WORLD TRADE  
ORGANIZATION  TN/RL/GEN/113 
21 April 2006 
 (06-1836) 
Negotiating Group on Rules Original:   English 
  
FURTHER PROPOSAL ON SERIOUS PREJUDICE
1 
 
Paper from Brazil  
   The following communication, dated 20 April 2006,  is being circulated at the request of the 
Delegation of Brazil. 
  The submitting delegation has requested that th is paper, which was submitted to the Rules 
Negotiating Group as an informal document (JOB(06)/94), also be circulated as a formal document.  
_______________ 
 
I. INTRODUCTION 
 
1. This communication addresses the “serious pr ejudice” provisions of Article 6 of the WTO 
Agreement on Subsidies and Countervailing Measures  (“SCM Agreement”).  This proposal is 
complementary to Brazil’s previous submission on the issue (TN/RL/GEN/81) and refers to some 
aspects not addressed in Canada’s proposal (TN/RL/GEN/14).  
II. PROPOSED AMENDMENTS 
 A. R
EINSTATEMENT AND REVISION OF ARTICLE 6.1 
 2. Brazil wishes to reaffirm its support to th e reinstatement of Article 6.1 of the SCM 
Agreement, provided that footnotes 15 and 16 relati ng to civil aircraft be deleted.  In any case, a 
reinstated Article 6.1 will require improvements and clarifications.
2 
 
3. Without undermining the proposals contained in document TN/RL/GEN/81 or the provisions 
of the Article 6.3 (d) of the SCM Agreement, Brazil is of the view that in agricultural subsidies the 
provisions of Article 6.1 should be applicable exclusively to those Members with a relevant 
international role, whose agricultural subsidies are most likely to cause trade-distorting effects.  In 
that sense,  in order to circumscribe the presumption of serious prejudice to agricultural subsidies that 
have a greater potential to have distortive effects, Brazil suggests a new footnote in the caput of the 
Article 6.1: 
                                                      
 1 Brazil reserves its rights to o ffer additional thoughts and submit further proposals on the matter. 
 2 In this regard, Brazil takes note of the proposal by the United States (TN/RL/GEN/94) to possibly 
reinstate Article 6.1 as an expansion of the prohibited subsidies category (Article 3 of the SCM Agreement).  
Concerning the approach proposed by the United States in footnote 4 of its proposal, Brazil believes that the 
expansion of the category of prohibited subsidies will be undermined if any so rt of “Peace Clause” is introduced 
for agricultural subsidies, be it in the Agreement on Agriculture (AoA) or in the SCM Agreement.  As the US - Upland Cotton Panel made it clear , agricultural subsidies must be treated as actionable subsidies under the SCM 
Agreement.  Additionally, the AoA has no specific provisions to deal with the impact of trade-distorting 
domestic subsidies on the market. In the light of the very trade-distorting nature of agricultural subsidies, any improvement in subsidies disciplines must also be oriented  to reduce the adverse effect s of agricultural subsidies 
on the international market and on the decision-making process of farmers. TN/RL/GEN/113 
Page 2  
   
Article 6  
Serious Prejudice  
 
6.1. Serious prejudice in the sense of paragraph (c) of Article 5 shall be deemed to 
exist in the case of 
1: 
 
----------------------------  
1 In the case of a particular primary agricultural product or commodity, the provisions of this article shall apply 
only if the average world export market share that the subsidizing Member had during the previous period of 
three years is higher than 2%.  
 
 
4. With regard to the suggestion contained in  document TN/RL/GEN/81 that paragraph 4 of 
Annex IV, including its footnote, be transposed as  a new Article 6.1(e), Brazil wishes to further 
clarify that the calculation of the benefit in start- up situations has also to be done according to the 
provisions of Annex IV.  The refined new paragraph 6.1(e) would now read: 
 
 
(e)  the overall rate of subsidization exceeding 15 percent of the total 
funds invested1, 2, where the recipient is in a start-up situation.3 
 
-------------------------------  
1 For purposes of this paragraph, a start-up period will not extend beyond the first year of production. 
2 The total ad valorem subsidization shall be calculated in accordance with the provisions of Annex IV. 
3 Start-up situations include instances where fin ancial commitments for product development or 
construction of facilities to manufa cture products benefiting from the subsidy have been made, even though 
production has not begun.  
 
