices at the time of planting and th at the adjusted world price has been below 
the marketing loan rate, the Panel considers that it is reasonable to conclude that the 
fact that US cotton producers know that th ey will receive marketing loan payments 
whenever the adjusted world price is below th e marketing loan rate continues to be an 
important factor affecting the level of acreag e planted to cotton (and thus the level of 
production), even when, as in MY 2006, the expected market price for upland cotton 
at the time of planting is higher than the ma rketing loan rate.  The Panel also notes in 
this regard that accordi ng to FAPRI and USDA data, the projected amount of 
marketing loan payments in MY 2006 is very significant. "330 (emphasis added, 
footnote omitted)  
"First, we recall that the original panel noted that the CCC has access to funds from 
the US Treasury and benefits from the fu ll faith and credit of the US Government. 
This is still the case, and were the GSM 102 programme to incur massive losses, it 
would have access to additional funds from the US Treasury ."331 (emphasis added, 
footnote omitted)  
                                                      
328 Brazil's comments on US responses to questions from the Arbitrator, question 136, paras. 404-405. 
329 Panel Report, para. 7.1308.   See also para. 7.1349 of that report. 
330 Panel Report, US – Upland Cotton (Article 21.5 – Brazil) , para. 10.81. 
331 Panel Report, US – Upland Cotton (Article 21.5 – Brazil) , para. 14.110.  WT/DS267/ARB/2 
 Page 95 
 
 
  "The Panel considers, in light of the appr oach taken by the pa nel and Appellate Body 
in the original proceeding, that in determ ining whether the magnitude of the subsidies 
at issue in this proceeding supports a findi ng that the effect of these subsidies is 
significant price suppression, it is necessary to examine this factor in relation to other 
factors.  Thus, the relevance of the magnitude  of the subsidies in this connection must 
also be assessed in light of our analysis above of the structure, design and operation 
of the subsidies.  We recall, in this re spect, our conclusion regarding the important 
revenue-stabilizing effect of these mandatory, pr ice-contingent subsidies.  In the latter 
regard, the evidence before us indicates th at marketing loan and counter-cyclical 
payments play a significant role in stabilizing the revenues of US upland cotton 
producers. The share of marketing loan payments and counter-cyclical payments in 
total revenues of US upland cotton produ cers was 35 per cent in MY 2004 and 27 per 
cent in MY 2005 ."332 (emphasis added, footnotes omitted) 
"Table 6B shows market revenue from cotton lint, total costs (less ginning costs) and 
the difference between market revenue a nd total costs on a per acre basis in MY 
2002-2006.  Over the period examined, US cotton producers' market revenue 
exceeded total costs of production twice, in MY 2003, when cotton prices were at their highest since MY 1997, and also in  the year immediately following that.  In 
other marketing years, total costs of pr oduction exceeded market revenue, at times by 
very huge margins.   In MY 2002, for example, total costs exceeded market revenue 
by 84 per cent.  Data provided by Brazil for MY 2006 suggests that total costs will 
continue to exceed market revenue.  The gap is expected to be about 56.25 dollar per 
acre, which would be equivalent to about 14 .7 percent of US cotton producers' market 
revenue in that marketing year.  Cumulated over the five marketing years 2002-2006, 
US cotton farmers' costs of production have exceeded market revenues by an average 
of  227.49 dollars per acre ."
333 (emphases added) 
"In conclusion, the Panel finds that there exists a significant gap between the total 
costs of production of US upland cotton producers and their market revenue.  The Panel considers that this  gap between costs and revenue, when analyzed in 
conjunction with the magnitude of the mark eting loan and counter-cyclical subsidies 
and their importance as a share of the revenue of US cotton producers, supports the 
proposition that the marketing loan and counter-cyclical payments are an important 
factor affecting the economic viability of US upland cotton farming .  The Panel 
therefore also considers that without these subsidies the level of US upland cotton acreage and production would be considerably lower."
334 (emphasis added, footnotes 
omitted) 
"We do not see a contradiction between the fact that United States shares of world 
production and exports of upland cotton have remained stable at consistently high 
levels between MY 2002 a nd MY 2007 and the Panel's findings of substantial 
proportionate influence of the United States in the world market for upland cotton.  
This is because stable high United States shares of world production and exports of 
upland cotton could be seen as evidence of th e fact that the United States continued to 
exert a substantial proportionate influence  in the period examined by the Panel, just 
as it had during the period examined by the original panel.  We also observe that the 
Panel specifically noted that this element supported its finding of significant price suppression when "analysed in the light of th e totality of the evidence". Therefore, we 
                                                     
 
332 Panel Report, US – Upland Cotton (Article 21.5 – Brazil) , para. 10.111. 
333 Panel Report, US – Upland Cotton (Article 21.5 – Brazil) , para. 10.190.  
334 Panel Report, US – Upland Cotton (Article 21.5 – Brazil) , para. 10.196. WT/DS267/ARB/2 
Page 96 
 
 
  do not consider that the Panel erred in finding that the United States exerts a 
substantial proportionate influence on  the world market for upland cotton ."335 
(emphasis added, footnotes omitted)  
5.219  We are not persuaded that, as Brazil argues, the very granting of the subsidies at issue would 
be sufficient to conclude that the circumstances are "s erious enough".  It is inherent in the situation at 
hand that a violation has taken place and that comp liance has not been achieved in a timely manner.  
This circumstance alone, which is common to all ca ses in which suspension of obligations is sought 
under the DSU, would not in our view justify the conclusion that the circumstances are "serious enough".  However, we agree with Brazil that the specific design and structur e of the subsidies at 
issue, as they have been maintained over a signifi cant period of time, is such as to have created an 
artificial and persisting competitive advantage for US producers over all other operators, and that this 
has a significant trade-distorting impact, not just on  the US domestic market, but on the world market 
in these products.   
5.220  The United States responds that Brazil has in  fact remained very competitive in the 
agricultural sector, including cotton, even w ith the US subsidies in place and without 
countermeasures.  We are not persuaded, however, th at this consideration alters the essence of the 
situation. The fact that Brazil may have remain ed competitive in spite of the trade-distorting 
conditions arising from the granting and maintenanc e of the subsidies at issue does not in essence 
modify the fact that these subsidies have a trade- distorting impact on the world market for cotton and 
the other products affected by them.  Given the st ructure and design of the programmes at issue, and 
in light of the time period over which they have been in place, these distortions are virtually, as Brazil 
puts it, a "structural" element of the world market  for the affected products, including cotton, as long 
as they remain available.  Our earlier determin ations in relation to the level of permissible 
countermeasures suggest that these trade-distorting e ffects are not insignificant, including on Brazil.  
Furthermore, these impacts are felt not only on the US  market but on other markets for the products at 
issue.  In addition, as Brazil observes, in times of  credit crisis, this trade-distorting impact will be 
further amplified, at least in so far as the GSM 102 programme is concerned.  These considerations, in 
our view, support the conclusion that "the circumstances are serious enough". 
5.221  In addition, Brazil observes that the dispropor tionate adverse impact of the suspension of 
concessions or other obligations on its economy, if a pplied only to trade in goods, also contributes to 
the "circumstances" being "serious enough".  We agree that this may also be a relevant consideration 
in such determination.
336  We have considered extensively Br azil's arguments concerning the potential 
adverse impact on its economy of a suspension applie d to trade in goods alone, in reviewing whether 
it is "practicable or effective" for Brazil to seek su spension in trade in goods alone.  In this context, 
we concluded that, to the extent that the level of  countermeasures that Brazil would be entitled to take 
would exceed a certain threshold, such suspension would be "not practicable or effective".  These 
considerations also inform the determination of whether "the ci rcumstances" would be "serious 
enough" to justify cross-agreement suspension.  If the threshold were reached, such that suspension of 
concessions or other obligations under the same sect or or agreement would not be practicable or 
effective for Brazil, this would also directly contri bute to the circumstances being "serious enough" to 
justify recourse to suspension under another agreement.   
                                                      
335 Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil) , para. 446. 
336 We note in this respect the observation of the arbitrator on US – Gambling  that the circumstances 
that justified a determination that "the circumstances ar e serious enough" in that case could be "directly related 
to the practicability and effectiveness of suspension under the agreement in which the violation was found (in 
that case, the GATS).  See Decision by the Arbitrator, US – Gambling (Article 22.6 – US) , para. 4.115.  WT/DS267/ARB/2 
 Page 97 
 
