WT/DS267/RW 
 Page D-443  
 
 
ANNEX D-14 
 
BRAZIL'S COMMENTS ON THE RESPONSES OF  
THE UNITED STATES TO THE PANEL'S  
SECOND SET OF QUESTIONS 
 
(24 April 2007) 
  
TABLE OF CONTENTS  
 
Page
  
LIST OF ABBREVIATIONS  
444 
 
TABLE OF CASES  445 
 
TABLE OF EXHIBITS  447 
 
A. S COPE OF THIS PROCEEDING  448 
 
B. C LAIMS OF BRAZIL REGARDING PRESENT SERIOUS PREJUDICE  459 
 1. Significant price suppression - Article 6.3(c) of the SCM Agreement   
459 
 
2. Increase in world market share - Article 6.3(d) of the SCM Agreement   489 
 
C. C LAIM OF BRAZIL REGARDING THREAT OF SERIOUS PREJUDICE  490 
 
D. EXPORT CREDIT GUARANTEES  497 
 1. Outstanding export credit guarantees  
497 
 3. "Benefit" under Articles 1.1 and 3.1(a) of the SCM Agreement   
498 
 
4. Item (j) of the Illustrative List  512 
 
 WT/DS267/RW  
Page D-444  
 
LIST OF ABBREVIATIONS 
 
 
Arrangement OECD Arrangement on Offi cially Supported Export Credits 
AWP Adjusted World Price 
BSC Bond Street Capital  
CCC U.S. Commodity Credit Corporation CCPs Counter-Cyclical Payments DSB Dispute Settlement Body DSU Understanding on Rules and Procedures Governing the Settlement of Disputes 
ECG Export Credit Guarantee 
ERS USDA's Economic Research Service FAPRI Food and Agricultural Policy Research Institute FAS USDA's Foreign Agriculture Service FCRA Federal Credit Reform Act 
FSRI Act Farm Security and Rural Investment Act of 2002 
FY Fiscal Year GATT General Agreement on Tariffs and Trade GAO Government Accountability Office GSM 102 General Sales Manager 102 GSM 103 General Sales Manager 103 
LCI ExIm Banks Letter of Credit Insurance 
MBS Mortgage-backed securities  MPRs Minimum Premium Rates MTI ExIm Bank's Medium-Term Export Credit Insurance MY Marketing Year 
NCC National Cotton Council of America 
NPV Net Present Value OECD Organization for Economic Co-operation and Development 
SCGP Supplier Credit Guarantee Program 
SCM  Agreement Agreement  on Subsidies  and Countervailing  Measures 
SPS Agreement Agreement  on Sanitary  and Phytosanitary  Measures 
TBT Agreement Agreement  on Technical  Barriers  to Trade 
U.S. United States 
USDA U.S. Department of Agriculture WTO World Trade Organization   WT/DS267/RW 
 Page D-445  
 
 
TABLE OF CASES 
 
Short Title Full Case Title and Citation 
Australia – Salmon (21.5) Panel Report, Australia – Measures Affecting Importation of Salmon , 
WT/DS18/R and Corr.1, adopted 6 Nove mber 1998, modified  by Appellate 
Body Report, WT/DS18/AB/R, DSR 1998:VIII, 3407 
Canada – Aircraft Appellate Body Report, Canada  – Measures  Affecting  the Export  of Civilian  
Aircraft , WT/DS70/AB/R, adopted 20 August 1999, DSR 1999:III, 1377 
Canada – Aircraft  
(21.5) Appellate Body Report, Canada  – Measures  Affecting  the Export  of 
Civilian  Aircraft  – Recourse  by Brazil  to Article  21.5 of the DSU , 
WT/DS70/AB/RW, adopted 4 August 2000, DSR 2000:IX, 4299 
Canada – Aircraft Credits 
and Guarantees Panel Report, Canada  – Export  Credits  and Loan  Guarantees  for Regional  
Aircraft , WT/DS222/R and Corr.1, adopted 19 February 2002, 
DSR 2002:III, 849 
Canada – Dairy (21.5 II) Appellate Body Report, Canada – Measures Affectin g the Importation of 
Milk and the Exportation of Dairy Products – Second Recourse to 
Article 21.5 of the DSU by New Zealand and the United States , 
WT/DS103/AB/RW2, WT/DS113/AB/ RW2, adopted 17 January 2003, 
DSR 2003:I, 213 
Chile – Alcoholic 
Beverages Award of the Arbitrator, Chile – Taxes on Alc oholic Beverages – 
Arbitration under Articl e 21.3(c) of the DSU , WT/DS87/15, WT/DS110/14, 
23 May 2000, DSR 2000:V, 2583 
EC – Bed Linen  
(21.5) Panel Report, European Communities – Anti-Du mping Duties on Imports of 
Cotton-Type Bed Linen from India – R ecourse to Article 21.5 of the DSU  by 
India , WT/DS141/RW, adopted 24 April 2003, modified by Appellate Body 
Report, WT/DS141/AB/RW, DSR 2003:IV, 1269 
EC – CVDs on DRAMs Panel Report, European  Communities  – Countervailing  Measures  on 
Dynamic  Random  Access  Memory  Chips  from  Korea , WT/DS299/R, 
adopted 3 August 2005 
EC – Sugar Appellate Body Report, European Communities – Export Subsidies on 
Sugar , WT/DS265/AB/R, WT /DS266/AB/R, WT/D S283/AB/R, adopted 
19 May 2005 
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 
Mexico – Corn Syrup 
(21.5) Appellate Body Report, Mexico  – Anti-Dumping  Investigation  of High  
Fructose  Corn  Syrup  (HFCS)  from the United  States  – Recourse  to Article  
21.5 of the DSU  by the United  States , WT/DS132/AB/RW, adopted 
21 November 2001, DSR 2001:XIII, 6675 
U.S. – 1916 Act Award of the Arbitrator, United States – Anti-Dumping Act of 1916 – 
Arbitration under Article 21.3(c) of the DSU , WT/DS136/11, 
WT/DS162/14, 28 February 2001, DSR 2001:V, 2017 
U.S. – Byrd Amendment Award of the Arbitrator, United States – Continued Dumping and Subsidy 
Offset Act of 2000 – Arbitration under Article 21.3(c) of the DSU , 
WT/DS217/14, WT/DS234/22, 13 June 2003, DSR 2003:III, 1163 
U.S. – Export Restraints Panel Report, United States – Measures Treating Exports Restraints as 
Subsidies , WT/DS194/R and Corr.2, adopted 23 August 2001, 
DSR 2001:XI, 5767 WT/DS267/RW  
Page D-446  
 
Short Title Full Case Title and Citation 
U.S. – FSC (21.5 II) Appellate Body Report, United States – Tax Treatment for "Foreign Sales 
Corporations" – Second Recourse to Article 21.5 of the DSU by the European Communities , WT/DS108/AB/RW2, adopted 14 March 2006 
U.S. – Gambling (21.5) Panel Report, United States – Measures Affecting the Cross-Border Supply 
of Gambling and Betting Services , WT/DS285/R, adopted 20 April 2005, 
modified by Appellate Body Report, WT/DS285/AB/R 
U.S. – OCTG from Argentina (21.5) Appellate Body Report, United  States  – Sunset  Reviews  of Anti-Dumping  
Measures  on Oil Country  Tubular  Goods  from Argentina - Recourse to 
Article 21.5 of the DSU by Argentina , WT/DS268/AB/RW, adopted 
12 April 2007 
U.S. – OCTG Sunset 
Reviews Appellate Body Report, United  States  – Sunset  Reviews  of Anti-Dumping  
Measures  on Oil Country  Tubular  Goods  from Argentina , 
WT/DS268/AB/R, adopted 17 Decem ber 2004, DSR 2004:VII, 3257 
U.S. – Softwood Lumber IV Appellate Body Report, United  States  – Final  Countervailing  Duty  
Determination  with Respect  to Certain  Softwood  Lumber  from Canada , 
WT/DS257/AB/R, adopted 17 February 2004, DSR 2004:II, 571 
U.S. – Softwood Lumber IV 
(21.5) Appellate Body Report, United  States  – Final  Countervailing  Duty  
Determination  with Respect  to Certain  Softwood  Lumber  from  Canada  – 
Recourse  by Canada  to Article  21.5 of the DSU , WT/DS257/AB/RW, 
adopted 20 December 2005 
U.S. – Softwood Lumber V Appellate Body Report, United  States  – Final  Dumping  Determination  on 
Softwood  Lumber  from Canada , WT/DS264/AB/R, adopted 31 August 
2004, DSR 2004:V, 1875 
U.S. – Softwood Lumber VI 
(21.5) Appellate Body Report, United  States  – Investigation  of the International  
Trade  Commission  in Softwood  Lumber  from Canada  – Recourse  to 
Article  21.5 of the DSU  by Canada , WT/DS277/AB/RW, adopted 
9 May 2006 
U.S. – Upland Cotton Appellate Body Report, United  States  – Subsidies  on Upland  Cotton , 
WT/DS267/AB/R, adopted 21 March 2005 
U.S. – Upland Cotton Panel Report, United  States  – Subsidies  on Upland  Cotton , WT/DS267/R, 
and Corr.1, adopted 21 March 2005, modi fied by Appellate Body Report, 
WT/DS/267/AB/R 
 
  WT/DS267/RW 
 Page D-447  
 
 
TABLE OF EXHIBITS 
  
Expected Upland Cotton Yields Exhibit Bra-688 
Freedom of Information Act Rejection Letter  Exhibit Bra-689 
Crop Losses and Profits 2002-2005 Exhibit Bra-690 
Average January to March Price of the December 2007 futures contract Exhibit Bra-691 
LIBOR and Prime rates, 1997 to the present Exhibit Bra-692 
GSM 102 fees as a percentage of ExIm LCI and MTI fees for GSM 102 
transactions involving annual repayment of principal  Exhibit Bra-693 
GSM 102 fees as a percentage of ExIm LCI and MTI fees for GSM 102 
transactions involving semi-annual repayment of principal Exhibit Bra-694 
 
 WT/DS267/RW  
Page D-448  
 
A. S
COPE OF THIS PROCEEDING  
 
Questions to both parties 
 
44. The European Communities argues in respect of the preliminary objection raised by the 
United States regarding the claims of Brazil relating to export credit guarantees for pig meat and 
poultry meat under the GSM 102 programme that "the important issue is the nexus or the degree of 
interrelatedness or interdependence between different elements of the measure".  (Oral Statement of 
the European Communities, para. 6)  The Europe an Communities submits in this regard that:   
 
"the Panel should examine the original meas ure at issue and the 'measures taken to 
comply', and, with particular reference to the 'elements of the measure' that the 
United States argues are outside the Panel's te rms of reference, enquire into the extent 
to which these are inter related  or inter dependent  with measures or 'elements of 
measures' that the United States accepts are within the Panel's terms of reference".  
(Oral Statement of the European Communities, para. 11)   
 Do the parties  agree  with the approach  suggested  by the European  Communities  and with the 
considerations  in paragraph  13 of the Oral  Statement  of the European  Communities? 
 
1. The United States' response addresses whether Brazil's claims regarding the amended 
GSM 102 pig meat and poultry meat are properly within the scope of these Article 21.5 proceedings.  
 
2. The first issue for the compliance Panel in  assessing the scope of these proceedings is to 
identify the measure(s) taken to comply with  respect to the DSB's recommendations on the 
application of the GSM 102 program.1   
 
3. By way of implementation, the United States modified the guarantee fee schedule of the 
GSM 102 program.  This is intended to eliminate th e "subsidy" component of the original program.  
There is no dispute between the Parties that the am ended GSM 102 program, in particular the revised 
guarantee fee schedule, is a "measu re taken to comply".  The amended GSM 102 program remains the 
United States' declared "measure taken to comply" whether or not, as the United States suggests, the 
original panel's findings related to specific guara ntees issued under the original GSM 102 program for 
specific products.2  
 4. Under Article 21.5, this Pane l is required to examine the declared compliance measure – the 
amended GSM 102 program – " in its totality " for "consistency" with the United States' obligations 
under the Agreement on Agriculture , because it is a measure taken to comply that is included in 
Brazil's panel request.
3  In U.S. – OCTG from Argentina (21.5) , the Appellate Body emphasized that 
there are important reasons of principle for requiri ng compliance panels to examine "fully" the WTO-
consistency of compliance measures.  These include promoting the prompt settlement of disputes by avoiding the delay resulting from new proceedings, and "making efficient use of the original panelists 
and their relevant experience".
4  The fact that the United States objected to two members of the 
original panel hearing this dispute cannot alter th e importance of this last factor in interpreting 
Article 21.5 generally.   
 5. The United States relies on the rulings in EC – Bed Linen (21.5)  to suggest that its voluntary 
decision to amend the GSM 102 program with resp ect to pig meat and poultry meat is beyond the 
scope of Article 21.5 proceedings.  Howeve r, this dispute is very different from EC – Bed 
                                                     
 
1 Appellate Body Report, U.S. – OCTG from Argentina (21 .5), para. 142. 
2 U.S. 2 April response to question 44, para. 8. 
3 Appellate Body Report, U.S. – OCTG from Argentina (21 .5), para. 146 (emphasis in original). 
4 Appellate Body Report, U.S. – OCTG from Argentina (21 .5), para. 151.  WT/DS267/RW 
 Page D-449 
 
 
Linen (21.5) .  In that dispute, the EC took a single measure to comply with its WTO obligations 
(Regulation 1644/2001).  Thereafter, it adopted tw o formally separate and unrelated measures 
(Regulations 160/2002 and 696/2002) that, while addressing substantive issues similar to those raised 
in the original proceedings in EC – Bed Linen , related to imports from other countries that were not 
part of the WTO proceedings.  The panel found that these two separate measures  
(Regulations 160/2002 and 696/2002) were not measures taken to comply, because they dealt with 
imports unconnected to the original WTO dispute.    6. In contrast, in this dispute, with respect  to export credit guarantees, Brazil challenges the 
application of a single measure – the amended GSM 102 program – which the Parties agree is a 
measure taken to comply.  The United States did not ta ke a measure to comply that relates solely to 
GSM 102 ECGs for unscheduled products and rice,  and separately adopt an unrelated measure 
relating solely to GSM 102 ECGs for pig meat, pou ltry meat and other scheduled products other than 
rice.  Rather, the United States adopted a single measure taken to comply – the amended GSM 102 
program – which has a single set of provisions that apply in exactly the same way to all eligible 
products.  
 7. The United States appears to argue that the Panel should parse the single compliance measure 
into components that relate to pig meat and pou ltry meat, and other components.  The components 
relating to pig meat and poultry meat would, unde r the United States' approach, be excluded from 
these proceedings.   
 