5. Additionally, notwithstanding the provisions of Article XVI of the GATT 1994, Article 6.1 of 
the ASCM should have a specific provision dealin g with direct payments based on price support 
schemes. Brazil proposes the introduction of a new sub- paragraph (f) in Article 6.1.  The suggested 
provision would read:  
(f) direct payments based on price support schemes. 
 
B. P
ROPOSED AMENDMENTS TO ARTICLE 6.3 
 6. Regarding, Article 6.3 (d) of the SCM Ag reement, Brazil proposes that the expression “world 
market share”  be replaced by the expression “world export market share”.  Thus, the provision 
would refer to a Member’s share of the world market for exports. In the United States – Upland 
Cotton dispute, the Panel found that the provision, as cu rrently stated, refers to “the share of the world 
market supplied by the subsidizing Member”, which includes both domestic and export markets. 
 7. Brazil understands that Article 6.3 should be adapted, as suggested, in order to more 
accurately cover the trade-distorting effects of ag ricultural subsidies in the world market.  The world 
export market share  is important not only to identify seri ous prejudice, but also to measure the 
adverse effects caused by the subsidies in the interna tional market. In the absence of the subsidies, the 
subsidizing Member would not be able  to maintain or increase its mark et share.  Brazil maintains that 
the adverse effects caused by subsidies are not only re lated to the increase of the market share of the 
subsidizing Member, but also to its maintenance. 
 TN/RL/GEN/113 
Page 3 
 
  8. In that sense, Brazil believes that the present te xt of Article 6.3(d) does not fully addresses 
situations where the subsidizing country is able to  sustain its market share due to the effect of 
subsidies. In order to precisely observe the effect s of the subsidies in the world export market, the 
capacity to sustain market share should also be analyzed.  Therefore, Brazil proposes the introduction 
of a new sub-paragraph (e) in Article 6.3.  The suggested provisions would thus read: 
 
Article 6  
Serious Prejudice  
 
6.3 Serious prejudice in the sense of paragraph (c) of Article 5 may arise in any case where one or several of the following apply: 
 
  (…) 
 
(d) the effect of the subsidy is an increase in the world export
 market share 
of the subsidizing Member in a partic ular subsidized primary product or 
commodity17 as compared to the average share it had during the 
previous period of three years and this increase follow a consistent trend over a period when subsidies have been granted. 
 (e) the effect of the subsidy is to su stain the world export market share of the 
subsidizing Member in a particular  subsidized primary product or 
commodity at levels that would not be possible in the absence of the 
subsidy. 
 
C. P
ROPOSED AMENDMENTS TO ANNEX  IV 
 
9. Firstly, in order to clarify that the provisions of Annex IV are to be used only for the purpose 
of calculating the total ad valorem subsidization under Article 6.1(a), Brazil proposes to clarify the 
title of Annex IV.  10. Secondly, considering the difficulties identifie d by the Informal Group of Experts (IGE) 
created to examine matters related to Annex IV (G /SCM/W/415/Rev.2), with regard to the calculation 
of the government costs of funds (paragraphs 17 to 27 of the said document), Brazil suggests to 
replace the concept of “cost to the government” appr oach of paragraph 1 of the said Annex with the 
concept of “benefit to the recipient”, according to the concept of “benefit” of Article 1.1(b) of the 
SCM Agreement.  Moreover, Brazil suggests fu rther improvements in the Annex, based on 
recommendations of the IGE. 
 
11. Lastly, Brazil proposes that the expression “tied to the production or sale of a given product” 
in paragraph 3 be replaced by the expression “tied to the production, sale, price or other specific 
characteristic of a given product”.  12. Annex IV, as amended by these suggestions, would thus read
3: 
     
 
 
                                                     
 
 3 The deletion of paragraph 4 within Annex IV has already been suggested by Brazil in document 
TN/RL/GEN/81. TN/RL/GEN/113 
Page 4  
   
ANNEX IV 
CALCULATION OF THE TOTAL AD VALOREM SUBSIDIZATION FOR THE PURPOSE OF
 
(PARAGRAPH 1(a) OF ARTICLE 6) 62 
  
1. Any calculation of the amount of a subsidy for the purpose of paragraph 1(a) of Article 6 
shall be done in terms of the cost to the granting government
 benefit to the recipient, according to 
Article 1.1(b) . The ad valorem subsidization of a produc t shall be calculated on a firm-specific 
basis62bis. Individual firms with less than 5 per cent subsidization would not be subject to a 
presumption of causing serious prejudice.  
 