 
  5.222  In light of all the above, and on the basis of the elements pr esented to us, we find that Brazil 
could reasonably determine that "the circumstan ces are serious enough" within the meaning of 
Article 22.3(c) of the DSU.   
5.223  In light of our determinations in the previ ous section above, we note that the two conditions 
foreseen in Article 22.3(c), i.e. a determination th at "it is not practicable or effective" to seek 
suspension under the same agreement and a determina tion that "the circumstances are serious enough" 
would only be met simultaneously in this case when ever the threshold identified in paragraph 5.201 
above would be exceeded.   
5.224  The United States has suggested that the potential implications of a suspension of obligations 
under the TRIPS Agreement is also a consideration to be taken into account, in light of the "layer of 
uncertainty" that may arise from such suspensi on in the sectors concerned and the "potentially 
devastating consequences" of such suspension.   We recognize that there may be legitimate 
considerations to which the complaining Member should be attentive in applying any suspension of 
obligations under the TRIPS Agreement.337  We are not persuaded, however, that this is a relevant 
consideration for us to take into account in revi ewing the question of whether the "circumstances are 
serious enough" to justify suspension of obligations u nder that agreement.  We first note that there is 
no general hierarchy in the DSU as between susp ension in various sectors or under various WTO 
Agreements, such that we should assume that a su spension of obligations under the TRIPS Agreement 
would be inherently more detrimental to the respond ing Member than another.  The only hierarchy to 
be found in the DSU in this respect is relative to the sector and agreement in which the violation has been found (thus, in a case involving a TRIPS viola tion, same-sector suspension would  have to be 
sought first under the TRIPS Agreement). We also not e that the level of suspension authorized will be 
the same whatever sector or agreement it may apply to.  We further note that, as the United States 
itself has observed in these proceedings, Brazil is not ob ligated at this time to explain in detail how it 
might impose such countermeasures.  This question is , in our view, beyond the scope of this enquiry, 
and it is not for us to speculate how a suspensi on of certain obligations under the TRIPS Agreement 
might be applied by Brazil or to assume that it wo uld have more detrimental consequences than a 
suspension in another sector or agreement.  In fact the United States itself does not explain what 
"devastating consequences" it is referring to.   
5.225  We make no determination in relation to th e United States' willingness or unwillingness to 
comply with the recommendations and rulings at issue.   We assume that the United States intends in 
good faith to promptly comply with these recommendati ons and rulings.  We have also not based our 
findings on Brazil's arguments relating to the adopti on of the 2008 Farm Bill, as such, in relation to 
which we have made no sp ecific determinations.   
5. Brazil's consideration of the elements under subparagraph (d) of Article 22.3 
5.226  Subparagraph (d) of Article 22.3 of the DSU requires the complaining party to "take into 
account", in applying the principles of s ubparagraphs (a) to (c), two elements: 
"(i) the trade in the sector or under the ag reement under which the panel or Appellate 
Body has found a violation or other nullifi cation or impairment , and the importance 
of that trade to [the complaining] party 
(ii) the broader economic elem ents related to the nullification or impairment and the 
broader economic consequences of the suspension of concessions or other 
obligations". 
                                                     
 
337 See para. 5.233. WT/DS267/ARB/2 
Page 98 
 
 
  5.227  As we have determined in Section V.C.1(c) above, in the circumstan ces of this case, this 
means that what is to be taken into account is "the trade" in all goods under the trade in goods 
agreement, that is, trade in goods generally, and its importance to Brazil, as well as "the broader 
economic elements"  relating to the nullification or impairment arising for Brazil from the subsidies at 
issue and the broader economic consequences of th e suspension, including a consideration of the 
economic consequences of the suspension.   
5.228  As we have discussed extensively in the pr eceding sections above, Brazil's determinations 
that it was not practicable or effective for it to seek to suspend obligations in trade in goods alone and 
that the circumstances are serious enough, were based importantly on a consideration of the 
importance to its economy of its trade in goods with the United States, and of the potential 
consequences of the proposed suspension, which it considers would be dispro portionately detrimental 
to its economy if applied solely to trade in goods.  In addition, Brazil has also taken into account the 
economic impact of the measures on the market of th e products affected by the measures at issue.  
5.229  In light of these elements, we are satisfied th at Brazil has taken into account the relevant 
elements under subparagraph (d) of Article 22.3 in accordance with the requirements of that 
provision.  
6. Conclusion 
5.230  In light of our determinations above, we find that in the event that the level of 
countermeasures that Brazil would be entitled to in a given year338 should increase to a level that 
would exceed the threshold identified in paragraph 5.201 above, updated for the same  year in a 
manner described in the next paragraph to account for the change in Brazil's total imports from the 
United States, then Brazil would be entitled to suspend certain obligations under the 
TRIPS Agreement and/or the GATS as identified in  its request pursuant to Article 7.9 of the 
SCM Agreement  and Article 22.2 of the DSU339, with respect to any amount of permissible 
                                                      
338 It is understood that this amount is to be calcu lated taking into account the entirety of the level of 
countermeasures that Brazil is entitled to at that point in time, arising both from this Decision and from the 
Decision by the Arbitrator contained in WT/DS267/ARB/1. 
339 See WT/DS267/26.  Brazil identifies the following obligations in its request: 
 
With respect to the TRIPS Agreement: 
 "The following sections of Part II of the Ag reement on Trade-Related Aspects of Intellectual 
Property Rights: 
 
 Section 1: Copyright and related rights 
 Section 2: Trademarks 
 Section 4: Industrial designs 
 Section 5: Patents 
 Section 7: Protection of undisclosed information." 
 
With respect to the GATS: 
 
"horizontal and/or sectoral concessions and obligations for all sectors contained in Brazil's 
Schedule of Specific Commitments  (GATS/SC/13) under the General Agreement on Trade in 
Services. Those sectors are: 
 
 1. Business Services 
 2. Communication Services 
 3. Construction and Related Engineering Services 
 4. Distribution Services  WT/DS267/ARB/2 
 Page 99 
 
 
  countermeasures applied in excess of that figure.  In any subsequent year where the level of 
countermeasures that Brazil would be entitled to falls  below this threshold, updated to account for the 
change in Brazil's total imports from the Unite d States, Brazil would be entitled to suspend 
concessions or other obligati ons only in trade in goods. 
5.231  As stated in the previous paragraph, in or der to determine whether suspension of certain 
obligations under the TRIPS Agreement or the GATS is permissible in a given year, the threshold 
should be updated to account for the change in Brazil's total imports from the United States.  For year 
2008, for example, the updated amount of the threshold would be equal to US$409.7 million 
multiplied by (1 + g 2008), where g 2008 is the percentage change in the value of Brazil's total imports 
from the United States between the years 2007 and 2008,  or in the absence of the trade data for years 
2007 and 2008, the percentage change in the value of Brazil's total imports from the United States 
based on the last available annual trade statistics.340  In general, the following difference equation and 
initial condition shall determine the updated amount of the threshold:  
 (2) ) 1(*1 1 + + +=t t t g T T ,  T 2007 = US$409.7 million 
 
where:  
 
Tt+1=threshold value in year t+1; 
 
Tt =threshold value in year t; 
 g
t+1 = percentage change in the value of Brazil's to tal  imports from the United States between the 
years t and t+1, or in the absence of the trade data for years t and t + 1, the percentage change in the 
value of Brazil's total imports from the United States based on the last available annual trade 
statistics. 
 5.232  The "same" year shall mean that the amount of countermeasures, calculated based on the 
fixed amount awarded under this Decision and the va riable amount arising from the Decision by the 
Arbitrator contained in WT/DS267/ARB/1, shall be compared to the value of the threshold in year 
2008 (1 January 2008 to 31 December 2008).  
5.233  In light of our determination that Brazil, ma y, in application of the above, be entitled to 
suspend certain obligations under the TRIPS Agreem ent and the GATS, we note the remarks made by 
the arbitrators on EC – Bananas III (Ecuador) (Article 22.6 – EC), with respect to the suspension of 
obligations under the TRIPS Agreement
341, which were also noted by the arbitrator on US – Gambling 
(Article 22.6 – US) .342  We consider these remarks to be releva nt also to this case, in that the same 
considerations will be pertinent to the manner in  which Brazil might implement a suspension of its 
obligations under the TRIPS Agreement in this case.   
5.234  In light of the fact that the form of permissible countermeasures may vary over time, we urge 
Brazil, if and when it submits a revised request for authorization to suspend concessions or other 
                                                                                                                                                                     