8. In U.S. – OCTG from Argentina (21.5) , the Appellate Body held that, where the challenged 
components of a compliance measure are not "separable", but  "integral parts" of that measure, the measure must be examined "in its totality".
 5  In this dispute, there are no "separable" provisions of the 
amended GSM 102 program that apply to pig meat  and poultry meat, but not to other products.  
Instead, the provisions of the program, in particul ar the revised fee schedule on the basis of which 
"benefits" are conferred, constitute an integrated p ackage that applies to all eligible products in 
exactly the same way.  There is, therefore, no basi s for dividing the measure taken to comply into 
different components.  9. Where the challenged components of a complian ce measure are integral parts of the measure, 
the Appellate Body also found it "difficult to concei ve" how two different pane ls (the first composed 
under Article 21.5, and the second in entirely new pro ceedings) could review inseparable elements of 
a single measure.
6  As a result, the Appellate Body held that the compliance panel must examine the 
integrated compliance measure "in its totality".  In this dispute, Brazil challenges the revised 
GSM 102 fee schedule, which is an integrated sche dule that does not distinguish between products.  
In Brazil's view, institutional efficiency and consid erations of legal certainty require that a single 
panel assess this schedule "in its totality".  10. The United States also argues that, in revisi ng the guarantee fee schedule, it was not taking 
action with respect to DSB recommendations regarding pig meat and poultry meat.
7  The panel in U.S. 
– Gambling (21.5)  also recently ruled that measures cannot  be excluded from the scope of compliance 
proceedings "due to the purpose  for which they have been taken".8  In U.S. – Softwood Lumber IV 
(21.5) , the Appellate Body also found the "first assessm ent review" to be a "measure taken to comply" 
even though the United States Department of Commerce did not adopt it "with the intention of 
complying with the DSB's recommendations and rulings."9  It is, therefore, irrelevant whether the 
United States intended to implement the DSB's recomme ndations with respect to pig meat and poultry 
                                                      
5 Appellate Body Report, U.S. – OCTG from Argentina (21 .5), paras. 146 and 148. 
6 Appellate Body Report, U.S. – OCTG from Argentina (21 .5), paras. 151. 
7 U.S. 2 April response to question 44, para. 18. 
8 Panel Report, U.S. – Gambling (21 .5), para. 6.24 (emphasis in original). 
9 Appellate Body Report, U.S. – Softwood Lumber IV (21 .5), paras. 15, 67 and 92. WT/DS267/RW  
Page D-450  
 
meat when it adopted the amended GSM 102 pr ogram.  The issue is whether the amended 
program "in its totality" is "fully" consistent with  the covered agreements, including with respect to 
the United States' export subsidy commitments for pig meat and poultry meat.  11. The United States also contends that this di spute may relate to specific guarantees issued for 
specific products
10, and professes confusion whether Brazil is "challenging" the "GSM 102 program 
as such", or "particular guarantees under the GSM 102 program".11   
 12. The United States' assertion that the measure at issue is only specific guarantees for specific 
products, and its feigned confusion concerning Brazil's "challenge", is disingenuous.  As the 
United States is aware, Brazil's claims under Articles 10.1 of the Agreement on Agriculture  involve a 
number of elements.  One such element is a s howing that the United States is providing "export 
subsidies".    13. The original panel found that the original GSM 102  program , without reference to specific 
guarantees or specific products, constituted an export s ubsidy under item (j) of the Illustrative List in 
Annex I of the SCM Agreement .
12  In these Article 21.5 proceedings, Brazil similarly establishes, in a 
number of ways, that the amended GSM 102 program  is an export subsidy.   
 14. First, Brazil has demonstrated that the amended GSM 102 program constitutes an export 
subsidy under item (j).  Nothing about this showing is product-specific. 
 
15. Second, Brazil has demonstrated that according to official, normative statements by the U.S. 
government in the GSM 102 regulations, FAS publica tions and FAS' self-as sessment of the program, 
the program always offers export-contingent fina ncial contributions that confer "benefits" on 
recipients.  Nothing about this showing is product-specific. 
 
16. Third, Brazil has demonstrated that under the amended GSM 102 fee schedule, GSM 102 
ECGs will necessarily constitute export-contingent fi nancial contributions that confer "benefits" on 
recipients.  With its ExIm Bank comparison exerci se, Brazil has provided exhaustive proof of this, 
demonstrating methodically that on a country-by- country, tenor-by-tenor basis, GSM 102 ECGs 
issued under the amended GSM 102 fee schedule are export subsidies.
13  As a practical matter, this 
amounts to a showing that the amended GSM 102 progra m is an export subsidy itself.  Nothing about 
this showing is product-specific.   17. Turning to another element of Brazil's clai ms, Brazil has demonstrated, as in the original 
proceedings, that the United States has "applied" the export subsidy in a manner that results in 
circumvention of U.S. export subsidy commitment s, within the meaning of Article 10.1 of the 
Agreement on Agriculture .  The "application" of the GSM 102 program that results in circumvention 
is, as it must be, established with respect to specific scheduled products (as well as with respect to the 
category of unscheduled products).  In assessing whet her the program is "applied" in a manner that 
circumvents export subsidy commitments, the orig inal panel considered evidence relating to the 
cumulative level of the guarantees is sued for the specific products that  were the subject of claims.  
However, the individual guarantees issued under the program did not thereby become the export 
subsidies at issue;  nor do they become th e export subsidies at issue in these proceedings. 
 
                                                     
 
10 U.S. 2 April response to questions 44 and 46, paras. 12 and 52. 
11 U.S. 2 April response to question 97, paras. 224-225. 
12 Panel Report, U.S. – Upland Cotton , para. 7.869. 
13 In comments on Question 98, Brazil shows that the amended GSM 102 program is an export subsidy 
by comparison with ExIm Bank products,  even taking account of the differi ng interest rate coverage of the 
products.  In its 2 April response to question 100, Braz il has also demonstrated that this same evidence proves 
that GSM 102 ECGs lower the "total cost of funds" in GSM 102-supported transactions.  WT/DS267/RW 
 Page D-451 
 
 
18. In any event, even if the individual GS M 102 guarantees issued for specific products are the 
export subsidies at issue in these compliance proceedi ngs, all of those guarantees – for rice, pig meat 
and poultry meat, and all unscheduled products – ha ve a sufficient nexus to the amended GSM 102 
program, the declared compliance measure, that they are part of the compliance measures for 
purposes of whether the program is "applie d" consistently with Article 10.1. 
 
19. In this regard, Brazil notes that it is the Unite d States that has suggested that the individual 
guarantees are the challenged "measures taken to comply". 14  It appears to accept that these new 
individual guarantees could, in theory, be "mea sures taken to comply" with DSB recommendations.  
Yet, when it comes to marketing loan and counter-cyclical payments , the United States vehemently 
objects that new payments cannot be "measures taken to comply" with DSB recommendations 
concerning earlier payments under the same programs.  Brazil argues below that the correct approach 
is to recognize – as the United States does for in dividual guarantees – that the new payments are 
sufficiently closely connected to  the DSB's recommendations regarding the old payments to be 
"measures taken to comply".15 
 
20. Having identified the amende d GSM 102 program as a declared "measure taken to comply", a 
second question arises for the compliance Panel with r espect to the scope of the claims that can be 
made regarding that measure.  Brazil's claims concern the application of the program to three scheduled agricultural products (rice, pig me at and poultry meat) and unscheduled agricultural 
products. 
 
21. The United States' argument is that the DSB's recommendations did not impose any implementation obligations with respect to pig m eat and poultry meat.  As a result, it says, even 
though its compliance measure applies to these products , no claims can be made regarding them.  This 
position incorrectly assumes that Article 21.5 proceedings are limited to examining whether the 
implementing Member has eliminated the WT O-inconsistencies identified in the DSB's 
recommendations.  22. According to the text of Article 21.5, a compliance panel is the appropriate forum for 
resolving any " disagreement " relating to the general  "consistency with a covered agreement " of a 
"measure taken to comply".  Thus, in Canada – Aircraft (21.5) , the Appellate Body expressly 
"disagreed" with the panel's view that Article 21.5 proceedings are confined to examining whether the 
implementing Member " has implemented the DSB recommendation ".
16  I n  U.S. – OCTG from 
Argentina (21.5) , citing Canada – Aircraft (21.5) , the Appellate Body reiterated that a compliance 
panel must "examine fully  the ' consistency with a covered agreement  of the measures taken to 
comply', as required by [Article 21.5]".17  As noted, it also affirmed that a compliance panel must 
examine the compliance measure " in its totality ".18   
 23. As a result, the precise scope of the DSB's recommendations does not determine the scope of 
Article 21.5 proceedings.  Moreover, Article 21.5 proceedings can, therefore, involve claims and 
arguments regarding the WTO-"consistency" of a measu re taken to comply, even though these claims 
were not the subject of DSB's recommendations.
19   
 
24. In effect, the United States asks the Panel, in essence, to reverse the Appellate Body's 
interpretation because it asserts that this  Panel can – indeed, must – examine exclusively  whether the 
measure taken to comply has eliminated the WTO-inconsistencies established in the DSB's 
                                                      
14 U.S. 2 April response to question 97, paras. 224-225. 
15 See Brazil's comments on U.S. responses to questions 45, 47 and 48, below. 
16 Appellate Body Report, Canada – Aircraft (21 .5), para. 40. 
17 Appellate Body Report, U.S. – OCTG from Argentina (21 .5), paras. 151. 
18 Appellate Body Report, U.S. – OCTG from Argentina (21 .5), paras. 146. 
19 Appellate Body Report, Canada – Aircraft (21 .5), para. 41. WT/DS267/RW  
Page D-452  
 
recommendations .  The Panel should reject this argument, and follow the wording of Article 21.5.  
The Panel may, therefore, examine whether the application of the amended GSM 102 program is 
"consistent" with the United States' obligations under Article 10.1 of the Agreement on Agriculture .   
 25. There remain, of course, limitations on the clai ms that can be made regarding a measure taken 
to comply.  In particular, certain panels have ruled that no new claims  can be made with respect to 
unchanged elements  of the original measure;  equally, the same claim  cannot be made with respect to 
unchanged elements  of the measure if that claim was rejected  in the original proceedings.  As Brazil 
has previously explained, neith er of these limitations apply.
20  Brazil's claims regarding pig meat and 
poultry meat concern a new element of the measure taken to comply , namely the revised guarantee fee 
schedule in the amended GSM 102 program.  There are no limits on the claims (much less the 
arguments) that can be made with respect to a new element of the compliance measure. 
 
45. Could the parties comment on the observati ons made by the Eu ropean Communities in 
paras. 15-24 of its Oral Statement on the issue of  whether the marketing loan and counter-cyclical 
payment programmes are within the scope of the Panel's proceeding? 
 
26. The United States' response to question 45 cl ouds the issue it raised in its preliminary 
objection.  Brazil's request for the establishment of  a panel identifies two measures that it claims 
cause adverse effects under Articles 5(c), 6.3(c) and 6.3(d) of the SCM Agreement .  These measures 
are:  (1) the marketing loan and counter-cycli cal payment programs and (2) payments made under 
these programs.21  The key issue is whether these two categories of measures are properly within the 
scope of compliance proceedings.  Braz il addresses these measures in turn below. 
 
 (i) Subsidy Programs 
 27. In U.S. – OCTG from Argentina (21.5) , the Appellate Body recalled that determining the 
scope of "measures taken to comply", or the ab sence thereof, involves an examination of the 
recommendations and rulings contained in the original  panel report, which is adopted by the Dispute 
Settlement Body ("DSB").
22 
 28. With respect to the subsidy programs, the issue that divides the Parties is whether the original 
panel's findings of "present" serious prejudice incl uded findings regarding the programs themselves.  
Brazil has presented a straightforward reading of the or iginal panel report that logically ties together:  
(1) the panel's identification of the measures at issu e in the "present" serious prejudice section;  (2) its 
reasoning regarding the "effect" of those measur es, which included a lengthy exposition of the 
"effects" of the programs;  (3) its reasoning for dec lining to examine Brazil's cl aims of threatened of 
serious prejudice;  (4) its reasoning for declining to examine Brazil's claims of "as such" violations;  
and (5) its description of the implementation acti on that the United States was obliged to take. 
 29. Brazil has addressed these factors in detail in  earlier submissions, and will not repeat its 
arguments.
23  All of these factors point in one direction:   the original panel's findings of "present" 
serious prejudice included the subsidy programs, as well as the payments mandated by these 
programs.  In these circumstances, the EC's arguments on the nexus between the programs and the 
payments, and the United States' criticism of those ar guments, are moot because they are premised on 
the assumption that the original panel made no findings regarding the programs.  
                                                     
 
20 Brazil's 26 February response to question 6, paras. 32-60. 
21 WT/DS267/30, paras. 13 and 17. 
22 Appellate Body Report, U.S. – OCTG from Argentina (21 .5), para. 142, circulated 12 April 2007, not 
yet adopted. 
23 See, in particular , Brazil's 26 February response to question 11 and its 2 April response to 
question 45.   WT/DS267/RW 
 Page D-453 
 
 
30. In rebutting Brazil's reading of the original  panel report, the United States relies heavily on 
fragments of Brazil's arguments in the original pr oceedings in an attempt to demonstrate that the 
original panel's findings did not include the progr ams.  However, as the Appellate Body held in U.S. – 
OCTG from Argentina (21.5) , the DSB's recommendations and ruli ngs are framed in terms of the 
findings made by the original panel and the Appellate Body, and not by the complainant's 
arguments.24  The compliance Panel must, therefore, fo cus on the original panel's findings, and the 
reasoning explaining those findings.  31. The United States accuses Brazil of "grasp[ing] at  isolated statements in the original panel 
report".
25  However, it is the United States that relies on isolated phrases, and misreads the original 
panel report.  The United States attaches considerab le importance to the alle ged temporal limitation 
on the scope of the measures.  Yet, it asserts no basi s in the original panel report for its conclusion 
that the original panel's findings were lim ited to payments made in MY 1999-MY 2002. 
 32. The original panel's general description of th e measures at issue included the statement that 
"[t]he programmes and legislation identified [in Brazil's request for establishment of a panel] include  
payments made before the date of es tablishment of the Panel, and those made subsequently ."
26  This 
statement reveals that the panel saw a necessary link between the programs and payments because it 
stated expressly that the programs " include payments ".  Further, the relevant "payments" were found 
to be both those made before and those to be made after the date of establishment. 
 
33. The United States also contends that a footnote in the Peace Clause section of the report 
decisively addresses the scope of the measures addr essed in the separate "present" serious prejudice 
section.27  This is absurd, because the original panel included a separate statement of the measures at 
issue in each section of the report.  The footnote in  the Peace Clause section, by its own terms, does 
not address the other sections of the report.  It cannot, therefore, alter the scope of the measures 
examined in the "present" serious prejudice section. 
 34. Instead, in that section, in paragraph 7.1107 of the report, the original panel stated that serious 
prejudice measures included the " legislative and regulatory provisions ", in addition to the payments.
28  
The United States' explanation of this st atement is that the reference to the " legislative and regulatory 
provisions " merely captures the " application " of those provisions.29  This is a distortion of the panel's 
words.  As Brazil has noted, the original panel re fers to the "provisions" as measures, without any 
qualification or other hint that the "provisions" are not, in fact, measures – as the United States now argues.
30  Further, it would have been utterly redu ndant for the original panel to identify the 
"application" of the "provisions" separately fro m the listed payments, because the payments are the 
"application" of the provisions. 
 