2. Except as provided in paragraphs 3 through 5, in determining whether the overall rate  
amount of subsidization exceeds 5 per cent of the value of the product, the value of the product shall 
be calculated as the total value of the recipient firm's63 sales in the most recent full accounting year  
12-month peri od, for which sales data is available, preced ing the period in which the subsidy is 
granted.64 
 
2.1 The recipient firm's sales should be th e recipient's sales during the most recent 
accounting year preceding the p eriod to which the relevant portion of the subsidy was 
allocated. The provision of this s ub-paragraph applies also to paragraph 3.  
 
3. Where the subsidy is tied to the production,  or sale, price or other specific characteristic  of a 
given product, the value of the product shall be calc ulated as the total value of the recipient firm's 
sales of that product in the most recent full accounting year  12-month period , for which sales data is 
available, preceding the period in which the subsidy is granted.   
3.1 To determine whether a subsidy is "tie d" to a particular product, and hence whether 
the recipient firm's sales should be  the recipient's sales of that product alone, instead of to its 
total sales, a subsidy may be deemed to be tie d to a product if its intended use is known to the 
granting Government, and so acknowledged, prior to  or concurrent with the subsidy's bestowal.   
 
3.2 Where a firm receives both tied and untied subsidies, separate ad valorem 
calculations should be performed for each us ing the appropriate sales denominators, and that 
the resulting percentages should be aggregated, to determine the total ad valorem subsidization 
of the product. Specifically, the ad valorem s ubsidization percentages from tied and untied 
subsidies should be calculated using as the recipien t firm's sales the recipient firm’s sales of the 
relevant product and the recipient firm’s total sales, respectively. The resulting ad valorem 
percentages then should be added together to de termine the aggregate ad valorem subsidization 
of the product from these subsidies.   
    
 
                                                     
 
 62 An understanding among Members should be develop ed, as necessary, on matters which are not 
specified in this Annex or which need further clarification for the purposes of paragraph 1(a) of Article 6. 
 62bis The ad valorem subsidization of a primary product or commodity shall be calculated on an 
industry output basis.  
 63 The recipient firm is a firm in the territory of the subsidizing Member. 
 64 In the case of tax-related subsidies, the value of the product shall be calculated as the total value of the 
recipient firm's sales in the fiscal year in which the tax-related measure was earned.  TN/RL/GEN/113 
Page 5 
 
  4. Where the recipient firm is in a start -up situation, serious prejudice shall be deemed 
to exist if the overall rate of subsidization exceed s 15 per cent of the total funds invested. For 
purposes of this paragraph, a start -up period will not extend beyon d the first year of production.65 In 
the event that a case is brought after the end of a start-up period during which subsidies were 
received, these subsidies are to be analyzed to determ ine whether any portion of them is allocable to 
the period under consideration. If so, these alloca ted subsidy amounts should be included in the 
calculation of ad valorem subsidization to det ermine if the 5 per cent th reshold has been reached.  
 5. Where the recipient firm is locate d in an inflationary economy country, t 
The value of the 
product shall be calculated as the recipient firm's to tal sales (or sales of the relevant product, if the 
subsidy is tied) in the preceding calendar year i ndexed by the rate of inflation experienced in the 
12 months preceding the month in wh ich the subsidy is to be given. 
 
5.1 The determination of which inflation index should be applied to both the numerator 
and the denominator shall be made on a case-by-c ase basis, to ensure the selection of the most 
appropriate index to fit the particular circumstances.   
 
5.2 As an alternative to adjusting the numerator and the denominator for inflation in the 
country granting the subsidy, both the subsidy am ounts and the recipients firm's sales could be 
converted to a stable currency commonly used in  international business transactions, or to a 
basket of currencies (the Purchasing Power Pa rity Index or the average for developed 
countries, for example).   
 
6. In determining the overall rate of subsid ization in a given year, subsidies given under 
different programmes and by different authorities in th e territory of a Member shall be aggregated. 
 7. Subsidies granted prior to the date of entry in to force of the WTO Agreement, the benefits of 
which are allocated to future production, shall be included in the overall rate of subsidization. 
 8. Subsidies which are non-actionable under relevant provisions of this Agreement shall not be 
included in the calculation of the amount of a subs idy for the purpose of paragraph 1(a) of Article 6. 
 
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 65 Start -up situations include instances where financi al commitments for product development or 
construction of facilities to manufacture pr oducts benefiting from the subsidy have been made, even though 
production has not begun.