 7. Financial Services 
 9. Tourism and Travel Related Services 
 11. Transport Services" 
 
340 Brazil shall use UN Comtrade data for the purpose of calculating the percentage change of its total 
imports from the United States. 
341 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC) , Section V, 
paras. 139-165 . 
342 Decision by the Arbitrator, US – Gambling (Article 22.6 – US) , para. 5.11. WT/DS267/ARB/2 
Page 100 
 
 
  obligations to the DSB in accordan ce with this Decision, to be as specific as possible about the terms 
of the measures to be adopted, so as to promote transparency and predictability in this process. 
5.235  We also take note of the undertaking by Br azil in its request under Article 4.10 of the 
SCM Agreement  and Article 22.2 of the DSU, that: 
"Every year, Brazil will notify to the DSB th e amount and the form of the suspension 
of concessions and other obligations in the light of data concerning the operation of 
the identified programmes in the most recent concluded marketing and fiscal year, as 
applicable."343 
5.236  We suggest that Brazil also similarly notify the amount and form of the suspension of 
concessions and other obligations arising from this  Decision, with respect to its request under 
Article 7.10 of the SCM Agreement  and Article 22.2 of the DSU. 
5.237  Finally, like previous arbitrators344, we also note that the United States may have recourse to 
the appropriate dispute settlement procedures in the event that it considers that the level of 
concessions or other obligations suspended by Br azil exceeds the level of countermeasures we have 
determined to be "commensurate with the degree and nature of the advers e effects determined to 
exist" in this case.  
VI. CONCLUSIONS AND AWARD 
6.1 For the reasons set out above, the Arbitrator determines that the annual level of 
countermeasures "commensurate with the degree and nature of the adverse effects determined to 
exist" in relation to the marketing loan and coun tercyclical payments amounts to US$147.3 million.   
6.2 We have also determined that Brazil has not  followed the principles and procedures of 
Article 22.3 of the DSU in determining that it is not  practicable or effective to suspend concessions or 
other obligations in trade in goods, and that, at cu rrent levels, it could not have plausibly determined 
that it is not practicable or effective to suspend c oncessions or other obligations  in trade in all goods 
under the Agreements contained in Annex 1A of the WTO Agreement.  We have also found, 
however, that, in the event that the level of counter measures that Brazil would be entitled to in a given 
year345 should increase to a level that would exceed a threshold, as identified in paragraph 5.201 
above, updated for the same  year in a manner described in paragraphs 5.231-5.232 to account for the 
change in Brazil's total imports from the United Stat es, then, it could be reasonably concluded that it 
is not practicable or effective for Brazil to susp end concessions or other obligations on trade in goods 
alone.  We have also determined that the ci rcumstances are serious enough and that Brazil has 
complied with the requirements of subparagraph (d) of Article 22.3.  
6.3 In light of these findings, we find that Brazil w ould be entitled to suspend certain obligations 
under the TRIPS Agreement and/or the GATS, w ith respect to any amount of permissible 
countermeasures applied in excess of the threshold identified in paragraph 5.201 above, updated for 
the same  year in a manner described in paragraphs 5.231-5.232 to account for the change in Brazil's 
total imports from the United States.  In any subse quent year where the level of countermeasures that 
Brazil would be entitled to falls below this threshol d, updated to account for the change in Brazil's 
                                                      
343 WT/DS267/21. 
344 Decisions by the Arbitrators, EC – Hormones (US) (Article 22.6 – EC), para. 82;  US – 1916 Act 
(EC) (Article 22.6 – US ), para. 9.2;  US – Offset Act (Byrd Amendment) (EC) (Article 22.6 – US),  para. 4.27;  
and US – Gambling (Article 22.6 – US),  para. 5.12. 
345 It is understood that this amount is to be calcu lated taking into account the entirety of the level of 
countermeasures that Brazil is entitled to at that point in time, arising both from this Decision and from the 
Decision contained in WT/DS267/ARB/1.  WT/DS267/ARB/2 
 Page 101 
 
 
  total imports from the United States, Brazil woul d be entitled to suspend concessions or other 
obligations only in trade in goods.  
6.4 We have also found that, in determining whether the level of countermeasures that Brazil 
would be entitled to has increased to an amount th at would allow it to suspend certain obligations 
under the TRIPS Agreement and/or the GATS, the data  in Table 4 shall be updated to reflect the 
amount of imports in the same  year, as described in paragraph 5.232 above.   
6.5 Accordingly, the Arbitrator determines that: 
(a) Brazil may request authorization from th e DSB to suspend concessions or other 
obligations under the Agreements on trade in  goods in Annex 1A, at a level not to 
exceed the value of US$147.3 million annually. 
(b) In the event that the total level of counter measures that Brazil would be entitled to in 
a given year346 should increase to a level that would exceed the threshold described in 
paragraph 5.201, updated to account for the change in Brazil's total imports from the 
United States, then, Brazil would also be entitled to seek to suspend certain 
obligations under the TRIPS Agreement and/or the GATS as identified in footnote 339, with respect to any amount of permissible countermeasures applied in excess of that figure. 
 
_______________ 
 
                                                     
 
346 It is understood that this amount is to be calcu lated taking into account the entirety of the level of 
countermeasures that Brazil is entitled to at that point in time, arising both from this Decision and from the 
Decision contained in WT/DS267/ARB/1.  WT/DS267/ARB/2 
 Page 103 
 
 
   
 
ANNEX 1 
 
Root Mean Square Error Results and Data 
  
1. Stata log file 
 
---------------------------------------------------------------------------------------------- 
log:  F:\Article 22.6\Final Calculations\Actionable\RMSE.smcl 
log type:  smcl opened on:  15 May 2009, 16:18:14  . use "F:\Article 22.6\Final Calculations\Actionable\RMSE.dta", clear  . regress Farmprice LagFarmprice if Year>=1975&Year<=2005        Source |       SS       df       MS              Number of obs =      31 -------------+------------------------------           F(  1,    29) =    6.64        Model |  557.674474     1  557.674474           Prob > F      =  0.0153     Residual |  2434.25281    29   83.939752           R-squared     =  0.1864 -------------+------------------------------           Adj R-squared =  0.1583        Total |  2991.92728    30  99.7309094           Root MSE      =  9.1619  ------------------------------------------------------------------------------    Farmprice |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval] -------------+---------------------------------------------------------------- LagFarmprice |   .4230483   .1641283     2.58   0.015     .0873683    .7587284        _cons |   33.35276   9.584455     3.48   0.002     13.75035    52.95517 ------------------------------------------------------------------------------ 
 
. regress Farmprice FebFutures if Year>=1975&Year<=2005        Source |       SS       df       MS              Number of obs =      31 -------------+------------------------------           F(  1,    29) =    9.55        Model |  741.187194     1  741.187194           Prob > F      =  0.0044     Residual |  2250.74009    29  77.6117272           R-squared     =  0.2477 -------------+------------------------------           Adj R-squared =  0.2218        Total |  2991.92728    30  99.7309094           Root MSE      =  8.8098  ------------------------------------------------------------------------------    Farmprice |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval] -------------+----------------------------------------------------------------   FebFutures |   .4870207   .1575967     3.09   0.004     .1646993    .8093422        _cons |    26.6572     10.166     2.62   0.014      5.86539    47.44902 ------------------------------------------------------------------------------  . regress Farmprice LagFarmprice if Year>=1985&Year<=2007        Source |       SS       df       MS              Number of obs =      23 
-------------+------------------------------           F(  1,    21) =    7.36 
       Model |  667.012479     1  667.012479           Prob > F      =  0.0130     Residual |  1903.19719    21  90.6284377           R-squared     =  0.2595 -------------+------------------------------           Adj R-squared =  0.2243        Total |  2570.20967    22  116.827712           Root MSE      =  9.5199  ------------------------------------------------------------------------------    Farmprice |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval] -------------+---------------------------------------------------------------- LagFarmprice |   .5101912   .1880608     2.71   0.013     .1190974     .901285        _cons |   27.61829   10.75863     2.57   0.018      5.24449     49.9921 ------------------------------------------------------------------------------ WT/DS267/ARB/2 
Page 104 
 
 
   