35. The United States also suggests that it is not "s urprising" that the original panel considered 
the operation of the subsidy programs in  examining the effects of payments.31  However, the 
United States overlooks that, in examining the effe cts of the three programs, the panel referred to 
them as the " three measures " and the " subsidies in question ".32 
 
                                                      
24 Appellate Body Report, U.S. – OCTG from Argentina (21 .5), para. 142, circulated 12 April 2007, not 
yet adopted. 
25 U.S. 16 March comments, para. 65. 
26 Panel Report, U.S. – Upland Cotton , para. 7.187.   
27 U.S. 16 March comments, para. 63. 
28 Panel Report, U.S. – Upland Cotton , paras, 7.1107.   
29 U.S. 16 March comments, para. 68. 
30 Brazil's 2 April response to question 44, para. 13. 
31 U.S. 16 March comments, para. 68. 
32 Brazil's 2 April response to question 44, paras. 14 to 16. WT/DS267/RW  
Page D-454  
 
36. Thus, once again, the original panel stated th at the programs themselves were the "measures";  
and it examined "their effects" in a particular reference period, finding that these effects included 
"present" serious prejudice to the interests of Br azil.  It concluded that the United States was " obliged
 
to take action concerning its present statutory and regulatory framework  as a result of our 'present' 
serious prejudice finding."33 
 
37. In its 2 April responses, the United States also  suggests that, if the original panel's findings 
included the programs, this would erode the distin ction between "as such" and "as applied" findings.34  
This is incorrect.  The original panel found that an examination of the " effects " of the subsidies 
(programs and payments) " cannot be conducted in the abstract ".35  The original panel, therefore, 
examined the effects of the subsidies (pr ograms and payments), in the marketplace, in a defined 
reference period  developed by the panel.  Accordingly, the original panel did not find that the 
programs " as such " cause adverse effects at all times.  Brazil has demonstrated, in these proceedings, 
that subsequent to the implementation period, th e unchanged programs and new mandatory payments 
continue to cause adverse effects, as shown by the analysis of their effects in a different reference 
period. 
 38. Finally, the United States has failed to offe r any explanation whatsoever why the original 
panel would have decided not to rule upon Brazil's threat claims, and its "as such" claims, if the 
"present" serious prejudice claims were limited to pa yments last made in MY 2002 – more than a year 
before the original panel issued its ruling.  If the United States were correct, the original panel chose  
to rule exclusively on past payments that it knew  might no longer produce "effects" in the marketplace 
because, by the time of its ruling, these payments  had been superseded by payments made in 
MY 2003 and MY 2004;  and it simultaneously chose not  to rule on subsidy programs and future 
payments that it knew would still be producing "effects" during the implementation period.  
 
39. It is simply not credible to believe that the original panel would have decided not to rule on 
the threat and "as such" claims in these circumstances.  Nothing suggests that the original panel 
decided to undermine the utility of its own work in th is way.  To the contrary, the original panel was 
highly sensitive to the importance of implementation of its rulings, and decided not to rule on the 
threat and "as such" claims because "the United States is obliged
 to take action concerning its present 
statutory and regulatory framework  as a result of our 'present' serious prejudice finding."36 
 
40. In sum, the marketing loan and counter-cyclical subsidy programs , including payments 
mandated under these programs, are properly within  the compliance Panel's terms of reference 
because the original panel's "present" serious prejudice findings included these programs.   
  (ii) Payments in MY 2005 and Thereafter 
 
41. The second category of measures that Brazil ch allenges in these proceedings covers payments 
made under the marketing loan and counter-cyclical programs.  Brazil's arguments have focused on 
the adverse effects caused by these measures in MY  2005 and thereafter.  Although the United States 
disputes that the original panel made findings on the subsidy programs , it accepts that, at a minimum, 
the panel made findings regarding payments made  in MY 1999 to 2002.  Even on the assumption that 
the United States is correct ( quod non ), Brazil demonstrates in this section, as it did in its 26 February 
responses
37, that the marketing loan and counter-cycli cal payments made in MY 2005 and thereafter 
must be regarded as (WTO-inconsistent) "measures ta ken to comply" because of their extremely close 
connection to the payments found to be causing serious  prejudice in the original proceedings.  These 
                                                      
33 Panel Report, U.S. – Upland  Cotton , para. 7.1501.   
34 U.S. 2 April response to question 45, paras. 27 ff. 
35 Panel Report, U.S. – Upland Cotton , para. 7.1198. 
36 Panel Report, U.S. – Upland  Cotton , para. 7.1501.   
37 Brazil's 26 February response to question 15, paras. 145-150.  WT/DS267/RW 
 Page D-455 
 
 
arguments are, obviously, made without prejudice to  Brazil's principal argument that the original 
panel found that the subsidy programs, including the payments mandated by the programs, were 
found to be WTO-inconsistent.  42. In U.S. – OCTG from Argentina (21.5) , the Appellate Body last week reiterated that it is for a 
compliance panel to determine whether the measures listed in a panel request are "measures taken to 
comply".
38  As noted above, citing the Appellate Body ruling in U.S. – Softwood Lumber IV (21.5) , 
the panel in U.S. – Gambling (21.5)  also recently ruled that measures cannot be excluded from the 
scope of compliance proceedings "due to the purpose  for which they have been taken".39  I t  i s ,  
therefore, irrelevant whether the United States gr anted the new marketing loan and counter-cyclical 
payments for the specific purpose of complying with the DSB's recommendations. 
 43. Rather, as the United States accepts, the de termination whether the new payments are 
"measures taken to comply" depends on the closene ss of their relationship (" interrelatedness") to the 
DSB's recommendations.
40  Because the DSB's recommendations are "directed" at the measures 
originally found to be WTO-inconsistent, the co mpliance Panel must assess the relationship between 
the alleged measures taken to comply and the original measures.41 
 44. In U.S. – Softwood Lumber IV (21.5) , the Appellate Body also held that a compliance panel 
must examine the alleged measures taken to comply "in their full context , including how such 
measures are introduced  into, and how they function  within, the particular system of the 
implementing Member."
42  Further, in its 2 April responses,  the United States acknowledges that, in 
U.S. – Softwood Lumber IV (21.5) , Australia – Leather (21.5)  and EC – Bed Linen (21.5) , measures 
that " undid " or " undermined " the implementing Member's compliance efforts were found to have a 
sufficiently close connection to the DSB's recomme ndations to be "measures taken to comply".43 
 
45. In view of these considerations, the new pa yments are (WTO-inconsistent) "measures taken 
to comply" with the DSB's recommendations regard ing the original payments.  These payments and 
the new payments collectively constitute an unbroken stream of identical subsidies.  As Brazil has 
noted, the payments subject to the DSB's recomm endations and the payments subject to these 
proceedings are mandated by the very same subsidy programs under the FSRI Act of 2002;  they are made to the same recipients;  they support the same  crop;  and they are granted on the same terms and 
conditions.
44  Thus, under U.S. domestic law, the or iginal and the new payments are all " introduced ", 
and " function ", in precisely the same way.45 
 46. Significantly, the new payments "undermi ne" – indeed, eviscerate – the United States' 
compliance efforts.  Assuming that the original  panel confined its findings to payments ( quod non ), 
the United States came under an obligation, on 21 March 2005, to take steps to remove the adverse 
effects of, at a minimum, the marketing loan a nd counter-cyclical payments made in MY 1999 to 
MY 2002, or to withdraw these payments.  
                                                     
 
38 Appellate Body Report, U.S. – OCTG from Argentina (21 .5), para. 140. 
39 Panel Report, U.S. – Gambling (21 .5), para. 6.24 (emphasis in original).  Appellate Body Report, 
U.S. – Softwood Lumber IV (21 .5), paras. 15, 67 and 92.  The Appellate Body found the "first assessment 
review" to be a "measure taken to co mply" even though the United States Department of Commerce did not 
adopt it "with the intention of complying wi th the DSB's recommendations and rulings." 
40 Appellate Body Report, U.S. – OCTG from Argentina (21 .5), para. 142 and Appellate Body Report, 
U.S. – Softwood Lumber IV (21 .5), para. 68.  See United States 2 April response to question 44, paras. 8 and 9. 
41 Appellate Body Report, U.S. – Softwood Lumber IV (21 .5), para. 68.   
42 Appellate Body Report, U.S. – Softwood Lumber IV (21 .5), para. 67 (emphasis added). 
43 U.S. 2 April response to question 44, footnotes 5 and 22, and para. 17. 
44 Brazil's 26 February response to question 15, para. 147. 
45 Appellate Body Report, U.S. – Softwood Lumber IV (21 .5), para. 67 (emphasis added). WT/DS267/RW  
Page D-456  
 
47. Yet, instead of taking any action of that natu re, the United States simply continued to provide 
the very same marketing loan and counter-cyclical  payments throughout MY 2005, and thereafter.  
Thus, rather than taking appropriate implementa tion action, the United States simply substituted the 
WTO-inconsistent payments with new payments th at, given the annual nature of both the payments 
and the crops, superseded the adverse effects of the original payments.  Thus, the effects of the 
original payments have simply been replaced by adverse effects caused by the new payments.  The 
United States thereby makes effec tive implementation under Article 7.8 impossible.  As the Appellate 
Body held in U.S. – FSC (21.5 II) , a Member fails to implement when it "replaces" one WTO-
inconsistent subsidy with another.
46 
48. The United States' sole defense to this line of argument is that Brazil attempts to "add" to the 
original measures found to be WTO-inconsistent by challenging the new payments, which were not 
found to be WTO-inconsistent.47  Brazil is not seeking to "add" anything to the original ruling.  Brazil 
accepts that the new payments were not part of the DSB's recommendations because the original panel exercised judicial economy with respect to the threat claims that would have included the new payments when they were still possible future payments.  In U.S. – OCTG from Argentina (21.5) , the 
Appellate Body held that complaining Members ar e not prevented from making claims in Article 21.5 
proceedings that were the subject of judicial economy in the original proceedings.
48  I n  s h o r t ,  
complaining Members are not prejudiced in complian ce proceedings by the original panel's decision 
to exercise judicial economy.    49. Thus, in the circumstances of this dispute, where possible future  payments were challenged in 
an original threat  claim that was subject to judicial economy, nothing in the DSU prevents those 
payments from being "measures taken to comply" after they are actually made , provided that they 
have a sufficiently close connection to the DSB's recommendations.  50. Finally, the United States incorrectly rejects the view that WTO dispute settlement becomes a 
"moving target", and is reduced to a "Groundh og Day", if the U.S. approach is accepted.
49  T h e  
United States observes that the Parties are "bound"  by the "outcome" of the original dispute.50  Yet, 
the United States believes that it can evade the "out come" of the original panel's "present" serious 
prejudice findings regarding payments simply by making more payments.  After every round of payments, it says that the complaining Member could contest the new payments solely  in new 
proceedings.  However, on this view, the compla ining Member could never take retaliatory action 
under Article 22 of the DSU for an endless stream  of identical recurring payments because there 
would never be any compliance measures.  As a r esult, the WTO disciplines regarding the "present" 
effects of the most obvious form of subsidies – cash payments – would be  reduced to inutility. 
 
 (iii) Conclusion 
 
51. In conclusion, Brazil argues that the marketing loan and counter-cyclical subsidy programs  
are properly within the panel's terms of reference because the original panel's rulings, and the DSB's 
recommendations, regarding "present" serious  prejudice include these programs.   
 52. In addition, Brazil argues that subsidy pa yments made in MY 2005, and thereafter, are 
"measures taken to comply" with the DSB's reco mmendations regarding pa yments made in MY 1999 
to MY 2002 because of the extremely close connec tion between these new payments and the DSB's 
recommendations.  The new payments cause "present" serious prejudice.  
                                                     
 
46 Appellate Body Report, U.S. – FSC (21 .5 II), para. 84. 
47 U.S. 16 March comments, para. 100;  and U.S. 2 April response to question 47, para. 53. 
48 Appellate Body Report, U.S. – OCTG from Argentina (21 .5), para. 148. 
49 U.S. 2 April response to question 48, para. 54. 
50 U.S. 16 March comments, para. 101;  U.S. 2 April response to question 48, paras. 54 ff.  WT/DS267/RW 
 Page D-457 
 
 
46. In its Oral Statement, the European Communities characterizes Brazil's and the 
United States' respective approaches as the "measure m odel" and the "element of the measure model" 
(Oral Statement of the European Communities, para.  7).  Please discuss whether you agree with this 
characterization and whether, in your view, the applic ation of a measure alleged to be a subsidy to 
different agricultural products relates to a "measure" (or elements thereof) or if, rather it relates to a 
"claim".  Would it be permissible for a complia nce panel to examine a "claim" that relates to 
subsidies (granted as part of measures taken to comply) provided to agricultural products to which 
the "initial measure" did not apply? 
53. Brazil's comments on the United States' answer to Question 44 also address relevant aspects 
of the United States' answer to this question.  Brazil also notes that the United States acknowledges 
that the "group of agricultural products" eligible to receive ECGs has not been altered since the 
original proceedings.51 
 54. The United States professes "difficult[y]" in seeing why a Member would comply with the DSB's recommendations relating to subsidies provi ded to one product by providing subsidies in 
respect of other products.
52  There are very straightforward reasons why a Member may wish to adopt 
precisely this course of action.  Subsidies are, generally, provided to benefit producers , not products .  
A Member may very well attempt to maintain the leve l of prior support afforded to a particular group 
of producers by altering the group of products eligib le to receive subsidies.  In that event, a 
"disagreement" may arise as to whether the subs idies granted to different products under the 
compliance measure are consistent with the WTO covered agreements.  The implementing Member 
could argue that the DSB's recommendations did not re quire it to take action with respect to the newly 
eligible products and, in consequen ce, this element of the measure is not a measure taken to comply.  
Yet, this is a good example of why the Appellate Body confirmed in U.S. – OCTG from 
Argentina (21.5)  that Article 21.5 disputes extend to assessi ng "fully" the "consistency with a covered 
agreement" of a measure taken to comply " in its totality ", and are not limited by the terms of the 
DSB's recommendations.53 
 
Questions to the United States   
 
47. The United States has raised a preliminary objection regarding Brazil's claims of (threat of) 
serious prejudice in respect of the marketing loan and counter-cyclical payment programmes.  Is the 
Panel's understanding correct that, apart from this preliminary objection regarding programmes, the 
United States also considers that the issue of whether payments made under the marketing loan and counter-cyclical payment programme after 21 Septem ber 2005 cause serious prejudice to the interests 
of Brazil is not properly within the scope of this proceeding? 
 55. Brazil refers the compliance Panel to its comments on the U.S. response to question 45, 
above.  
48. How does the United States address the argument of Brazil that "[i]f the United States were 
to prevail on its view that subsequent mandat ory and price-contingent marketing loan and CCP 
payments are not properly before this Panel, the grant of annual recurring subsidies becomes 
'a moving target that escape from [the WTO subsid y] disciplines' "?  (Closing Statement of Brazil, 
para. 4) 
 
56. Brazil refers the compliance Panel to its comments on the U.S. response to question 45, 
above. 
                                                     
 
51 U.S. 2 April response to question 46, para. 52. 
52 U.S. 2 April response to question 46, para. 51. 
53 Appellate Body Report, U.S. – OCTG from Argentina (21 .5), paras. 146 and 151 (emphasis in 
original). WT/DS267/RW  
Page D-458  
 
49. Could the United States comment on the argument of the European Communities that the text 
of Article 21.5 of the DSU does not limit the temporal  scope of that provision in the manner suggested 
by the United States?  (para. 29 of the Oral Statement of the European Communities)  
 
57. Brazil makes claims regarding the non- existence of compliance measures between 
21 September 2005, the end of the implem entation period under Article 7.9 of the SCM Agreement , 
and 1 August 2006, when the United States adopted certain compliance measur es with respect to the 
Step 2 program.  The United States response is that  "Brazil has not identified any textual basis that 
requires the Panel to make findings regarding complia nce as of the end of the six-month period set out 
in Article 7.9 of the SCM Agreement rather than as of the date of panel establishment pursuant to 
Article 21.5 of the DSU."
54 
 58. This argument is absurd.  Article 7.9 of the SCM Agreement  provides a clear textual basis for 
Brazil's claim.  The provision states:  
In the event  the Member has not taken appropriate steps to remove the adverse effects 
of the subsidy or withdraw the subsidy 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 , commensurate with the degree and nature of the adverse 
effects determined to exist, unless the DSB d ecides by consensus to  reject the request. 
59. The provision sets forth that the DSB "s hall", by negative consensus, authorize 
"countermeasures" when ("in the event") the implementing Member fails to implement "within 
six months" of the date of adoption.  Thus, accord ing to the treaty text, a right to "countermeasures" 
arises on that date, subject only to negative con sensus.  By pursuing its claim regarding the non-
existence of measures on 21 September 2005, Brazil seeks a multilateral basis for the DSB to 
authorize countermeasures against the United Stat es for its failure to take any implementation 
measures by the date required in Article 7.9 of the SCM Agreement . 
 60. Brazil also notes that additional textual suppor t for its position is found in the DSU.  Although 
Articles 7.8 and 7.9 are "special or additional ru les and procedures" under Article 1.2 of the DSU, 
they do not supplant the DSU.  Instead, the DSU conti nues to apply to the extent that the rules in the 
DSU do not conflict with the special or additional rules.
55 
 61. Articles 3.7 and 21.3 of the DSU indicate that "prompt compliance" with the DSB's recommendation, in principle, implies "immediate" compliance.
56  If "immediate" compliance is not 
"practicable", Article 21.3 envisages, as an exceptional matter, a grace period for implementation.  
Accordingly, under these provisions, the implementin g Member must have complied with the DSB's 
recommendations, at the latest, by the end of the im plementation period.  None of these rules in the 
DSU conflicts with Article 7.9 of the SCM Agreement .   
 62. Under Article XVI:4 of the WTO Agreement , the United States was bound to comply with its 
WTO obligations in the SCM Agreement  and the DSU by the end of the six month implementation 
period.  Under Article 21.5 of the DSU, as part of the " continuum of events "
57 from the original 
                                                      
54 U.S. 2 April response to question 49, para. 59. 
55 Appellate Body Report, Guatemala – Cement I , para. 65. 
56 See Award of the Arbitrator, Chile . – Alcoholic Beverages , para. 38;  Award of the Arbitrator, U.S. – 
Byrd Amendment , para. 40;  Award of the Arbitrator, U.S. – 1916 Act , para. 30. 
57 Appellate Body Report, U.S. – Softwood Lumber IV (21 .5), para. 103 (emphasis added) citing 
Appellate Body Report, Mexico – Corn Syrup (21 .5), para. 121.   See Brazil's First Written Submission, 
para. 28.  WT/DS267/RW 
 Page D-459 
 
 
proceedings, a complaining Member is entitled to obtain a ruling, for purposes of its compensation 
rights in the dispute, that the implementing Me mber failed to implement by the required date. 
 63. Besides being supported by the text of th e covered agreements, Brazil's position is fully 
supported by the ruling of the compliance panel in Australia – Salmon (21.5) , which ruled that 
Australia had failed to take appropriate complia nce measures with effect from the end of the 
implementation period.
58  It stated that "Australia was under an obligation to comply with DSB 
recommendations and rulings by the end of the reasonable period of time.  If it did not do so, 
Australia could face suspension of concessions or other obligations under Article 22.6 of the DSU."59 
64. Brazil's argument does not preclude a Member from coming into compliance with its WTO 
obligations after the end of the implementation period.  Nor does it exclude measures from the scope 
of compliance proceedings simply because they we re not adopted during the implementation period.  
However, if the implementing Member chooses  to implement later than required by the 
SCM Agreement  and the DSU, the complaining Member is entitled to a finding by a compliance panel 
to that effect, and to seek "countermeasures" for the delay.    
 
65. The United States relies on two panel reports in  which the panel ruled that the appropriate 
date for declaring the non-existence of compliance measures is the date of the compliance panel's establishment.  However, these panels failed to consider the significance of this date for the 
implementing Member's compensation rights.  The United States also refers to the fact that the parties 
in those disputes entered into sequencing agreemen ts, like the agreement in this dispute, which 
address procedures under Articles 21 and 22 of the DS U.  However, these agreements do not diminish 
the substance  of complaining Member's rights under the covered agreements.  In particular, the 
sequencing agreement in this dispute does not, in any way, diminish Brazil's right to seek authorization for countermeasures under Article 7.9 of the SCM Agreement  for the United States' 
failure to implement by 21 September 2005.
60 
 
B. C LAIMS OF BRAZIL REGARDING PRESENT SERIOUS PREJUDICE  
 
1. Significant price suppression - Article 6.3(c) of the SCM  Agreement   
 
Questions to both parties  
 
51. The parties disagree on whether or not th e marketing loan and counter-cyclical payments 
have more than minimal effects on production of upland cotton.  Could each party explain how its approach to the analysis of the impact of these pay ments on production of upl and cotton is supported 
by the provisions of Articles 5 and 6 of the SCM Agreement and by any other relevant WTO 
provisions?   
66. At the outset, Brazil notes that, in response to  a strictly legal question, the United States 
embarks on a lengthy summary of its various factua l arguments regarding a lleged "expectations" of 
U.S. farmers and the alleged absence of anything more than minimal effects from the billions of 
dollars of marketing loans and counter-cyclical subs idies provided to U.S. upland cotton producers.  
These U.S. arguments would certainly come as a su rprise to the National Cotton Council, one of 
whose primary functions is to lobby the U.S. C ongress for huge marketing loan and counter-cyclical 
subsidies in order to maintain the commerc ial viability of U.S. upland cotton production.
61  These 
                                                      
58 Brazil's 26 February response to question 21, paras. 154 ff. 
59 Panel Report, Australia – Salmon (21 .5), para. 7.30.  See, also , para. 8.1(i) of the panel's findings and 
conclusions (underlining added). 
60 WT/DS267/29. 
61 Panel Report, U.S. – Upland  Cotton , footnote 1471 referring to Exhibit Bra-109 (Testimony (Full) of 
Robert McLendon, Chairman, NCC Exec utive Committee, Before the Hous e Agricultural Committee. National WT/DS267/RW  
Page D-460  
 
arguments would also surprise the typical U.S. co tton farmer, embodied by Mr. Stephen Houston, Sr. 
who was recently quoted as stating that "[market] prices don't have anything to do with what we're doing … [w]e're just looking at the government payments."
62  And these arguments certainly would 
have surprised the original panel which, when confronted with the same U.S. arguments, found that 
there was "no doubt that marketing loan paymen ts stimulate production and exports and result in 
lower world market prices."63  Finally, these arguments would surprise the 58 U.S. Senators that 
recently wrote to President Bush expressing concerns about reductions in U.S. agricultural subsidies.  
The Senators states that a deal in the Doha Deve lopment Agenda would "reduce[] net farm income 
through steep cuts in farm programs," indicating their belief that government subsidies play a 
fundamental role in allowing U.S. farmers, in cluding U.S. upland cotton farmers, to generate 
sufficient profits from growing crops.64  
 67. Brazil has responded to these argument s in numerous previous submissions.
65  Therefore, 
Brazil will not repeat the overwhelming evidence dem onstrating that U.S. upland cotton farmers have 
received, do receive, and expect to receive huge marketing loan and counter-cyclical subsidies 
supporting the production of upland cotton.  Brazil's arguments and evidence demonstrating that, but 
for marketing loan and counter-cyclical subsidies,  U.S. upland cotton acreage, production, exports and 
stocks would be much lower and world market prices for upland cotton would be much higher are 
summarized in Brazil's answer to question 6966 and found throughout Brazil's many submissions.   
 68. Brazil explained that the most basic facts concerning the U.S. subsidies at issue and the 
conditions of competition in the world market for upland cotton suffice to establish a causal link 
between the subsidies and significant price suppression in the world market.
67  These facts are as 
follows:  It is undisputed that U.S. upland co tton is "like" Brazilian upland cotton as well as the 
upland cotton produced by many other countries.68  It is undisputed that there is a closely integrated 
world market for upland cotton and that heavily s ubsidized U.S. upland cotton competes directly in 
that world market with upland cotton from Br azilian and other third country producers.69  I t  i s  
undisputed that the price of U.S. upland cotton, like that of other upland cotton producers, is reflected in a world market price, the A-Index.
70  Finally, it is undisputed that the United States maintains a 40 
percent world export market share and accounts for 20 percent of total world production resulting in a 
substantial proportionate influence on th e world market price of upland cotton.71   
 
69. These undisputed facts, combined with the fact  that massive price-contingent U.S. marketing 
loan and counter-cyclical subsidies represent a 40 percent ad valorem subsidization rate over the 
                                                                                                                                                                     
Cotton Council (NCC)).  See also Exhibit Bra-324 (NCC Chairman's Report by Kenneth Hood, 24 July 2002, 
p. 2). 
62 Exhibit Bra-563 ("Cotton bailout:  How your tax dollars prop up big growers and squeeze the little 
guy," Atlanta Journal-Constitution, 1 Oct ober 2006, p. 2, accessed December 2006 at 
http://www.ajc.com/search/conte nt/metro/stories/cotton1.html ).  
63 Panel Report, U.S. – Upland Cotton , para. 7.1291.   
64 A letter to the President dated 12 April and signed by 58 U.S. Senators states "We cannot support a 
deal that directly reduces net farm income through steep cuts in farm programs in return for minimal market 
access gains whose effects on farm gate recei pts is speculative at best," available at 
http://conrad.senate.gov/issues/statement s/agriculture/070412_WTO_Ag_Letter.pdf . 
65 Brazil's First Written Submission, paras 126-150;  Brazil's Rebuttal Submission, paras. 101-113, 
180-194, 209-231;  Brazil's Oral Statement, paras. 63-78. 
66 See Brazil's 2 April response to question 69, paras. 90-106. 
67 Brazil's 2 April response to question 69, paras. 92-96. 
68 Brazil's First Written Submission, Section 7.4. 
69 Brazil's First Written Submission, Section 7.4. 
70 Brazil's First Written Submission, Section 7.4;  Braz il's Oral Statement, para. 148 and Declaration by 
Andrew Macdonald, Brazil's First Written Submission, Annex II, para. 18. 
71 Exhibit Bra-559 ("Potential Challenges to U.S. Fa rm Subsidies in the WTO:   A Brief Overview," 
Congressional Research Service Report for Congress, 25 October 2006, p. 5).  WT/DS267/RW 
 Page D-461 
 
 
lifetime of the FSRI Act of 2002, alone  are sufficient for the complianc e Panel to find that these 
subsidies cause significant price suppression in the wo rld market for upland cotton.  This is all the 
more true in light of the consistent inability of the average U.S. upland cotton producer to cover its 
costs of production without these two subsidies.  
70. In these comments, Brazil focuses on the general theme of the U.S. response, i.e., 
"expectations" allegedly held by U.S. upland cotton farmers at the time of planting.  Brazil agrees that an analysis of U.S. upland cotton producers' expectat ions, at the time of planting, about market prices 
and subsidy revenue is  a useful supplement
 to the basic facts identified above.  Indeed, Brazil 
conducted just such analyses in its First Written Submission72, Rebuttal Submission73 and Oral 
Statement.74  However Brazil considers that an assessment of the basic facts noted above is sufficient 
for the compliance Panel to find that the U.S. ma rketing loan and counter-c yclical subsidies cause 
significant price suppression in the world market for upland cotton, in violation of Articles 5(c) and 6.3(c) of the SCM Agreement .  
 
71. The United States emphasizes that it is "important  to look at the way that the marketing loan 
and counter-cyclical payment programs actually operate and interact with production decisions."
75  
Brazil agrees with this general proposition.  U.S.  upland cotton farmers, like any other businesses, 
function to generate revenue and make a profit.  On e of the questions before this compliance Panel is 
from what source typical U.S. upland cotton farmers expect to receive revenue sufficient to cover 
production costs and generate profits from their busin ess.  Do market returns alone provide sufficient 
revenue, or are U.S. marketing loan and counter-c yclical subsidies necessary to achieve the current 
levels of U.S. upland cotton supply?  Both an assessment of actual costs an d returns and expected 
costs and returns are relevant in considering these questions.    72. Expectations of U.S. upland cotton farmers,  almost all of whom grow on upland cotton base 
acres benefiting from upland cotton counter-cyclical  payments, are usefully summed up by Figure 8 
of Brazil's First Written Submission, showing a consistent high stre am of total revenue.
76   
 
                                                      
72 Brazil's First Written Submission, paras. 126-150. 
73 Brazil's Rebuttal Submission, paras. 101-113, 180-194, 209-231. 
74 Brazil's Opening Statement, paras. 63-78. 
75 U.S. 2 April response to question 51, para. 69 (emphasis in original). 
76 Brazil's First Written Submissi on, Table 8 at para. 133. WT/DS267/RW  
Page D-462  
 
Figure 1 – Support to Upland Cotton
77 
    
 
    
 
    
 
     
 
    
 
73. This figure demonstrates the critical impact of  marketing loans and counter-cyclical subsidies.  
U.S. upland cotton farmers can expect high total revenu e even if prices turn out to be low, for instance 
due to a collapse of Chinese dema nd or expanded Indian exports.  I ndeed total revenue will be high 
regardless of whether prices plunge for demand- or  supply-related reasons.  Every U.S. upland cotton 
farmer knows that, year-in and year-out , no matter what happens, he or she will receive a guaranteed 
revenue for the upland cotton he or she produces.  During the lifetime of the FSRI Act of 2002, 
marketing loan and counter-cyclical subsidi es accounted for an average of 40 percent
 of the market 
value of upland cotton.    74. The United States now claims that it is "not  remarkable" that marketing loans and counter-
cyclical payments have this  revenue-stabilizing effect.
78  Yet, labelling these payments as "income 
support" and suggesting that this is a normal and expected effect of price-contingent subsidies 
disregards the critical role of these subsidies fo r U.S. upland cotton production.  Indeed, the U.S. 
arguments boil down to the following:  the planting decisions of the typical U.S. upland cotton farmer have no, or at most minimal connection, to the tw o price-contingent subsidies that provide revenue 
worth an average of 40 percent of the market revenue  of the crop produced.  That argument is totally 
inconsistent with, to quote the United States, "the  way that the marketing loan and counter-cyclical 
payment programs actually operate and interact with production decisions."
79   
 75. Contrary to the U.S. arguments, which attemp t to minimize the revenue-stabilizing effect of 
these subsidies
80, Brazil's "expectation" arguments have alwa ys heavily relied on the fact that U.S. 
upland cotton farmers know, at the time of planti ng, that they will receive guaranteed and profit-
                                                      
77 Brazil's First Written Submissi on, Table 8 at para. 133. 
78 U.S. 2 April response to question 53(c), para. 94. 
79 U.S. 2 April response to question 51, para. 69.  
80 U.S. 2 April response to question 51, para. 71.   cents per pound   
0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 
MY1999  MY2000  MY2001 MY2002 MY2003 MY2004  MY2005  
Market value of production Marketing loan payments MLA/CCP payments  
Cottonseed payments  PFC/DP payments Crop insurance payments  Market revenue and marketing loan 
and counter-cyclical payments  
Market revenue   WT/DS267/RW 
 Page D-463 
 
 
making revenue by virtue of the price-contingent subsidies, no matter how market prices develop in 
the months ahead.  The Appellate Body recognized this when finding that " although farmers had 
expected higher prices in making their planting decisi ons, they were also aware that if actual prices 
were ultimately lower, they would be 'insulated' by … marketing loan program payments [and]also 
counter-cyclical payments, which were based on a target upland cotton price of 72.4 cents 
per pound ."81   
 76. Brazil, of course, does not assert that marke ting loan and counter-cyclical subsidies are the 
only consideration for U.S. upland cotton farmers.  Ce rtain other factors, such as the current record 
high corn prices, will influence the planting decisions of upland cotton farmers.  This is because even 
the generous U.S. marketing loan and counter-cyc lical subsidies for upland cotton are no match for 
the returns that a farmer can expect from growing corn in MY 2007.
82  Against this background, the 
remarkable fact is not, as the United States asserts83, that U.S. upland cotton acreage for MY 2007 is 
down.  The remarkable fact is that despite vastly most attractive corn prices,  the significant majority 
of U.S. upland cotton acreage stays in the production of upland cotton. 
 