. regress Farmprice JanMarFutures if Year>=1985&Year<=2007 
 
      Source |       SS       df       MS              Number of obs =      23 -------------+------------------------------           F(  1,    21) =    9.32        Model |  790.326662     1  790.326662           Prob > F      =  0.0060     Residual |  1779.88301    21  84.7563337           R-squared     =  0.3075 -------------+------------------------------           Adj R-squared =  0.2745        Total |  2570.20967    22  116.827712           Root MSE      =  9.2063  ------------------------------------------------------------------------------    Farmprice |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval] -------------+---------------------------------------------------------------- JanMarFutu~s |   .6679844   .2187505     3.05   0.006     .2130678    1.122901        _cons |   14.63084   13.78153     1.06   0.300    -14.02942    43.29109 ------------------------------------------------------------------------------  . log close log:  F:\Article 22.6\Final Calculations\Actionable\RMSE.smcl log type:  smcl closed on:  15 May 2009, 16:19:39 ----------------------------------------------------------------------------------- 
 
 
2. Data 
 
Year JanMarFutures FebFutures Farmprice LagFarmprice 
1960 . . 30.1 . 
1961 . . 32.8 30.1 
1962 . . 31.7 32.8 
1963 . . 32 31.7 
1964 . . 30.9 32 
1965 . . 29.3 30.9 
1966 . . 21.5 29.3 
1967 . . 26.5 21.5 
1968 . . 23 26.5 
1969 . . 21.9 23 
1970 . . 22.82 21.9 
1971 . . 28.07 22.82 
1972 . . 27.2 28.07 
1973 . . 44.4 27.2 
1974 . . 42.7 44.4 
1975 . 44.19 51.1 42.7 
1976 . 58.7 63.8 51.1 
1977 . 68.23 52.1 63.8 
1978 . 59.3 58.1 52.1 
1979 . 64.86 63.1 58.1 
1980 . 77.36 74.4 63.1 
1981 . 82.61 54 74.4 
1982 . 71.69 59.1 54 
1983 . 67.92 66 59.1 
1984 . 72.36 57.5 66 
1985 66.5 66.48 56.8 57.5 
1986 46.1 46.8 51.5 56.8 
1987 54.2 53.45 63.7 51.5 
1988 59.8 59.5 55.6 63.7  WT/DS267/ARB/2 
 Page 105 
 
 
  Year JanMarFutures FebFutures Farmprice LagFarmprice 
1989 60 58.81 63.6 55.6 
1990 64.8 65.31 67.1 63.6 
1991 66.6 67.69 56.8 67.1 
1992 61.1 60.32 53.7 56.8 
1993 61.3 61.87 58.1 53.7 
1994 70.5 70.61 72 58.1 
1995 75.8 75.25 75.4 72 
1996 78.6 78.58 69.3 75.4 
1997 76.8 76.82 65.2 69.3 
1998 72.7 72.15 60.2 65.2 
1999 61.1 60.27 45 60.2 
2000 61 61.31 49.8 45 
2001 57.8 58.63 29.8 49.8 
2002 42.7 42.18 44.5 29.8 
2003 59.1 59.6 61.8 44.5 
2004 67.4 66.81 41.6 61.8 
2005 52.9 45.67 47.7 41.6 
2006 59.3 . 46.5 47.7 
2007 58.8 . 59.3 46.5 
Sources :  Exhibit Bra-770 and US responses to questio ns from the Arbitrator, question 7, para. 39. 
 WT/DS267/ARB/2 
Page 106 
 
 
  ANNEX 2 
 
Worksheet 1  
  
Overview 
 
– Worksheet 2 "Instructions for Simulation" c ontains details for unde rstanding and using the 
model. 
 
– Worksheet 3 "Param Matrix" contains the pa rameters to be used in the simulation. 
 
– Worksheet 4 "Model Run" contains  the operational simulation model. 
 – Worksheet 5 "Instructions for Data"  cont ains details for understanding and using the 
subsequent four spreadsheets. 
 – Worksheet 6 is based on sheets " γ and P over g" and "Regressions" of Exhibit Bra-17 nov 
(Annex I). 
 – Worksheet 7 is based on sheets "dLnG" and "Regressions" of Exhibit Bra-17 nov (Annex I). 
 
– Worksheet 8 contains data on US and ROW production, consumption and exports. 
 
– Worksheets 9 and 10 presents the model results, including the apportioning of adverse effects 
to Brazil. 
 
– Worksheet 11 contains the regressions results from sheet "Regressions" of Exhibit Bra-17 nov 
(Annex I). 
 
– Each of the individual spreadsheets also  contain instructions and explanations. 
 
  WT/DS267/ARB/2 
 Page 107 
 
 
  Worksheet 2  
 
Instructions for Simulation  
  
1. Enable Macros: 
 (a) The default security setting in Microsoft Excel will likely disable the macro that 
executes the simulation. 
 
 (b) To enable the macro and run the simula tion, the security level in Microsoft Excel 
must be reduced. 
  – Go to "Options" in the Tools menu.  
  – Click on the "Security" tab.  
  – Click on "Macro Security".   – Set security to "Medium" or "Low". 
 
 (c) If necessary, close and reopen Microsoft Excel.  
2. Set parameters in spreadsheet 3 "Input param Matrix". 
 (a) Instructions for data input:   (i) Rows 4 and 5 have US and rest-o f-world production and consumption shares 
in the world. These can be obtained from worksheet 8 "US and RoW shares". 
   (ii) Rows 6-9 have US and rest-of-w orld supply and demand elasticities. These 
have to be entered manually here.  
 
  (iii) Row 10 shows dlnG. The dlnG data is taken from worksheet 7 "dlnG" 
(row 63) for the partial reductions that apply when ML and CCP subsidies are removed.   
  – When pasting from the dlnG spreadsheet use "Paste Special" and 
"Values and Number formatting". 
 
  (iv) Rows 11 and 12 show γ and P/g.  Data for these rows is taken from 
worksheet 6 " γ and P over g".   
  – When pasting from the γ and P/g spreadsheet use "Paste Special" and 
"Values and Number formatting". 
 3. Run the model and get results: 
 (a) Copy the entire input parameter matrix (cells B4:H12, in all simulations use the full
 
dimensions of this matrix) out of work sheet 3 "Input Param Matrix" into cells 
G5:M13 of worksheet 4 "Model Run". 
 
  NOTE: It is important to always copy and paste the whole parameter matrix to 
spreadsheet 4 "Model Run", meaning cells B4 :H12, no matter which marketing year.   
  (b) In worksheet 4 "Model Run", click "Run" in order to run a simulation. A macro will 
copy results into cells C27:M30 of worksheet 4 "Model Run". 
  (c) Click "Switch" to align year s into ascending chronological order. 
 
 (d) To save results they must be c opied into a separate sheet or file.  WT/DS267/ARB/2 
Page 108 
 
 
  Worksheet 3  
 
 Input Parameter Matrix
 MY 1999-2005  (for instructions see below and worksheet 2 "Instructions for 
simulation") 
 
– Copy from here (B4:H12) to cells G5:M13 in worksheet 4 "Model Run". Always copy the whole area, 
even if not interested in all years. 
 
 1999 2000 2001 2002 2003 2004 2005 
δsu 0.193 0.193 0.206 0.189 0.189 0.192 0.205 
δdu 0.112 0.096 0.082 0.074 0.064 0.062 0.051 
εu 0.8 0.8 0.8 0.8 0.8 0.8 0.8 
εr 0.2 0.2 0.2 0.2 0.2 0.2 0.2 
ηu -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 
ηr -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 
dlnG -0.543 -0.529 -0.519 -0 .677 -0.606 -0.571 -0.698 
γ 0.633 0.661 0.717 0.698 0.674 0.673 0.676 
P/g 1.66 1.77 1.67 0.82 1.37 1.86 1.11 
 
 
– Description of parameters: 
 
δsu Share of US production in world production ( see worksheet 8 "US and RoW shares") 
δdu Share of US consumption in world consumption ( see worksheet 8 "US and RoW shares") 
εu Elasticity of supply in US 
εr Elasticity of supply in RoW 
ηu Elasticity of demand in US 
ηr Elasticity of demand in RoW 
dlnG Percentage change in the effective government subsidy (measured as a price-subsidy equivalent; see 
worksheet 7 "dlnG") 
γ overall "coupling factor": degree to which government revenue provides a production incentive 
relative to revenue from the 
 market ( see worksheet 6 " γ and P over g") 
P/g Ratio of market revenue to revenue from government subsidy ( see worksheet 6 " γ and P over g") 
 
– Instructions for data input (the second step in worksheet 2 "Instructions for simulation"):  
 
 1. Rows 4 and 5 contain US production and consumption shares in the world.  The shares 
currently listed are from the wo rksheet 8 "US and RoW shares". 
 2. Rows 6-9 contain US and ROW supply and dema nd elasticities.  These are entered manually.   
 3. Data for row 10 is taken from the worksheet 7 "dlnG" (row 63) for the partial reductions that 
apply when the ML and CCP subsidies are removed.  This is based on worksheet "dLnG" 
from Bra-17 nov (Annex I).  When pasting from the dlnG spreadsheet use "Paste Special" and 
"Values and Number formatting". 
 4. Rows 11 and 12 show γ and P/g.  Data inputs are taken from the worksheet 6 " γ and P over g" 
(rows 34 and 35).  This is based on worksheet " γ and P over g" of Bra-17 nov (Annex I).  
When pasting from the γ and P/g spreadsheet use "Paste Special" and "Values and Number 
formatting".    
 