77. The original panel and Appellate Body fo und that marketing loan and counter-cyclical 
subsidies numb U.S. farmer's reactions to market forces – not totally deaden them.84  The considerable 
weight of the evidence shows that, over the life-time of the FSRI Act of 2002, for many farmers, these 
government subsidies made the difference between ea rning a long-term profit and having to leave the 
business of growing upland cotton.85  This is the background to the planting decisions made by 
thousands of U.S. upland cotton farmers like Mr. Ho uston.  The result of these guaranteed and price-
contingent subsidies is a U.S. upland cotton supply th at is much larger than it would otherwise be.  
This is what USDA economists86 and the original panel found87, what the Appellate Body affirmed88, 
and what the evidence on record before  this compliance Panel demonstrates. 
78. In its response to the compliance Panel's narro w legal question, the United States also repeats 
a number of arguments, at paragraph 72, that Brazil previously responded to in detail.  Brazil briefly 
recalls those responses and cross-references to  its own argumentation refuting these points.  
 79. First, the United States claims that Braz il improperly focuses on actual prices and payments 
received by U.S. farmers at the time of harvest.
89  Of course, actual prices in an isolated marketing 
year cannot be relevant to planting decisions taken before their realization.  However, the collective 
knowledge of historic actual prices – and large s ubsidies resulting therefrom – constitute highly 
relevant evidence showing that, year-in and yea r-out, U.S. upland cotton farmers know that their 
revenue will be supported no matter wh at happens to prices.  A typical U.S. farmer planting upland 
cotton in the spring of 2006, knew that when pri ces collapsed in MY 2004 against expectations, he 
received price-contingent subsidies accoun ting for 60 percent of market revenue.90  This experience is 
highly relevant to the farmer's planting decision in  MY 2006.  In any event, Brazil has also provided 
                                                      
81 Appellate Body Report, U.S. – Upland Cotton , para. 445.   
82 Brazil's Oral Statement, paras. 70-71. 
83 U.S. 2 April introduction to responses to questions, paras. 1-4. 
84 Panel Report, U.S. – Upland Cotton , para. 7.1294.  Appellate Body Report, U.S. – Upland Cotton , 
para. 445.  
85 Brazil's Oral Statement, paras. 54-91. 
86 Panel Report, U.S. – Upland Cotton , para. 7.1295. 
87 Panel Report, U.S. – Upland Cotton , para. 8.1(g)(i). 
88 Appellate Body Report, U.S. – Upland Cotton , para. 763. 
89 U.S. 2 April response to question 51, para. 72, first bullet point.   
90 Brazil's First Written Submission, Table 6 at para . 111, as amended by updated marketing loan 
subsidy amounts ( see Brazil's 16 March Comments on U.S. Answer to Question 4, para. 14) and an updated 
counter-cyclical subsidy amount in MY 2005 ( see Brazil's Oral Statement, paras. 40, 107-119). WT/DS267/RW  
Page D-464  
 
detailed evidence showing that the typi cal U.S. upland cotton farmer expected
 to receive marketing 
loan and counter-cyclical subsidies every year under the FSRI Act of 2002.91   
80. Brazil also notes Professor Sumner's explanation that farmers' price expectations are 
fundamentally unobservable and that "it is impo ssible to know precisely what individual growers 
expect."92  However, given past experience with the price volatility of upland cotton and the price-
contingent U.S. subsidies at issue in this dispute,  it is appropriate to assume that farmers learn from 
their experience.  Thus, an examination of historical payments is important.  The United States asserts that "farmers cannot rewind time."
93  But farmers certainly can – and no doubt do – learn from 
previous time periods.  In trying to predict the futu re, farmers will rely on their past receipt of large 
marketing loan and counter-cyclical subsidies.   
 
81. Moreover, Brazil demonstrated, re lying on the Appellate Body's findings94 and much other 
evidence95, that farmers' expectations take account of  their experience of past very high counter-
cyclical and marketing loan subsidies, and the kno wledge that, whatever happens to prices, their 
revenue will be protected by U.S. subsidies at profitable levels.96  The United States has not and 
cannot explain how such subsidies today suddenly no  longer affect planting decisions and how they 
no longer have significant supply-enhancing a nd world market price-suppressing effect.  
 82. Second, the United States claims that Braz il has ignored net revenue and other conditions 
regarding competing crops vis-à-vis upland cotton.
97  This is simply false.  Among other evidence, 
Brazil demonstrated in figures 1-12 of its Oral Statement98 and its Comments on the U.S. Oral 
Statements99 that it was upland cotton marketing loan and counter-cyclical  subsidies that allowed U.S. 
upland cotton farmers to expect higher profits fro m planting upland cotton than from switching to 
substitute crops, such as soybeans or corn.100   
 83. Third, the United States claims that Braz il has focused on total production, as opposed to 
plantings, and ignored other factors affecting pr oduction that are outside of a farmer's control.
101  That 
is also false.  Brazil has recognized that factors su ch as weather and yields do impact total production 
and total exports.102  Yet, Brazil has demonstrated that, in MY 2005, but for the two challenged 
subsidies, U.S. production and exports would ac tually have been 18 and 25 percent lower, 
respectively.103  The subsidy-induced extra acreage benefits from good weather or increased yields 
and significantly contributes to higher U.S. production and higher U.S. exports.104  Brazil also noted 
that the original panel conducted its analysis at a time when a significant percentage of U.S. upland 
                                                      
91 Brazil's First Written Submission, paras. 126-150;   Brazil's Rebuttal Submission, paras. 101-113;  
180-194, 209-231;  and Brazil's Opening Statement, paras. 63-78. 
92 See Quantitative Simulation Analysis by Professor Da niel Sumner, Annex I to Brazil's Further 
Submission before the original panel, 9 September 2003, para. 18, available at 
http://www.mre.gov.br/portugues/ministerio/s itios_secretaria/cgc/analisequantitativa.pdf . 
93 U.S. 2 April response to question 51, para. 71. 
94 Appellate Body Report, U.S. – Upland Cotton , para. 445. 
95 See, e.g., Brazil's Rebuttal Submission, Sections 7.7, 7.8, 7.9, 7.11, 7.12.  
96 Brazil notes that even using the futures price analysis for the Decem ber contract, U.S. upland cotton 
farmers expected to receive significant marketing loan and counter-cyclical payments in every year under the 
FSRI Act of 2002. 
97 U.S. 2 April response to question 51, para. 72, second bullet point.  
98 Brazil's Opening Statement, paras. 63-77 
99 Brazil's Comments on U.S. Oral Statements, paras. 13-34. 
100 See also Brazil's comments on the U.S. responses to questions 53 and 59, below. 
101 U.S. 2 April response to question 51, para 72, third and fourth bullet points.  
102 Brazil's Rebuttal Submission, paras. 201-202. 
103 "Analysis of Effects of U.S. Upland Cotton Su bsidies on Upland Cotton Prices and Quantities by 
Daniel A. Sumner," Brazil's First Written Submission, Annex I, Table  
104 Brazil's Rebuttal Submission, paras. 226-231.  WT/DS267/RW 
 Page D-465 
 
 
cotton was already grown from biotech varieties105, and that also during the reference period assessed 
by the original panel yields had increased.106   
 84. Fourth, the United States claims that Brazil im properly focuses on total costs and not variable 
costs.  In fact, Brazil's evidence addresses both types of costs.  Brazil refers the compliance Panel to 
its comments on the U.S. response to question 59, below.  Indeed, it is the United States that 
improperly downplays the crucial importance of cove ring total costs in light of the enormous long-
term deficit of $12.4 billion in losses that U.S.  upland cotton farmers would have accumulated over 
the past seven marketing years based only on market revenue.
107   
 
85. Fifth, the United States claims that Brazil fa ils to take into account demand from China in the 
world market for upland cotton.108  Brazil acknowledged that China plays an important role in the 
discovery of the A-Index world market prices, primarily from the demand side.109  But Brazil also 
emphasized that the United States – with a command ing 40 percent world market share of exports – 
plays a crucial role on the supply side of that price discovery process.110  Indeed, Brazil demonstrated 
that while Chinese demand skyrocketed in MY  2004 and MY 2005, prices actually fell due, in 
significant part, to record high U.S. production and exports.111  Thus, Brazil demonstrated that the 
impact of Chinese demand on the world market prices does not break the genuine and substantial relationship of cause and effect between the challe nged subsidies and significant price suppression in 
the world market.  
86. Finally, the United States' response to ques tion 51 summarizes a number of arguments that it 
elaborates on in more detail in response to other que stions.  Brazil refers the compliance Panel to its 
comments on the U.S. response to question 53 with respect to additional planting decision and expectations related arguments
112, questions 56/57 with respect to studies on the effects of counter-
cyclical payments113, and question 59, with respect to the U.S. cost of production.114  Brazil also notes 
that the United States again repeats its criticis m of Professor Sumner's simulation model that it 
advanced in its First Written Submissions115, but that the United States has not even attempted to 
rebut any of the arguments, explanations and rebu ttals submitted by Brazil and Professor Sumner in 
their many submissions since.  
52. In its Third Party Submission New Zealand observes: 
 
"Marketing loan payments are amber box measures, the category in which are included the non-prohibited measures with the most trade distorting effect on production and trade."  (para. 5.19) 
 Do  the parties  consider  that the fact that under  the Agreement  on Agriculture  a subsidy  is 
included  in the "amber  box" is relevant  to the analysis  of the subsidy's  consistency  with Articles  5 
and 6 of the SCM  Agreement? 
 
                                                     
 
105 Brazil's Comments on the U.S. Oral Statement, para. 31.  
106 See Exhibit Bra-562 (Cotton and Wool Situation Outlook and Yearbook, USDA, November 2006, 
Table 2, accessed November 2007 at http://usda.ma nnlib.cornell.edu/usda/current/CWS-yearbook/CWS-
yearbook-11-21-2006.pdf .  
107 See, e.g., Brazil's comments on the U.S. response to question 59, below. 
108 U.S. 2 April response to question 51, para. 72, fifth bullet point. 
109 Brazil's Rebuttal Submission, paras. 335-336.   
110 Brazil's Rebuttal Submission, paras. 324-345.   
111 Brazil's Rebuttal Submission, paras. 337-339. 
112 U.S. 2 April response to question 51, paras. 75-76. 
113 U.S. 2 April response to question 51, para. 77. 
114 U.S. 2 April response to question 51, para. 78. 
115 U.S. 2 April response to question 51, para. 73. WT/DS267/RW  
Page D-466  
 
87. Brazil refers the compliance Panel to  its own response to this question. 
 
Questions to the United States 
 
53. The United States argues that Brazil has not provided evidence of "actual production 
inducing" effects of marketing loan and counter- cyclical payments and that  Brazil "purports to 
demonstrate indirect production effects through its claim that the US planting, production, and 
exports are not responsive to prices" .  (Opening Statement of the United States at the meeting of the 
Panel with the parties, paras. 62 and 69, emphasis in original) 
 
a) Could  the United  States  explain  further  the distinction  between  what  it terms  "actual  
production  inducing  effects  "and "indirect  production  effects "?  Could  the United  
States  also elaborate  on how this distinction  is legally  relevant  in the context  of 
Articles  5 and
 6 of the SCM  Agreement? 
 
88. Brazil agrees with the United States that th ere is no legally relevant distinction between 
"actual" and "indirect" production effect s recognized in Articles 5 and 6 of the SCM  Agreement .116  
That should have been the extent of the U.S. answ er.  Unfortunately, the United States went on to 
provide an extensive and unresponsive recap of its factual  arguments.  Brazil briefly responds to these 
unresponsive assertions and cross-references to Br azil's earlier submissions where these arguments 
have been addressed. 
 
89. Brazil's comments on the U.S. response to question 51 summarize a number of Brazil's arguments concerning "expectations" of farmers an d how the marketing loan and counter-cyclical 
subsidies "numb" those farmer s response to market forces.
117  In an attempt to counter this core 
finding by the original panel, the United States now argues that "it is unrealistic to suggest that there 
should be a one-to-one link between upland cotton pl anting, production, and export and upland cotton 
prices."118  Yet, Brazil's claims never required such a "one-to-one" link and the original panel never 
based its findings on such a precise link.  Nor does Brazil claim that U.S. producers are incapable of 
any response to market price signals.119  Rather, Brazil's claim is that the updated evidence continues 
to demonstrate the correctness of the original panel's finding concerning the " numbness " of U.S. 
producers to market prices.  That is, U.S. upland co tton producers do not react to market price signals 
and/or do not react to the extent that would be expe cted absent the price-contingent U.S. subsidies at 
issue in this dispute.  90. Brazil demonstrated that, as in the earlie r MY 1999-2002 referen ce period, Brazilian and 
other non-subsidized low-cost producers continued during MY 2002-2006 to react to lower expected 
world market prices by lowering their acreage and decreasing production.
120  In fact, in every year 
between MY 2002-2006, total foreign harvested acreage moved in the same direction as futures 
                                                      
116 U.S. 2 April response to question 53(a), para. 83.   
117 These Comments respond to many of the expectation-related arguments in the U.S. 2 April response 
to question 53(a).  
118 U.S. 2 April response to question 53(a), para. 85. 
119 See, e.g., Brazil's Rebuttal Submission, para 188 (Braz il agrees that there are some factors that may 
influence planting decisions for some upland cotton producers in addition to expected prices and expected 
subsidy revenue . . . However, these exogenous factors do not reduce the importance or U.S. upland cotton 
producers of  the  key economic factor based on what farmers decide to produce upland cotton:  expected 
revenue from selling upland cotton as topped up by massive U.S. marketing loan and counter-cyclical payments.").   
120 Brazil's Rebuttal Submission, para 221-222 discussing Figure 8 – Futures Prices and Planted 
Acreage;  see also U.S. Rebuttal Submission, Figure in para. 306 (showing that since 2002, foreign harvested 
acreage has increased when prices were predicted to be higher, and decreased when prices were predicted to be 
lower;  by contrast, the U.S. harvested acreage did not show any correlation to price movements in MY 2003, 
MY 2005, and MY 2006).    WT/DS267/RW 
 Page D-467 
 
 
prices.121  By contrast, the planting decisions of subsid ized, high-cost U.S. upland cotton producers, in 
general, did not correlate with changes in cotton market prices.122  For example, between MY 2002-
2006, U.S. harvested acreage moved in opposite directions to those expected based on price 
movements in three out of five years – MY 2003, MY 2005, and MY 2006.  The United States 
attempts to explain this by claiming that, in MY  2003 and MY 2006, this is because "U.S. harvested 
acreage reacts more conservatively  than foreign acreage to increasing futures prices …."123  Yet, it is 
the lack of a correlation to prices that illustrates how U.S. producers are "numbed" from reacting to 
market forces.    91. More importantly, the degree and magnitude  to which U.S. producers respond to market 
signals is also muted compared to their non-U.S. counterparts.  In the past 5 years (MY 2002-2006), 
the change in U.S. harvested acreage from the previ ous year averaged 7 percent.  Annual changes in 
Brazil, by contrast were 36 percent.
124  These facts constitute evidence sustaining Brazil's point and 
that of Mr. Houston125 – that expected upland cotton market prices do not play an important role in the 
planting decisions of many U.S. upland cotton farmers.126   
 
92. The United States repeats several times the unsupported assertion that "[s]ince the [FSRI Act 
of 2002] came into effect, U.S. export behavior has been entirely consistent with that of foreign 
counterparts."127  This is incorrect.  A recent USDA analys is of the cotton market found that "[o]n the 
export side of the world trade equation, the United States has accounted for the lion's share of global 
gains , with 11 million bales of in creased exports since 1999/2000."128  Brazil recalls that record U.S. 
export volumes were achieved in MY 2001, 2002, 2003,  2004 and 2005.  The 40 percent U.S. share of 
world exports is more than three times higher than the share of Uzbekistan, the second largest 
exporter.129   
 93. The dramatic 55 percent increase in abso lute U.S. export volumes between MY 2002 and 
2005
130 inevitably came at the expense of producers in non-subsidizing countries.  Australia's average 
export market share of 12 percent between MY  1999-2001 was cut in half to 6 percent by 
                                                      
121 U.S. Rebuttal Submission, Figure in para. 306 (showing that since 2002, foreign harvested acreage 
has increased when prices were predicted to be higher, and decreased when prices were predicted to be lower;  
by contrast, the U.S. harvested acreage did not show any correlation to price movements in MY 2003, MY 2005, and MY 2006).   
122 Brazil's Rebuttal Submission, para. 224 discussing Figure 9 – Changes in Acreage and Percentage 
Changes in Futures Prices;  Brazil's First Written S ubmission, paras 141-143 discussing Figure 9 – Futures 
Prices and Planted Acreage;  Brazil' s Oral Statement, para. 61-62.  
123 U.S. 2 April response to question, para. 89.  
124 Exhibit Bra-629 (Brazilian Harvested Acreage, Producer, Supply & Distribution Database, FAS, 
USDA, accessed Fe bruary 2007 at http://www.fas.u sda.gov/psdonline/psdquery.aspx ).  See also 
Exhibit Bra-570 (Producer, Suppl y & Distribution Database, FAS, USDA, accessed January 2007 at 
http://www.fas.usda.gov/psdonline/psdquery.aspx ).  
125 Citations by Stephen Houston Sr., a cotton farmer from Georgia, can be found in Exhibit Bra-563 
("Cotton bailout:  How your tax dolla rs prop up big growers and squ eeze the little guy," Atlanta Journal-
Constitution, 1 October 2006, p.  2, accessed December 2006 at 
http://www.ajc.com/search/conte nt/metro/stories/cotton1.html ). 
126 See also Professor Sumner's analysis regarding the magnitude of the reaction of U.S. upland cotton 
producers to an elimination of marketing loan and coun ter-cyclical subsidies, Brazil's First Written Submission, 
Annex I. 
127 U.S. 2 April response to question 53, paras. 88 and 90 ("the data show … that U.S. production and 
exports shift consistently with production and exports elsewhere in the world.").   
128See "Cotton Backgrounder," USDA, Marc h 2007, accessed April 2007 at 
http://www.ers.usda.gov/Publications/CWS/2007/03Mar/CWS07B01/ ).  
129 Producer, Supply and Distri bution Database, Foreign Agricu lture Service, USDA, accessed 
April 2007 at http://www.fas.usda.gov/psdonline/psdQuery.aspx . 
130 Exhibit Bra-447 (Upland Cotton Supply and Use). WT/DS267/RW  
Page D-468  
 
MY 2005.
131  Similarly, West and Central Africa's share of the world market declined to a ten-year 
low in MY 2005.  The UN Food and Agricultural Organization recently summed up what has been 
occurring:  
Subsidies maintain cotton production at othe rwise unprofitable levels in industrialized 
countries, reducing the opportunities for deve loping countries to export to subsidizing 
country markets and displacing their exports to third countries.
132 
94. Of course, exports of upland cotton are th e consequence of planting decisions and other 
factors, including subsidies, yields, domestic demand, etc.  The relevant question is, therefore, what would U.S. exports be but for marketing loan a nd counter-cyclical subsidies.  As discussed above, 
U.S. upland cotton planting are higher than they would be but for the U.S. subsidies at issue.  Brazil 
has demonstrated that but for the two U.S. subsidies at issue, U. S. exports would have been 25 percent 
lower in MY 2005.
133 
 95. But even accepting, arguendo, the U.S. argument that U.S. and foreign exports did react in 
roughly the same manner as non-subsidized forei gn exports, the United States ignores the reason why 
this may have occurred.  Many of these non-subsid ized foreign producers have far lower costs of 
production than U.S. producers.
134  Brazil recalls ICAC's finding that it costs U.S. upland cotton 
producers $0.67 to grow a pound of upland cotton, wh ile it costs producers in West and Central Africa 
$0.45 and producers in Brazil just $0.38.135  Such lower costs are essentia l to the survival of Brazilian 
and African producers, because they do not have the benefit of 40 percent ad valorem subsidies for 
the same basic commodity product as U.S. producers.   These lower costs allow them to withstand 
certain levels of lower prices and still cover their to tal costs.  U.S. producers are only able to compete 
with foreign producers in MY 2005 because marketi ng loan and counter-cyclical subsidies allowed 
them to sustain high levels of planted acreage.  Brazil has demonstrated that but for these 
two subsidies, U.S. producers would have reacte d to lower expected prices in MY 2005 (combined 
with higher costs) by reducing acreage, reducing production, and reducing exports.136  And with lower 
U.S. exports available to meet world demand,  world market prices would be higher.   
 96. Finally, against this backdrop, the United St ates claims that the elimination of Step 2 
payments caused a major shift in U.S. exports.
137  While complete data for MY 2006 is, of course, not 
available, USDA projects that U.S. exports in MY 2006 will be at their second highest level in 
history.  USDA further projects that the U.S. world market share of exports will be 36 percent in 
MY 2006.  While this does constitute a decline in th e U.S. world market share of exports, the United 
States still holds a commanding market share.  As Br azil explained at the Panel meeting, the decline 
in the U.S. share of world exports in MY 2006 is larg ely due to the rise of Indian exports to China and 
the surge of U.S. exports just prior to the termination of the Step 2 program at the end of MY 2005.138  
Further, with over 9 million bales of U.S. upla nd cotton sitting in U.S. warehouses, USDA and FAPRI 
project that the United States will increase its exports in MY 2007.  In fact, FAPRI's 2007 baseline 
                                                      
131 Producer, Supply and Distri bution Database, Foreign Agricu lture Service, USDA, accessed 
April 2007 at http://www.fas.usda.gov/psdonline/psdQuery.aspx .  
132 Exhibit Bra-579 ("Cotton:  Impact of Support Policies on Developing Countries – Why Do the 
Numbers Vary?" FAO Trade Policy Brie f, p. 1, accessed December 2006 at 
ftp://ftp.fao.org/docrep/fao/007/y5533e/y5533e00.pdf ). 
133 "Analysis of Effects of U.S. Upland Cotton Su bsidies on Upland Cotton Prices and Quantities by 
Daniel A. Sumner," Brazil's First Written Su bmission, Annex I, Tables 2.A.1-2.A.3. 
134 See Brazil's First Written Submission, para. 162.  See also  Exhibit Bra-480 (Survey of the Cost of 
Production of Raw Cotton, ICAC, November 2004, p. 13). 
135 See Brazil's First Written Submission, para. 162.  See also  Exhibit Bra-480 (Survey of the Cost of 
Production of Raw Cotton, ICAC, November 2004, p. 13). 
136 See Brazil's First Written Submission, paras. 167-180. 
137 U.S. 16 March comments on Brazil's answer to question 28(a), para. 121. 
138 See Brazil's Closing Statement, para. 11.  WT/DS267/RW 
 Page D-469 
 
 
projects the U.S. share of the world export market to rise to 43 percent in MY 2007 and remain above 
40 percent through MY 2011.139  
 
b)  What  is the response  of the United  States  to the argument  that the fact that 
"U.S. upland  cotton  producers  know  that their  overall  revenue  will always  be 
protected  by marketing  loans  and counter-cyclical  payments  ... plays  a major  role in 
their  planting  decisions "?  (Rebuttal  of Brazil , para . 185;  see  also Third  Party  
Submission  of New Zealand , paras  5.20-5.21)   
 
97. The United States asserts that the "mere" fact that income support programs support the 
income of agricultural producers "does not, however,  mean that the payments have 'major' effects on 
planting or cause any of the adverse effects listed in Articles 5 and 6 of the SCM  Agreement ."140  
Brazil agrees that different forms of income support may have different effects on production and that 
Articles 5 and 6 do not contain a presumption of adverse effects from income support.  As the 
complaining Member, Brazil must demonstrate that the particular price-contingent subsidies at issue 
in this dispute cause serious prejudice to its inter ests.  Contrary to the U.S. assertion, all of the 
evidence submitted by Brazil in this proceeding is suffi cient to more than discharge this burden.   
 98. In commenting on the U.S. response, Brazil recalls its 2 April response to question 69, its 
comments on the U.S. response to questions 51 an d 53(a), above, and 53(c), below, and the many 
arguments and evidence provided in its earlier submissions.   
 
99. Brazil does not consider it "mere" or unimpor tant facts that, during the lifetime of the FSRI 
Act of 2002, marketing loan and count er-cyclical subsidies represented an average  40 percent 
ad valorem subsidization rate, covered an average 29 percent of total costs of production
141, and were 
received by 96 percent  of U.S. upland cotton producers holding upland cotton base acres.142  Nor is it 
"mere" fact that,  but for  these subsidies, U.S. production would be 15 to 16 percent lower143 and U.S. 
exports 21 to 22 percent lower.144  Nor is it "mere" fact that the original panel found that the subsidy 
payments are mandatory, i.e., they must be made by the U.S. Secretary of Agriculture without 
exceptions, and that they are contingent upon world and U.S. prices, i.e., they function to guarantee 
U.S. producers revenue regardless of how low pr ices fall.  As both the Appellate Body and the 
original panel found145, the knowledge of U.S. upland cotton pr oducers that these subsidies will be 
received at times of low prices is an important factor affecting their planting decisions and, 
consequently, affecting U.S. supply of upland cotton to the world market.   
 100. While it is possible that some forms and low levels of income support may not cause serious prejudice under particular conditions of competition, this is certainly not the case with respect to the 
two subsidies at issue:  U.S. marketing loan a nd counter-cyclical subsidies for upland cotton.  These 
particular mandatory, price-contingent subsidies cau se serious prejudice in view of their nature and 
                                                     
 
139 See "World Cotton," 2007 FAPRI Ba seline, accessed April 2007 at 
http://www.fapri.iastate.edu/b rfbk07/CottonTables2007.xls .  
140 U.S. 2 April response to question 53, para. 92.   
141 Exhibit Bra-477 (Upland Cotton Costs and Returns). 
142 Brazil's Rebuttal Submission, Table 3 at para. 157.   Results are from U.S. First Written Submission, 
table at para. 224. 
143 Average effects from MY 2002-2005, see "Analysis of Effects of U.S.  Upland Cotton Subsidies on 
Upland Cotton Prices and Quantities by Daniel A. Su mner," Brazil's First Written Submission, Annex I, 
Tables 2.A.1-2.A.3.  
144 Average effects from MY 2002-2005, see "Analysis of Effects of U.S.  Upland Cotton Subsidies on 
Upland Cotton Prices and Quantities by Daniel A. Su mner," Brazil's First Written Submission, Annex I, 
Tables 2.A.1-2.A.3. 
145 Appellate Body Report, U.S.–Upland  Cotton¸  para. 445;  Panel Report, U.S. – Upland Cotton , 
paras. 7.1290-7.1303.  WT/DS267/RW  
Page D-470  
 
magnitude, and in view of the product they suppor t and the particular conditions of competition in 
which that product is traded in international markets.
146  
 c) In  its Opening  Statement  at the meeting  of the Panel  with the Parties , Brazil  observed: 
 
"...we have demonstrated that these subs idies stabilized cotton producers' revenue 
despite wildly fluctuating market pri ces, thereby insulating and numbing acreage 
response to market price signals.  These s ubsidies also cover the huge long-term gaps 
between market returns and total costs of  production.  Both effects are closely 
interrelated."  (para.55) 
Is the United  States  only arguing  that Brazil  has not empirically  substantiated  that these  
two "effects " have  actually  occurred  or is it also the position  of the United  States  that these
 
effects  are in any event  legally  irrelevant  to an analysis  of whether  a subsidy  causes  
significant  price  suppression  within  the meaning  of Article  6.3 (c) of the SCM  Agreement?   
 
101. The passage cited by the compliance Panel ties together two important themes in Brazil's 
causation arguments and two important effects of the U.S. marketing loan and counter-cyclical 
subsidies.  The planting decisions analysis presente d in the paragraphs that follow this portion of 
Brazil's Oral Statement shows how marketing loan and counter-cyclical subsidies (i) numb farmers' 
planting decisions and (ii) cover their total costs of production, resulting in higher levels of planting 
and supply than would exist but for the subsidies.  
 