  
   WT/DS267/ARB/2
 Page 109Worksheet 4  
 
– This is the simulation sheet.  For instructions see below and worksheet 2 "Instructions for simulation". 
– Before running this spreadsheet, the parameter input matrix s hould have been copied to cells G5:M13 (from worksheet 3 "Input param. matrix"). 
– If desired, copy the results from ce lls H36:N38 into a new spreadsheet. 
 
 A B C D E F 
4 Input 2005 Parameter Description   
5 0.205 δsu is the share of US in world production δsu
6 0.051 δdu is the share of US in world consumption δdu
7 0.8 εu is the elasticity of supply in US εu
8 0.2 εr is the elasticity of supply in ROW εr
9 -0.2 ηu is the elasticity of demand in US ηu
10 -0.2 ηr is the elasticity of demand in ROW ηr
11 -0.698 dlnG reduction dlnG
12 0.676 γ  γ
13 1.11 P/g  P/g
14 0.3779 1- α   
15 0.6221 α   
 
 
 A B C D E F G H I J K L M N 
20 1-α   Calculations Price    Quantities supplied, demanded, exported   
21 (γ/(γ + P/g) α  dln P = 0.062 δsuεu(1-α)  dlnSu= -0.1644  dlnSr= 0.0188 dlnXr=  
22 0.3779 0.6221   -0.200 δduηu + (1- δdu)ηr  dlnDu= -0.0188  dlnDr= -0.018764  
23     0.261 δsuαεu +  (1- δsu)εr  dlnXu= -0.211631     
24    dln P = 0.09382053     S/X 1.32 dlnX u = dln(S u – D u) = (S u/Xu)dlnS u – (D u/Xu)dlnD u. 
25          D/X 0.33 dlnI u = dln(D u-Su) = (Du/Xu)dlnDu- (S u/Xu)dlnS u 
 
 
 A B C D E F G H I J K 
28 Results    2005 2004 2003 2002 2001 2000 1999 
29 dlnP           
30 dlnSu=           
31 dlnXu=           
32            
33    switch to get the right chronological order     
34            
  
  WT/DS267/ARB/2 
Page 110  
 A B C D E F G H I J K L M N 
35 Results in reverse order       1999  2000  2001  2002  2003  2004  2005  
36 dlnP       4.87% 4.68% 5.40% 10.65% 6.50% 4.89% 9.38% 
37 dlnSu=       -9.13% -8.76% -9.42% -20.39% -12.49% -9.24% -16.44% 
38 dlnXu=       -11.78% -11.30% -12.13% -26.31% -16.13% -11.92% -21.16% 
 
  WT/DS267/ARB/2 
 Page 111 
 
 
  Worksheet 5  
 
  
Instructions for Data Input 
  
1. Worksheet 6 " γ and P over g" calculates fa rmers' expectations of " γ" (overall coupling factor) 
and "P/g" (ratio of market revenue to reve nue from government subsidy), which are then 
copied into worksheet 3 "Input param matrix". 
  – Cells B4:K11 in worksheet 6 " γ and P over g" contain subsidy data. 
 
 – Rows 20 through 23 contain the calculations for the per-unit payment of the PFC, DP, 
MLA and Crop Insurance Program.  These payments are non-price based and thus 
independent of the expectation values of P, g and γ.  Instead, direct payments are 
based on well-known formulas that are publicized well in advance of the crop year.  Actual direct payments each year are u sed to represent what farmers expected to 
receive.  
  – The resulting per unit payment rates from the four programs are marked in grey 
highlight and in bold. 
  – Rows 27 through 29 show the calculation of the per unit payment rates of the CCP, 
marketing loan and Step 2 programs based  on the regressions of actual payments on 
futures prices.  The per unit rates are in grey highlight and in  bold. 
 
 – Rows 31 through 39 show the calculations of γ and P/g based on the payment rates 
derived using futures prices to model expectations. The resulting P/g and γ are in bold 
and grey highlight. 
  – Because the cells are connected by formul ae, any change in subsidy information in 
cells B4:K11 will also result in a change of outcome for P/g and γ. 
  – If one wanted to change the calculation of P/g and γ, one would have to change the 
subsidy data in B4:K11 (if PFC, DP, MLA or  CIS figures were to be changed).  
 2. Worksheet 7 "dlnG" calculates dlnG, the pe rcentage change in the effective government 
subsidy (measured as a price-subsidy equivalent).  The result is then copied into worksheet 3 
"Input param matrix".  
 
 – Worksheet 7 "dlnG" is not linked to worksheet 6 " γ and P over g".  So, if the per-unit 
payment data is updated, the new per unit payment rates (E(P), MLA, CCP, ML, 
Step 2, DP, etc.) have to be copied into  spreadsheet 7 "dlnG" and dlnG has to be 
recalculated.  Do not copy and paste the three lines " γ", "g", "P/g" from worksheet 6 
"γ and P/g" to worksheet 7 "dlnG". 
 
 – Rows 17-50 show the dlnG calculations for each individual program payment.  
 – In order to calculate the withdrawal of individual subsidies, proceed in the following 
manner.  The example given here is for ML  payments, but it applies to ML and CCP 
subsidies in the same way.  
 WT/DS267/ARB/2 
Page 112 
 
 
   – The dlnG for the ML program is shown in rows 43-45.  In row 43, g1 stands for total 
g (government subsidies) without including the ML payment.  In row 44, γ1 stands 
for a γ (total coupling factor) without having the ML program in place.  To obtain this 
latter number, one must delete row 11 (ML payments) and then copy and paste the 
new resulting γ (from row 15) into row 44.  After th at, paste back in the data for ML 
payments into row 11 and move on to the next program.  The resulting figure in row 
45 is the dlnG for the ML program. 
  – After conducting the same calculations fo r the CCP subsidies, one can add up the 
dlnG for the two individual programs into one dlnG for an aggregate of programs. 
  – In row 58, the impacts of the removal of CCP and ML subsidies are shown. 
 
 – Rows 60-63 contain the same figures as in row 55-58 times (-1).   
 – Results from row 63 are then pasted into  the worksheet 3 "Input param. matrix". 
 3. Worksheet 8 "US and RoW shares" calculates the production and consumption shares of the 
US in the world, which are copied into rows 4 and 5 of worksheet 3 "Input param matrix" and 
the ratios US production over US Exports and US Consumption over US exports, which are 
copied into worksheet 4 "Model Run", cell K24 + K25 (Shares of MY 2005 are used for all 
years). 
 4. Once the input parameter matrix is fully comp iled, the data can be inserted in worksheet 4 
"Model run" ( see worksheet 2 "Instructions for simulation").  The output matrix shows the 
results for dlnP, dlnSu, and, less pertinent for the question at hand, dlnXu, for the 
MY 1999-2005.  These percentage changes from the initial equilibrium are then used as data 
inputs for the calculations in worksheet 9 "Model results MY1999-2005" as indicated. 
 
  
   WT/DS267/ARB/2
 Page 113Worksheet 6  
 
Expected prices and expected subsidy revenue (using futures prices) 
 
3 Subsidy data* 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 
4 Production Flexibility Contract payments ( PFC )1) 699 597 637 616 575 474 436 0 0 0 
5 Direct payments ( DP)1) 0 0 0 0 0 0 182 616 615 611 
6 Counter Cyclical payments ( CCP )1) 0 0 0 0 0 0 1312 392 1375 1376 
7 Market Loss Assistance payments ( MLA ) 1) 0 0 316 613 612 524 0 0 0 0 
8 User Marketing ( Step 2 ) payments1)   3 390 308 422 236 193 429 350 544 350 
9 Marketing Loan Program benefits ( ML)1) 0 29 534 1546 531 2520 871 168 1842 1257 
10 Crop insurance subsidy  (CIS )1) 185 67 308 317 426 473 277 279 79 -11 
11 Total support 887 1083 2103 3514 2380 4184 3507 1805 4455 3583 
12 Value of production 6,125 5,710 3,894 3,665 4,109 2,904 3,676 5,415 4,643 5,470 
13 Quantity produced, in million lbs3) 8,838 8,758 6,468 8,145 8,250 9,745 8,260 8,762 11,160 11,467 
14 Per unit market revenue $/lb. 2) $0.69 $0.65 $0.60 $0.45 $0.50 $0.30 $0.45 $0.62 $0.42 $0.48 
 
 
The following per-unit calculatio ns refer to the expected per unit rate of the PFC, DP, MLA and CIS programs FAPRI expected pro duction1) 
 
 bales 17.25 18.88 18.67 17.02 16.45 17.44 18.14 
 pounds 8,280 9,062 8,962 8,170 7,896 8,371 8,707
         
PFC4) per unit rates 0.074 0.063 0.053 0.053 0.000 0.000 0.000
DP4) per unit rates 0.000 0.000 0.000 0.022 0.078 0.073 0.070
MLA4) per unit rates 0.074 0.068 0.058 0.000 0.000 0.000 0.000
CIS4)  0.025 0.031 0.046 0.046 0.045 0.038 0.024
 
  
  WT/DS267/ARB/2 
Page 114 The following per-unit calculatio ns refer to the expected per-unit rate of CCP, ML and Step 2 subsidies (based on regressions o n futures prices) 
 
CCP5)    0.000 0.000 0.000 0.137 0.113 0.081 0.137
ML5)    0.111 0.108 0.117 0.171 0.113 0.090 0.142
Step 25)    0.039 0.038 0.039 0.048 0.039 0.035 0.043
           
E(P)    0.538 0.546 0.525 0.390 0.533 0.591 0.463
PFC4)    0.074 0.063 0.053 0.053 0.000 0.000 0.000
DP4)    0.000 0.000 0.000 0.022 0.078 0.073 0.070
CCP    0.000 0.000 0.000 0.137 0.113 0.081 0.137
MLA4)    0.074 0.068 0.058 0.000 0.000 0.000 0.000
Step2    0.039 0.038 0.039 0.048 0.039 0.035 0.043
Loan    0.111 0.108 0.117 0.171 0.113 0.090 0.142
CIS4)    0.025 0.031 0.046 0.046 0.045 0.038 0.024
E(g)    0.32 0.31 0.31 0.48 0.39 0.32 0.42
E(γ)6)       0.633 0.661 0.717 0.698 0.674 0.673 0.676
E(P/g)6)       1.66 1.77 1.67 0.82 1.37 1.86 1.11
 
 
Notes : 
* Rows 4-14 are identical to Exhibit Bra-705 (US Upland cotton subsidy, and value of production MY 1996-2005 ($million and mill ion lbs)). 
1) See Exhibit Bra-705. 
2) Cotton farm-gate price data available from http://u sda.mannlib.cornell.edu/usda/ers/890 04/Table11.xls (last accessed 10 Octo ber 2008). 
3) Data taken from worksheet 8 "US and RoW shares". 
4) These cotton subsidies do not change with variations in price expectation. 
5) The cells in grey highlights depict US cotton farmers' subsidy expectations according to worksheet 11 "Regressions". It is b ased on sheet "Regressions" in Bra-17 nov (Annex 
I). 
6) The results in grey highlights enter dir ectly into worksheet 3 "Input param matrix". 
  WT/DS267/ARB/2 
 Page 115 
 
 
  Worksheet 7  
 
dlnG calculations  
Expectations formed using futures prices 
 
4   1999 2000 2001 2002 2003 2004 2005 
5 E(P) 0.54 0.55 0.52 0.39 0.53 0.59 0.46 
6 PFC 0.07 0.06 0.05 0.05 0.00 0.00 0.00 
7 DP 0.00 0.00 0.00 0.02 0.08 0.07 0.07 
8 CCP 0.00 0.00 0.00 0.14 0.11 0.08 0.14 
9 MLA 0.07 0.07 0.06 0.00 0.00 0.00 0.00 
10 Step 2 0.04 0.04 0.04 0.05 0.04 0.04 0.04 
11 ML 0.11 0.11 0.12 0.17 0.11 0.09 0.14 
12 CIS 0.03 0.03 0.05 0.05 0.04 0.04 0.02 
13 g 0.323 0.31 0.31 0.48 0.39 0.32 0.42 
14 P/g 1.66 1.77 1.67 0.82 1.37 1.86 1.11 
15 γ 0.633 0.661 0.717 0.698 0.674 0.673 0.676 
1 6          
1 7  P F C         
18 g1 0.25 0.24 0.26 0.42 0.39 0.32 0.42 
19 γ1 0.777 0.793 0.832 0.767 0.674 0.673 0.676 
20 dlnG 0.055 0.047 0.035 0.024 0.000 0.000 0.000 
2 1          
2 2  D P         
23 g1 0.32 0.31 0.31 0.46 0.31 0.24 0.35 
24 γ1 0.633 0.661 0.717 0.720 0.781 0.801 0.762 
25 dlnG 0.000 0.000 0.000 0.017 0.075 0.086 0.062 
2 6          
2 7  C C P         
28 g1 0.32 0.31 0.31 0.34 0.27 0.24 0.28 
29 γ1 0.633 0.661 0.717 0.818 0.787 0.767 0.811 
30 dlnG 0.000 0.000 0.000 0.165 0.173 0.152 0.195 
3 1          
3 2  M L A         
33 g1 0.25 0.24 0.25 0.48 0.39 0.32 0.42 
34 γ1 0.746 0.776 0.824 0.698 0.674 0.673 0.676 
35 dlnG 0.090 0.083 0.065 0.000 0.000 0.000 0.000 
3 6          
3 7  U s e r         
38 g1 0.28 0.27 0.27 0.43 0.35 0.28 0.37 
39 γ1 0.583 0.613 0.676 0.664 0.638 0.632 0.638 
40 dlnG 0.188 0.187 0.175 0.143 0.149 0.165 0.153 
4 1          
4 2  M L         
43 g1 0.21 0.20 0.20 0.31 0.27 0.23 0.27 
44 γ1 0.441 0.478 0.549 0.529 0.540 0.545 0.509 
45 dlnG 0.543 0.529 0.519 0.513 0.433 0.419 0.503 
4 6          
4 7  C I S         
48 g1 0.30 0.28 0.27 0.43 0.34 0.28 0.39 
49 γ1 0.601 0.622 0.668 0.665 0.632 0.629 0.656 
50 dlnG 0.124 0.154 0.205 0.139 0.170 0.178 0.086 
5 1          
52 Test 1.00 1.00 1.00 1.00 1.00 1.00 1.00 
5 3          
5 4          
         WT/DS267/ARB/2 
Page 116 
 
 
  55 MLA+CCP+ML 0.633 0.612 0.584 0.677 0.606 0.571 0.698 
56 MLA+CCP+ML+Step2 0.821 0.799 0.760 0.820 0.755 0.736 0.852 
57 Step2 0.188 0.187 0.175 0.143 0.149 0.165 0.153 
58 CCP+ML 0.543 0.529 0.519 0.677 0.606 0.571 0.698 
5 9          
60 MLA+CCP+ML -0.633 -0.612 -0.584  -0.677 -0.606 -0.571 -0.698 
61 MLA+CCP+ML+Step2 -0.821 -0.799 -0. 760 -0.820 -0.755 -0.736 -0.852 
62 Step2 -0.188 -0.187 -0.175 -0.143 -0.149 -0.165 -0.153 
63 CCP+ML -0.543 -0.529 -0.519 -0. 677 -0.606 -0.571 -0.698 
 