102. In its response, the United States accepts that  marketing loan and counter-cyclical subsidies 
stabilize upland cotton producers' revenue, i.e., constitute price-contingent subsidies, but submits that 
Brazil's demonstration to that effect is not "remarkable".147  Yet, the conciseness of this fact and the 
simplicity of its demonstration does not make it any less important.  It is crucial that every U.S. 
producer growing upland cotton on upland cotton base knows that he or she will receive a profitable 
return regardless of market prices at th e time of harvest.  This knowledge is the key aspect of revenue 
"expectations" at the time of planting.148   
 103. While the United States presents a number of  arguments concerning the alleged absence of 
any effects on production of marketing loan subs idies (responses to which are largely set out in 
Brazil's comments to U.S. response to question 51), the United States fails to demonstrate any
 
fundamental change in the conditions of compe tition in the U.S. or world upland cotton market 
between the reference year of MY 2002 and the reference year of MY 2005 (or MY 2006).  The same 
basic facts continue to exist.  Therefore, and b ecause the U.S. arguments raised are without merit, 
there is no basis for the compliance Panel to deviat e from the findings of the original panel, as upheld 
by the Appellate Body.  The FSRI Act of 2002 mandat es the payment of marketing loan subsidies for 
every pound of upland cotton grown in the United States, without  limitation , if the adjusted world 
price falls below $0.52 per pound.149  Farmers know that the more upland cotton they produce, the 
more they will receive in marketing loan subsidies.   Perversely, the operation of this subsidy means 
that when U.S. supply surges and world prices fall as a result, more  marketing loan subsidies are 
made, perpetuating the cycle of high levels of production.150  In view of this fact, there is little wonder 
that the original panel found that "[w]e have no doubt  that the payments stimulate production and 
                                                      
146 See, e.g., Brazil's 2 April response to question 69. 
147 U.S. 2 April response to question 53(c), paras.  94-95 citing Brazil's Oral Statement, para. 55. 
148 Brazil's comments on the U.S. response to question 51, above, address the arguments in 
paragraphs 95-96 in the Answer to Question 53(c).  
149 For more details on the functioning of the marketing loan program, see Section 7.3.1 of Brazil's 
First Written Submission or see 7 U.S.C. §7931(a) in Exhibit Bra-442 (7 U.S.C. §§ 7901-7939, Legal 
Information Institute, Cornell Law School, accessed July 2006 at http://www.l aw.cornell.edu/uscode/). 
150 Panel Report, U.S. – Upland Cotton , paras. 7.1294-7.1295.  WT/DS267/RW 
 Page D-471 
 
 
exports and result in lower world market pr ices than would prevail in their absence."151  Moreover, the 
original panel found that "the text of the measure  indicates that the payments are mandatory, where 
certain market conditions prevail."152  Brazil notes that marketing loan subsidies in MY 2005 were 
41 percent larger than in MY 2002.153  
 
104. The United States repeats its argument that th e actual payment of marketing loan and counter-
cyclical subsidies is irrelevant and that only expectations matter.154  As Brazil has repeatedly 
demonstrated155, actual payments of these subsidies provi de U.S. producers with payments worth 
40 percent of the market value of a highly price-sensitive commodity.156  The experience of U.S. 
upland cotton farmers, who received very large subsidies over the years due to actual prices below the 
trigger prices, is a crucial fact that forms part of the background against which U.S. farmers' build 
their expectations about future revenue from the market and the subsidy programs.157  This remains 
unchanged from the facts before and the findings of the original panel and the Appellate Body.158  The 
U.S. expectation analysis narrowly and incorrectly assumes that farmers expect to receive subsidies 
only on the basis of a firmly expected price and di sregard the possibility (i) that actual prices might 
deviate from this projection and (ii) that U.S. pr ice-contingent subsidies provide a revenue guarantee 
against such changes in volatile upland cotton prices.159   
 105. With respect to the U.S. arguments regard ing the absence of effects from counter-cyclical 
subsidies
160, Brazil refers the compliance Panel to its re buttal of similar arguments made in response 
to questions 56/57 below. 
 
106. Next, the United States raises several new argu ments (or new variations on older arguments) 
and presents new evidence in its response to questio n 53(c).  In particular, it  argues that "in every 
single marketing year since the FSRI Act came into  effect, it would have been economically rational 
for upland cotton farmers to plant upland cotton rather  than allowing their land to sit idle because the 
farmers expected that, even without any paymen t from the government, market revenue for upland 
cotton was more than sufficien t to cover variable costs."161   
 107. This assertion is fundamentally flawed for a number of reasons.  First, Brazil has never 
suggested that all or even most upland cotton acreag e would be left idle without marketing loan and 
counter-cyclical subsidies.  The counter-factual be fore this compliance Panel concerns the question 
whether, in the absence of marketing loan and counter-cyclical subsidies, upland cotton acreage 
would decline.  Whether that land would be left  idle or would be switc hed to the production of 
alternative crops that continue to benefit from U.S.  subsidies, such as corn, soybeans, wheat, and rice, 
is not relevant for this assessment.  
108. Further, contrary to the U.S. assertion, it is  not economically rational to plant upland cotton 
year after year unless producers are able to cover their total costs, not merely variable  costs.  The 
                                                     
 
151 Panel Report, U.S. – Upland Cotton , para. 7.1291. 
152 Panel Report, U.S. – Upland  Cotton , para. 7.1291.  
153 Brazil's First Written Submission, Table 6 at para. 111, as amended by updated marketing loan 
subsidy amounts ( see Brazil's 16 March Comments on U.S. Answer to Question 4, para. 14) and an updated 
counter-cyclical subsidy amount in MY 2005 ( see Brazil's Oral Statement, para. 40).  See also  Brazil's 2 April 
Answer to question 69, para. 99. 
154 See also Brazil's comment on the U.S. response to question 51, above. 
155 See also Brazil's comment on the U.S. response to question 51, above. 
156 Brazil's First Written Submission, paras. 111-113 and Table 6. 
157 See Brazil's comment on the U.S. re sponse to question 51, above. 
158 Appellate Body Report, U.S. – Upland Cotton , para. 445;  Panel Report, U.S. – Upland Cotton , 
paras. 7.1290-7.1303. 
159 See Brazil's comment on the U.S. re sponse to question 51, above. 
160 U.S. 2 April response to question 53, para. 97. 
161 U.S. 2 April response to question 53, para. 98.   WT/DS267/RW  
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original panel recognized this fact when it found th at "[w]e believe that the existence of this gap 
between upland cotton producers' total production co sts and market revenue, on the one hand, and the 
effect of the subsidies, on the other hand, was to  sustain a higher level of output than would have 
occurred in the absence of the Un ited States subsidies at issue."
162  Brazil refers the compliance Panel 
to its 2 April response to question 71 for a discussion of  why total costs, in addition to variable costs, 
are highly relevant to planting decisions.163   
 109. Moreover, a significant portion of upland cotton farmers are not able to cover their variable  
production costs with market revenue alone, nor do ma ny upland cotton farmers expect to be able to 
do so at the time of planting.
164  The portion of upland cotton farmer s that are not able to cover their 
variable costs of production depend on  which costs are considered variable.165  As explained in 
Brazil's Oral Statement, whether or not a cost  is variable depends on the time period being 
considered.166   
 110. However, in addition to the time period under consideration, the categorization of cost items 
depends on the nature of the counte rfactual examination.  In this dispute, the compliance Panel is 
tasked to examine the effect of permanently removing a major source of upland cotton producers' income.
167  This question is fundamentally different fro m examining the effects of annual fluctuations 
in market price levels.  The counterfactual involv ing a permanent removal of the subsidies calls for 
the inclusion of costs in a plan ting decisions analysis that might  not always be included when 
assessing planting decisions based solely on limited a nnual price fluctuations.  For instance, if a drop 
in prices is expected to be isolated ( i.e., only lasting a single year), a farmer would be more willing to 
continue producing even if he or she is unable to  cover fully the opportunity cost of labor and land 
and special machineries.  However, if the farmer knows that, due to the termination of a government 
program, a source of revenue representing an average 40 percent ad valorem subsidization rate will 
permanently be lost, no rational farmer would cont inue planting upland cott on unless he or she can 
cover operating, land and labor costs.  Instead, th e farmer would shift production to other crops or 
potentially lease his or her land to other farm operato rs.  In other words, a producer's supply response 
would be greater if the reduction in subs idies was fully anticipated and permanent.168    
 111. Next, the United States claims that "in each of the years under FSRI Act, shifts in U.S. 
planted acreage were consistent with what one would expect if there were no marketing loan 
payments or counter-cyclical payments and U.S. fa rmers were basing their planting decisions solely 
on market prices signals and other considera tions relevant to planting and production."
169  T h i s  
assertion is based on a flawed U.S. analysis of upland cotton planting decisions.  The new U.S. analysis appears to have been engineered to ma ke upland cotton appear more attractive relative to 
corn and soybeans than it actually was.
170   
 
                                                      
162 Panel Report, U.S. – Upland  Cotton , para. 7.1354. 
163 See also Brazil's comments on the U.S. response to question 59, below. 
164 Brazil's Rebuttal Submission, paras. 254-283.   
165 The United States does not consider unpaid labor, land or capital recovery costs to be variable, see 
U.S. Rebuttal Submission, paras. 324-332.  Brazil considers these costs to be fully, or in part, variable, see 
Brazil's Rebuttal Submission, para. 254-283. 
166 Brazil's Oral Statement, paras. 87-88 
167 See Brazil's 2 April response to question 73;  Brazil's First Written Submission, Annex I. 
168 See Brazil's Rebuttal Submission, Annex I, para. 11.  Brazil also notes that it addresses the other 
U.S. cost of production related arguments in its comm ents on the U.S. response to question 59, below. 
169 U.S. 2 April response to question 53(c), para. 99. 
170 Brazil notes that it is impossible to verify much of the new information presented by the 
United States.  Exhibit U.S.-139, which contains the U.S. analysis, was not provided electronically and much of 
the information does not appear to be publicly available.   Brazil's analysis, by contrast, was based on publicly 
available information and provided to the Pane l and the United States  in electronic format.  WT/DS267/RW 
 Page D-473 
 
 
112. The first major flaw in the United States anal ysis is the manner in which the United States 
calculates expected market prices ( i.e., the farm price).  It derives that price by applying a "basis" (or 
discount) to the January-March average closing price of the harvest period futures  contract.  For 
example, the United States discounts the futures pr ice for soybeans and corn by $0.14 and futures 
prices for upland cotton by $0.05 a pound.171  The United States cites a USDA website in support of 
its "basis" for corn, soybeans and upland cotton.172  However, the website applies only to soybeans, 
corn and wheat, but not upland cotton.173  Thus, the United States provides no explanation or any data 
to justify why its basis of $0.05 per pound is appropriate.    113. While trumpeting FAPRI's analysis in its rep eated critique of Professor Sumner's model, the 
United States rejects Brazil's use of projected prices published in FAPRI's baseline projections.  
However, the United States does not explain why FA PRI's projected prices should not be used.  Nor 
does the United States explain why the compliance Pa nel should find that prices calculated by the 
United States for purposes of this litigation – a nd not supported by the source cited by the 
United States – should be adopted by the complia nce Panel as superior to FAPRI's published price 
projections.  (Brazil notes that USDA is prohi bited by U.S. law from publishing its own price 
projections for upland cotton.)  114. As noted, Brazil's alternative crop expectations exercise relies on prices projected by FAPRI and published in its baseline during the planting period.
174  The differences between these FAPRI-
projected prices and the prices constructed by the United States are very significant for most 
marketing years, and especially for those crucial to the compliance Panel's assessment.  The table 
below shows the expected prices for upla nd cotton under the two approaches:   
 
Table 2 – Expected Upland Cotton Prices175 
 
 2002 2003 2004 2005 2006 2007 
New U.S. Expected Prices  0.38 0.54 0.62 0.48 0.54 0.54 
FAPRI Expected Prices 0.39 0.47 0.57 0.44 0.48 0.53 
 
115. The bias of the new U.S. analysis becomes a pparent when applying these two sets of prices.  
When the FAPRI-projected prices are inputted into the U.S. planting decisions analysis, upland cotton 
is no longer the most attractive crop to plant in any year other than MY 2004.176  In other words, 
correcting solely for this single flaw in the U.S. an alysis leads to the collap se of the U.S. assertion that 
"shifts in U.S. planted acreage were c onsistent with what one would expect."177  Given the absence of 
any evidence supporting the U.S. "basis" for upla nd cotton of $0.05 per pound, there is no basis for 
the compliance Panel to accept its use.    116. Another significant flaw in the U.S. planting decisions analysis concerns the manner in which 
the United States derives expected yields.  The firs t error in the U.S. yield analysis is that the 
                                                     
 
171 U.S. Comments on Brazil's Oral  Presentation, Annex I, Section 1 "Expected Market Prices."  
172 U.S. Comments on Brazil's Oral  Presentation, Annex I, Section 1 "Expected Market Prices."  
173 See http://www.ers.usda. gov/Data/PriceForecast/ , accessed April 2007. 
174 Brazil used CBO's projection of MY 2007 prices because the corresponding FAPRI projection was 
not yet available.  See Exhibit Bra-634 (Analysis of Planting Decisions Based on Expected Returns). 
175 See expected prices for upland cotton in Exhibit Bra-634 (Analysis of Planting Decisions Based on 
Expected Returns) and Exhibit US- 139 (Data Supporting Expected Mark et Returns Above Variable Costs 
Chart) 
176 Compare expected net outlays in  Exhibit US-139 (Data Supporting Expected Market Returns Above 
Variable Costs Chart,  p. 1).  
177 U.S. 2 April response to question 53(c), para. 99. WT/DS267/RW  
Page D-474  
 
United States erroneously ove rstates expected yields by relying on yields per harvested  acres
178, 
whereas the planting decision analysis s hould be based on expected yields by planted  acre.179  
Correcting this error would reduce expected yields  (and expected market returns) by an average 
12 percent each year.180   
 
117. The United States also improperly constructs yield projections based on a linear regression 
analysis of actual  yields per harvested acre for MY 1995-2006.181  In other words, the United States 
derives projected yields for, e.g., MY 2003 taking into account information of actual yields in 
MY 2004-2005 and assuming that farmers fully anticipat ed the record high yields achieved in the 
MY 2004 and MY 2005.182  An examination of the annual USDA baselines released prior to the 
planting periods from MY 2002 through MY 2007 confir ms that USDA did not project yields to 
increase to the extent that they di d.  Much less could U.S. upland cotton producers have made that 
projection.   
 