Notes : 
(i) Worksheet 7 "dlnG" calculates dlnG, the percentage change in the effective government subsidy 
(measured as a price-subsidy equivalent).  The result is then copied into the worksheet 3 "Input param 
matrix".  
(ii) For input details (rows 5-12), see worksheet 6 " γ and P over g".  
(iii) This spreadsheet is not linked to worksheet 6 " γ and P/g".  So, if the per-unit payment data is updated 
or changed, the new per-unit payment rates have to be copied into this spreadsheet (dlnG) and dlnG has 
to be recalculated.  
(iv) Rows 17-50 show the dlnG calculations for each individual program payment. 
(v) In order to calculate the withdrawal of ML an d CCP subsidies, proceed in the following manner. 
 – The example given here is for The ML payment, but it applies to ML and CCP subsidies in the 
same way. 
 – The dlnG for the ML program is shown in rows 43-45.  In row 43, g1 stands for total g 
(government subsidies) without including the ML payment.  In row 44, γ1 stands for a γ (total 
coupling factor) without having the ML program in  place.  To obtain this latter number, one 
must delete row 11 (ML payments) and then copy and paste the new resulting γ (from row 15) 
into row 44.  After that, paste back in the data for ML payments into row 11 and move on to 
the next program.  The resulting figure in row 45 is the dlnG for the ML program. After 
conducting the same calculations for the CCP subs idies, one can add up the dlnG for the two 
individual programs into one dlnG for an aggregate of programs.  In rows 58 the resulting sum 
is presented. 
(vi) Rows 60-63 contain the same figures as in row 55-58 times (-1).  
(vii) Results from row 63 are then pasted into worksheet 3 "Input param matrix". 
  
   WT/DS267/ARB/2
 Page 117 
 
Worksheet 8  
 
US and rest-of-world shares in cotton production, consumption and exports 
 
  1999 2000 2001 2002 2003 2004 2005 
Production in 1000 480 lb bales1),2),3)               
   United States 16,968 17,188 20 ,303 17,209 18,255 23,251 23,890 
   World Total 87,964 89,099 98,702 90,991 96,782 121,386 116,590 
   ROW (World - US) 70,996 71,911 78,399 73,782 78,527 98,135 92,700 
   Share US in World, in % 19.29% 19.29% 20.57% 18.91% 18.86% 19.15% 20.49% 
   Share ROW in % 80.71% 80.71% 79.43% 81.09% 81.14% 80.85% 79.51% 
                
Consumption In 1000 480 lb bales1),2)          
   United States 10,194 8,862 7,696 7,237 6,266 6,691 5,871 
   World Total 91,082 92,158 94,278 98,355 98,033 108,586 116,241 
   ROW (World - US) 80,888 83,296 86,582 91,118 91,767 101,895 110,370 
   Share US in World, in % 11.19% 9.62% 8.16% 7.36% 6.39% 6.16% 5.05% 
   Share ROW in % 88.81% 90.38% 91.84% 92.64% 93.61% 93.84% 94.95% 
          
Exports in 1000 480lb bales1),2)          
   United States 6,750 6,740 11,000 11,900 13,758 14,436 18,036 
   World Total 27,195 26,258 29, 093 30,325 33,277 35,012 44,935 
   ROW (World - US) 20,445 19,518 18,093 18,425 19,519 20,576 26,899 
   Ratio US Production/US Exports5) 2.51 2.55 1.85 1.45 1.33 1.61 1.32 
   Ratio US Consumption/US Exports6) 1.51 1.31 0.70 0.61 0.46 0.46 0.33 
   Ratio ROW Production/ROW Exports 3.23 3.39 3.39 3.00 2.91 3.47 2.59 
   Ratio ROW Consumption/ROW Exports 3.96 4.27 4.79 4.95 4.70 4.95 4.10 
 
Notes : 
1) Source :  Panel Report, US – Upland Cotton (21.5) , Table 3, and http:// www.fas.usda.gov/psdonline/. 
2) Production, consumption and exports are c onverted into pounds (lb) in columns L-S. 
3) The share of US production in world production (row 13) en ters into worksheet 3 "Input param matrix" cells B4:H4. 
4) The share of US consumption in world consumption (row 20)  enters into worksheet 3 "Input param matrix" cells B5:H5. 
5) The ratio of US production over US exports (row 27) enter into  worksheet 4 "Model Run" to calc ulate the approximate change i n US exports (dlnXu). 
6) The ratio of US consumption over US e xports (row 28) enters into worksheet 4 "Mode l Run" to calculate the approximate change  in US exports (dlnXu). 
  
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  1999 2000 2001 2002 2003 2004 2005 
Production in lb                
   United States 8,144,640,000 8,250,240,000 9,745,440,000 8,260,320,000 8,762,400,000 11,160,480,000 11,467,200,000 
   World Total 42,222,720,000 42,767,520,000 47,376,960,000 43,675,680,000 46,455,360,000 58,265,280,000 55,963,200,000 
   ROW (World - US) 34,078,080,000 34,517,280,000 37,631,520, 000 35,415,360,000 37,692,960,000 47,104,800,000 44,496,000,000 
                
                
                
Consumption in lb                
   United States 4,893,120,000 4,253,760,000 3,694,08 0,000 3,473,760,000 3,007,680,000 3,211,680,000 2,818,080,000 
   World Total 43,719,360,000 44,235,840,000 45,253,440,000 47,210,400,000 47,055,840,000 52,121,280,000 55,795,680,000 
   ROW (World - US) 38,826,240,000 39,982,080,000 41,559,360, 000 43,736,640,000 44,048,160,000 48,909,600,000 52,977,600,000 
                
                
                
Exports in lb                
   United States 3,240,000,000 3,235,200,000 5,280,00 0,000 5,712,000,000 6,603,840,000 6,929,280,000 8,657,280,000 
   ROW 13,053,600,000 12,603,840,000 13,964,640,000 14, 556,000,000 15,972,960,000 16,805,760,000 21,568,800,000 
   ROW (World - US) 9,813,600,000 9,368,640,000 8,684,64 0,000 8,844,000,000 9,369,120,000 9,876,480,000 12,911,520,000 
  
   WT/DS267/ARB/2
 Page 119Worksheet 9  
 
Model Results MY 1999-2005  
 
1. Model scenario: complete and permanen t withdrawal of ML and CCP subsidies. 
2. Input parameters: see worksheet 3 "Input param matrix". 
3. Price expectations: Futures prices. 
4. Coupling factor for CCP is 0.4. 
 
Row A B C D E F G H I 
7 Input parameter matrix MY 1999-2005  
8   Source 1999 2000 2001 2002 2003 2004 2005 
9 δsu worksheet 8 "U.S. and RoW shar es" 0.193 0.193 0.206 0.189 0.189 0.192 0.205 
10 δdu worksheet 8 "U.S. and RoW shar es" 0.112 0.096 0.082 0.074 0.064 0.062 0.051 
11 εu worksheet 3 "Input param matrix " 0.8 0.8 0.8 0.8 0.8 0.8 0.8 
12 εr worksheet 3 "Input param matrix"  0.2 0.2 0.2 0.2 0.2 0.2 0.2 
13 ηu worksheet 3 "Input param matrix"  -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 
14 ηr worksheet 3 "Input param matrix"  -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 
15 dlnG worksheet 7 "dlnG" -0.543 -0 .529 -0.519 -0.677 -0.606 -0.571 -0.698 
16 γ worksheet 6 "g and P over g"  0.633 0.661 0.717 0.698 0.674 0.673 0.676 
17 P/g worksheet 6 "g and P over g" 1.66 1.77 1.67 0.82 1.37 1.86 1.11 
1 8           
19 Output matrix MY 1999-2005 (see worksheet 4 "Model run")  
20 Output matrix Explanation/calculation 1999 2000 2001 2002 2003 2004 2005 
21 dlnP Model run output1) 4.87% 4.68% 5.40% 10.65% 6.50% 4.89% 9.38% 
22 dlnSu Model run output1) -9.13% -8.76% -9.42% -20.39% -12.49% -9.24% -16.44% 
23 dlnXu Model run output1) -11.78% -11.30% -12.13% -26.31% -16.13% -11.92% -21.16% 
24 dlnP Model run output1) 4.87% 4.68% 5.40% 10.65% 6.50% 4.89% 9.38% 
25 dlnSr dlnSr = εr(dlnP) 0.97% 0.94% 1.08% 2.13% 1.30% 0.98% 1.88% 
26 dlnDr dlnDr = ηr(dlnP) -0.97% -0.94% -1.08% -2.13% -1.30% -0.98% -1.88% 
 
Notes:  
1) See worksheet 4 "Model Run".  
 
  
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Row A B C D E F G H I 
31 Model results MY 1999-2005 - US excess production and excess revenue, worldw ide adverse effects 
32 US production effects Explanation/calculation 1999 2000 2001 2002 2003 2004 2005 
33 US excess production 
(lb cotton) dlnSu*actual US production -743,597,092 -723,046, 405 -918,506,550 -1,683,967,155 -1, 094,758,202 -1,031,224,878 -1,8 85,027,126 
34 US excess revenue 
(USD) dlnSu*actual US 
production*actual WP -$392,991,063 -$413,944,067 -$384,670, 543 -$939,822,069 -$758,010,579 - $552,014,677 -$1,076,350,489 
35                  
36 Worldwide adverse 
effects Explanation/calculation 1999 2000 2001 2002 2003 2004 2005 
37 Sales value effect AE SV=dlnP*actual WP*world 
Prod. (in lb) $877,604,225 $924,387,671 $851,429,013 $2, 104,166,093 $1,697,696,545 $1, 233,867,383 $2,383,718,532 
38 Reduced production 
effect AE RP=actual world prod. * 
(dlnSr)*(1+dlnP)*actual WP $184,073,625 $193,525,744 $179,485,392 $465,634, 078 $361,626,110 $258,848,961 $521,472,055 
39 Total adverse effects AE SV + AE RP $1,061,677,850 $1,117,913,415 $1, 030,914,405 $2,569,800,171 $2,059,322 ,655 $1,492,716,344 $2,905,190,586 
          
 
  World price (A-Index) 
1999-2005               
   Year 1999 2000 2001 2002 2003 2004 2005 
 
  Per unit market revenue 
$/lb. P $0.53 $0.57 $0.42 $0.56 $0.69 $0.54 $0.57 
Source :  http://usda.mannlib.cornell.edu/usda/ers/CWS-yearbook//2000s /2007/CWS-yearbook-12-10-2007.pdf (Appendix table 14); accessed 10 October 2008 
  WT/DS267/ARB/2 
 Page 121 
 
 
  Worksheet 10  
 
 
Apportioning to Brazil 
Adverse Effects (Global Level)  $2,905,190,586
Brazil's Share $147,314,091
 
 
Cotton Production  
(1000 480 lb bales)  
Country/Region 2005/2006 
Brazil 4,700
ROW (World less US) 92,689
World 116,579
Brazil's Share of ROW 5.1%
Source :  Exhibit US-68 (worksheet "Production"). 
 
 
  
  WT/DS267/ARB/2 
Page 122 Worksheet 11  
 
 
This spreadsheet contains the regression on future prices,  the results, and calculations based on those results. 
 The resulting expected figures fo r a specific program were then copied into the spreadsheet " γ and P over g".  Those figures are here in bold and with grey 
background. 
 
1. Regression Results and Expected Market Price 
 
 Average February Price of December Contract Marketing Year Average Farm Price Expected Per Unit Market price 
1996 0.786 0.693  
1997 0.768 0.652  
1998 0.721 0.602  
1999 0.603 0.450 0.538 
2000 0.613 0.498 0.546 
2001 0.586 0.298 0.525 
2002 0.422 0.445 0.390 
2003 0.596 0.618 0.533 
2004 0.668 0.416 0.591 
2005 0.511 0.477 0.463 
2006 0.604  0.539 
 
SUMMARY OUTPUT 
 
Regression Statistics 
Multiple R 0.957943 
R Square 0.917655 
Adjusted R Square 0.907362 
Standard Error 0.037467 
Observations 10 
  
   WT/DS267/ARB/2
 Page 123 
ANOVA      
  df SS MS F Significance F 
Regression 1 0.125149 0.125149 89.1528 1.3E-05 
Residual 8 0.01123 0.001404   
Total 9 0.136379       
 
  Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lo wer 95.0% Upper 95.0% 
Intercept 0.04565 0.051091 0.893509 0. 397667 -0.07217 0.16 -0.072165174 0.163 
X Variable 1 0.816883 0.086515 9.442076 1.3E-05 0.617378 1.02 0.617378453 1.016 
 
2. Regression Results and Expected Step 2 Payment 
 
 Average February Price of 
December Contract Step 2, million $ production, million lbs paym ent rate, $/lb Expected Per Unit Step 2 
1996 0.786 3 8,838 0.000  
1997 0.768 390 8,758 0.045  
1998 0.721 308 6,468 0.048  
1999 0.603 422 7,821 0.054 0.039 
2000 0.613 236 8,064 0.029 0.038 
2001 0.586 193 9,409 0.021 0.039 
2002 0.422 429 7,935 0.054 0.048 
2003 0.596 350 8,555 0.041 0.039 
2004 0.668 544 10,802 0.050 0.035 
2005 0.511 350 11,165 0.031 0.043 
 
SUMMARY OUTPUT 
 
Regression Statistics 
Multiple R 0.333198 
R Square 0.111021 
Adjusted R Square -0.0001 
Standard Error 0.017144 
Observations 10 
  
  WT/DS267/ARB/2 
Page 124 ANOVA 
  df SS MS F Significance F 
Regression 1 0.000294 0.00 0294 0.999086 0.346802
Residual 8 0.002351 0.000294   
Total 9 0.002645       
 
  Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% 
Intercept 0.069045 0.03223 2.142276 0.064547 -0.00528 0.14 -0.00527693 0.143 
X Variable 1 -0.05061 0.050632 -0.99954 0.346802 -0.16737 0.07 -0.167365142 0.066 
 
 3. Regression Results and Expected Marketing Loan Program Payment 
 
 Average February Price of 
December Contract MLG total, million $ production, million lbs payment rate, $/lb Expected Per Unit Loan 
Payment 
1996 0.786 0 8,838 0.000  
1997 0.768 29 8,758 0.003  
1998 0.721 534 6,468 0.083  
1999 0.603 1,546 7,821 0.198 0.111 
2000 0.613 531 8,064 0.066 0.108 
2001 0.586 2,520 9,409 0.268 0.117 
2002 0.422 871 7,935 0.110 0.171 
2003 0.596 168 8,555 0.020 0.113 
2004 0.668 1,842 10,802 0.170 0.090 
2005 0.511 1,257 11,165 0.113 0.142 
2006 0.604    0.111 
 
 
SUMMARY OUTPUT 
 
Regression Statistics 
Multiple R 0.423526 
R Square 0.179375 
Adjusted R Square 0.076796 
Standard Error 0.084794 
Observations 10 
  
   WT/DS267/ARB/2
 Page 125ANOVA 
  df SS MS F Significance F 
Regression 1 0.012573 0.01 2573 1.748663 0.222598
Residual 8 0.05752 0.00719   
Total 9 0.070093       
 
  Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% 
Intercept 0.310755 0.159407 1.949448 0.087066 -0.05684 0.68 -0.056837531 0.678 
X Variable 1 -0.33115 0.250421 -1.32237 0.222598 -0.90862 0.25 -0.908621632 0.246 
 
 
4. Regression Results and Expected CCP payment  
 
 Average February Price of 
December Contract CCP, million $ production, million lbs payment rate, $/lb Expected Per Unit CCP 
Payment 
1996 0.786 0 8,838 0.000  
1997 0.768 0 8,758 0.000  
1998 0.721 385 6,468 0.060  
1999 0.603 1,312 7,821 0.168  
2000 0.613 1,312 8,064 0.163  
2001 0.586 1,312 9,409 0.139  
2002 0.422 1,312 7,935 0.165 0.191 
2003 0.596 392 8,555 0.046 0.113 
2004 0.668 1,375 10,802 0.127 0.081 
2005 0.511 1,376 11,165 0.123 0.151 
2006 0.604    0.110 
 SUMMARY OUTPUT  
Regression Statistics 
Multiple R 0.754296 
R Square 0.568962 
Adjusted R Square 0.515082 
Standard Error 0.04654 
Observations 10 
  
  WT/DS267/ARB/2 
Page 126 ANOVA 
  df SS MS F Significance F 
Regression 1 0.022872 0.02 2872 10.55985 0.011708
Residual 8 0.017328 0.002166   
Total 9 0.0402       
 
  Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% 
Intercept 0.379375 0.087492 4.336105 0.002491 0.177618 0.58 0.177617707 0.581 
X Variable 1 -0.44664 0.137446 -3.24959 0.011708 -0.7636 -0.1 -0.763595134 -0.13 
 
 
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