Table 3 – USDA Yield Projections183 
 
  2002 2003 2004 2005 2006 2007 
  Yield per planted acre 
2002 USDA Baseline Projection 572 577 578 579 579 581 
2003 USDA Baseline Projection   574 579 581 581 582 
2004 USDA Baseline Projection    587 589 590 591 
2005 USDA Baseline Projection     612 612 616 
2006 USDA Baseline Projection      699 706 
2007 USDA Baseline Projection           725 
Actual Yield 579 643 806 799 668 NA 
Percent greater than USDA pr ojection 1% 12% 37% 31% -4% NA 
Yield used by U.S. in their analysis 723 745 766 788 809 831 
Percent greater than USDA proj ection 26% 30% 31% 29% 16% 15% 
 
 
118. Table 3 shows that USDA projections  of upland cotton yields in the upcoming marketing year 
were significantly less than actual  yields achieved every year.  Of course, it is impossible for farmers 
                                                      
178 See US-139 (Data Supporting Expect ed Market Returns Above Variab le Costs Chart, p. 20).  For 
convenience, Brazil's replicates and provides citations to  the United States yield calcu lations in Exhibit Bra-688 
(Expected Upland Cotton Yields).  
179 USDA cost of production of data  clearly specifies that yields ar e in terms of planted acres, not 
harvested acres.  See, e.g. Exhibit Bra-475 (U.S. Cotton Producers Costs and Returns Per Planted Acre, 
Excluding Government Payments, Economic Resear ch Service, USDA, accessed October 2006 at 
http://www.ers.usda.gov/data/costsandreturns/testpick.htm ). 
180 The United States provided very little documentation as to how it constructed its "linear trend 
equation" of expected yields in US-139 ( see U.S. Comments on Brazil's Oral Statement, Annex I).  Brazil has 
reconstructed the U.S. calculation for the panel's convenience, using both yields per harvested acre and yields 
per planted acre in Exhibit Bra-688 (Expected Upland Cotton Yields).  
181 See US-139 (Data Supporting Expect ed Market Returns Above Variab le Costs Chart, p. 20).  For 
convenience, Brazil's replicates and provides citations to  the United States yield calcu lations in Exhibit Bra-688 
(Expected Upland Cotton Yields). 
182 By contrast, Brazil used a three year rolling average of yields per planted acre actually achieved on 
farms in USDA's cost survey.  See Exhibit Bra-634 (Analysis of Planting Decisions Based on Expected 
Returns).  
183 USDA baseline projections are from Exhib it Bra-635 (2002-2007 USDA Agricultural Baseline 
Projections).  Actual yields are from Exhibit Bra-562 (Cotton and Wool Situation Outlook and Yearbook, USDA, November 2006, Table 2, available at http://usda.mannlib.cornell.edu/usda/current/CWS-
yearbook/CWS-yearbook-11-21-2006.pdf ).  Yields used by the U.S. in thei r planting decisions analysis is from 
Exhibit US-139.  WT/DS267/RW 
 Page D-475 
 
 
to predict both the weather and their yields.  And it is unreasonable for the United States to now 
suppose that U.S. farmers, but not USDA, anticipated  the dramatic increases in yield in MY 2004 and 
MY 2005.  Table 3 also shows that the yields used  by the United States in their planting decisions 
analysis significantly overstated the expectations of  upland cotton farmers.  The yields used by the 
United States in its analysis are, on average, 24 percent greater than USDA baseline projections.  
Correcting this flaw in the U.S. analysis, once agai n, invalidates the U.S. conclusions that "shifts in 
U.S. planted acreage were consiste nt with what one would expect."184  
 119. In sum, the new U.S. planting decision analys is is based on unsupported assertions that result 
in a biased and result-orientated conclusion to atte mpt to argue that mandatory and price-contingent 
subsidies constituting 40 percent of the market value of a basic commodity product have no effect on 
production.  This analysis should be rejected by the compliance Panel.    120. As Brazil demonstrated in its own analys is, a proper assessment of U.S. upland cotton 
producers' plantings decisions demonstrates that , but for marketing loan and counter-cyclical 
subsidies, it would have been econom ically rational for them to switch to the production of alternative 
crops nearly every year.
185  
 121. Finally, even assuming, arguendo , that the flawed U.S. analysis demonstrates that upland 
cotton farmers planting decisions move  generally in the same direction
 as might be expected from 
market signals, the U.S. analysis fails to refute the original panel's basic finding that these subsidies 
"numb" U.S. producers reactions.  The United States analysis does not demonstrate that the extent  to 
which U.S. producers have changed upland cotton plan tings is consistent with the extent to which 
U.S. upland cotton producers would have changed their plantings but for the subsidies.   
 122. The original panel found, and Brazil demonstr ates with updated evidence, that upland cotton 
producers are numbed from market signals, not comple tely deadened.  The elimination of subsidies 
that account for an average of 40 percent of the mark et value of upland cotton and cover an average of 
29 percent of total costs over the life-time of the FSRI Act of 2002 would cause a significant shift of 
acreage to alternative uses now providing higher net re turns.  Brazil again recalls that the issue before 
the compliance Panel is not whether the general direction  of U.S. planted acreage correlates with 
expected revenue from upland cotton and other crops .  The issue before the compliance Panel is 
whether U.S. upland cotton acreage would be lower and world market price higher but for marketing 
loan and counter-cyclical subsidies.  One relevant piece of evidence of the effects of these subsidies is 
the fact that their revenue-stabilizing effect numbs U.S. upland cotton producer s' reactions to market 
price signals.  54. Could the United States explain whether, and, if so, why, it is of the view that this Panel 
should not rely on the findings and analysis by the original Panel regarding the effects of marketing loan and counter-cyclical payments on production a nd exports?  Please comment in particular on 
paras. 7.1291, 7.1295, 7.1302, 7.1349, 7.1353 of the Panel Report. 
 
123. In its response, the United States asks the co mpliance Panel to revisit the original panel's 
findings regarding marketing loan and counter-cycli cal subsidies.  These adopted findings should be 
followed by the compliance Panel.  Prior adopted pa nel and Appellate Body re ports create "legitimate 
expectations" among WTO Members, and should be taken into account by panels when they are 
relevant to the resolution of a dispute.
186 
                                                      
184 U.S. 2 April response to question 53(c), para. 99. 
185 See Brazil's Oral Statement, paras. 63-78 and Brazil's Comments on the U.S Oral Statements, 
paras. 13-27. As Brazil explained in its Comments on the U.S. Oral Statements, using total costs or variable 
costs does not change the relative attractiveness of producing upland cotton versus corn or soybeans. 
186 Appellate Body Report, U.S. – Softwood  Lumber  V, para. 111. WT/DS267/RW  
Page D-476  
 
124. This is particularly the case where particular  issues and questions of fact before a panel are 
the same as those previously examined by the Appe llate Body.  In such a situation, it is "not only 
appropriate," but to "be expected," that the panel would follow the Appellate Body's earlier 
conclusions.
187  With respect to compliance proceedings, in particular, the Appellate Body has stated 
that "Article 21.5 proceedings do not oc cur in isolation but are part of a ' continuum of events .'"188  The 
Appellate Body observed that "doubts could arise about the objective nature  of an Article 21.5 panel's 
assessment if, on a specific issue, that panel were to deviate  from the reasoning in the original panel 
report in the absence of any cha nge in the underlying evidence."189  The compliance panel in U.S. – 
Gambling (21.5) noted that "[a] re-assessment in a compliance proceeding of an issue that had already 
been ruled upon in an original proceeding in an ad opted report, even with better arguments by the 
respondent but without a change relevant to the unde rlying facts in the intervening period, would run 
counter to the prompt settlement of disputes."190  The United States is not entitled to re-litigate an 
issue that has been definitively reso lved for purposes of this dispute. 
125. As a factual matter, Brazil recalls that the evidence regarding the nature of marketing loan 
and counter-cyclical payments remains unchanged, th at their magnitude in MY 2005 is even larger 
than the magnitude assessed by the original panel for MY 2002 and that the conditions of competition 
in the world market for upland cotton have not ch anged in any fundamental way since the original 
panel's assessment.  Therefore, there is no basis of the United States to argue that the compliance 
Panel should disregard and/or overturn the findings of  the original panel, as upheld by the Appellate 
Body.  Brazil addresses the specific U.S. arguments ra ised in response to this question in the context 
of its comments on other U.S. responses.  Specifically: 
 
• With respect to the U.S. arguments con cerning the production effects of marketing 
loan subsidies191, Brazil refers to the compliance Pa nel to its comments on the U.S. 
response to question 53, above. 
 
• With respect to the issue of production effects from counter-cyclical payments 
supporting the production of upland cotton, Brazil refers the compliance Panel to its comments on the U.S. response to questions 53, above, and 56/57, below.
192 
 
• With respect to the cost of production rela ted issues raised by the United States in 
response to this question193, Brazil refers the compliance Panel to its comments on the 
U.S. response to question 59, below.  
 
56. The United States has cited new empirical research on the production effects of counter-
cyclical payments.  How does the United States ad dress Brazil's criticism that none of this research 
has dealt specifically with the effects of c ountercyclical payments under the FSRI Act of 2002 on 
upland cotton?  (Rebuttal Submission of Brazil, para. 120)    
57. The United States has offered the Lin and Dismukes (Exhibit US-34) and Westcott (US-35) 
studies as examples of new empirical research on the production effects of countercyclical payments.   
a) Is  it not more  accurate  to characterize  the Lin and Dismukes  study  as a simulation  of 
the possible  effect  of countercyclical  payments  on production  rather  than a study  on 
                                                     
 
187 Appellate Body Report, U.S. – OCTG  Sunset  Reviews , para. 188. 
188 Appellate Body Report, U.S. – Softwood  Lumber  IV (21.5), para. 103 (emphasis added) citing 
Appellate Body Report, Mexico  – Corn  Syrup  (21.5), para. 121.  See Brazil's First Written Submission, para. 28. 
189 Appellate Body Report, U.S. – Softwood  Lumber  VI (21.5), para. 103 (emphasis added). 
190 Panel Report, United States – Gambling (Article 21 .5), para. 6.53. 
191 U.S. 2 April response to question 54, paras. 108-110. 
192 U.S. 2 April response to question 54, paras. 111-115. 
193 U.S. 2 April response to question 54, paras. 117-120.   WT/DS267/RW 
 Page D-477 
 
 
the actual  impact  of the payments  since  it does not statistically  estimate  the effect  of 
the actual  payments  (which  began  only in 2002)  on crop production?   (Please  refer  to 
pages  9-12 of the paper  which  describe  the data, covering  the period  1991-2001 , 
used for the study) .   
 
b) How  does the United  States  deal with Brazil's  characterization  of the Westcott  study  
as offering  no new empirical  evidence , and instead , being  a qualitative  discussion , 
much  like that presented  to the original  panel  (see para  128 of Brazil's  rebuttal)?   
 
126. Brazil provides below consolidated comments on the U.S. responses to questions 56 and 57.  
 
127. The United States argues that since the orig inal proceeding there "have been a number of 
studies conducted regarding the effects of the [counter-cyclical] program."194  This statement is not 
correct with respect to counter-cyclical payments for upland cotton.  No empirical study has specifically examined the effect of counter-cycli cal payments on upland cotton production and the 
United States has cited one empirical study on the effect of counter-cyclical payments generally.
195  
As noted by the compliance Panel in question 57(a), this study, by Lin and Dismukes, is a simulation 
of the possible effect of counter-cyclical payments on production, rather than a study on the actual impact of the subsidies.  The dearth of studies, as implied by the compliance Panel's question, is due 
to the fact that the program is relatively new.  However, the absence of specific studies does not 
constitute a basis for the United States to argue th at Brazil has not met its burden of demonstrating 
that there remains a the strong positive link, found by the original panel, between counter-cyclical 
payments and the production of U.S. upland cotton.    128. The original panel found that counter-cyclical  contributed to serious prejudice based on an 
examination of the structure, design and operation of the program.
196  As Brazil explained, the few 
studies that have been conducted since then s upport the finding that counter-cyclical subsidies 
contribute to serious prejudice.197   
 129. As explained by Professor Sumner, there are at least five major mechanisms through which 
counter-cyclical payments have the potential to affect production.
198  The study by Lin and Dismukes 
examined only two of these mechanisms.199  Beyond that, the study solely examined counter-cyclical 
subsidies for corn, wheat and soybeans in the Midwest.   In its 2 April response to questions 64 and 65, 
Brazil provided a number of reasons why counte r-cyclical subsidies for upland cotton would be 
expected to have significantly greater effects on production that counter-cycli cal subsidies for these 
field crops in the Midwest. 200  For convenience, Brazil lists thes e factors in the following chart, 
comparing counter-cyclical subsidies for upland cotton to counter-cyclical subsidies for the 
commonly studied field crops in the Midwest. 
                                                      
194 U.S. 2 April response to question 56, para. 123. 
195 Brazil also cited one study by McIntosh, Shrogren and Dohlman on the effect of counter-cyclical 
payments that found significant production impacts from counter-cyclical subsidies.  See Brazil's 2 April 
response to question 64. 
196 Panel Report, U.S. – Upland  Cotton , paras. 7.1301-7.1302. 
197 Brazil's First Written Submission, paras. 167-185;   Brazil's Rebuttal Submission, paras. 69-70, 
119-123 or Exhibit Bra-659 (Statement of Professor Sumner Concerning Various U.S. Arguments), paras 42-47. 
198 These include reducing risk associated with price variability, increasing investment through wealth 
effects, reducing risk aversion th rough wealth effects, constraining pr oduction choices because of planting 
restrictions, and increasing incentives to plant because of base acre updating.  See "Analysis of Effects of U.S. 
Upland Cotton Subsidies on Upland Cotton Prices and Quantities by Daniel A. Sumner," Brazil's First Written 
Submission, Annex I, paras. 59-64. 
199 These include reducing risk associated with price variability and reducing risk through wealth 
effects.  See Exhibit Bra-659 (Statement of Professor Sumner Concerning Various U.S. Arguments, para. ) 
200 Brazil's 2 April response to questions 64 and 65. WT/DS267/RW  
Page D-478  
 
Table 4 – Comparison of CCPs for Cotton and CCPs for Soybeans,  
Corn and Wheat in the Midwest 
 
 Upland Cotton Soybeans, Corn and Wheat in the Midwest 
Frequency of 
CCP Subsidies201 • Every year under the FSRI 
Act 
•  Maximum CCPs in three 
out of four years • No CCPs for wheat  
•  No CCPs for soybeans  
• CCPs for corn in two out of four years;  subsidies 
below their maximum in both years 
Maximum Size of 
Payments202 •  CCP of $75 per acre 
(19 percent of target price) •  Corn CCP of $39 per acre (15 percent of target price) 
•  Wheat CCP of $20 per acre (17 percent of target 
price) 
•  Soybean CCP of $10 per acre (6 percent of target 
price)  
Maximum CCPs and Production 
Costs
203 •  14 percent of production 
costs  •  Corn:  10 percent of cost of production 
•  Wheat:  10 percent of production costs 
•  Soybean:  4 percent of production costs 
Substitute Crops •  Peanuts, rice, corn, 
soybeans, hay, sorghum, fruits, vegetables, melons 
and wild rice •  Very few substitute crops 
•  Many regions plant corn and soybeans exclusively 
Supply 
Elasticities • High supply elasticities • Low supply elasticities 
 
130. As demonstrated in Table 4, upland cotton c ounter-cyclical subsidies are larger and paid out 
far more frequently than counter-cyclical subsidies fo r major field crops in the Midwest.  In addition, 
counter-cyclical subsidies cover a greater portion of upland cotton producers' costs of production then 
they do for soybeans, corn and wheat.  It follows  from these basic differences that the effect of 
counter-cyclical subsidies for upland cotton is greater than that for major field crops in the Midwest.  
The availability of substitute crops is another si gnificant reason why counter-cyclical payments for 
upland cotton have a larger effect on acreage and production that they do for corn, wheat and 
soybeans.  Upland cotton acreage can more readily switch to the production of other crops and, thus, 
has a higher elasticity of supply than soybeans, co rn and wheat.  The collective effect of these 
differences is to dramatically in crease the ability of upland cotton counter-cyclical payments to reduce 
risks associated with price variability and ultim ately, increase supply as compared with counter-
cyclical payments for soybeans, corn and wheat.   
 
131. For all these reasons, upland cotton counter-cyc lical subsidies greatly reduce the risk of 
producing upland cotton.  They do so, however, only when upland cotton is grown on upland cotton base, as only under this scenario is there the revenue  stabilizing effect resulting from the combination 
of upland cotton market revenue and upland cotton  price-contingent counter-cyclical subsidies.  This 
is the reason that the vast majority of U.S. upland cotton is grown on upland cotton base.   
 132. The studies cited by the United States do not and can not address this crucial issue because 
the data on upland cotton base and upland cotton plan tings is not available in the public domain.
204  
Yet, this information was available to the origin al panel, and the same data is available to the 
                                                      
201 Exhibit Bra-675 (Updated Program Crop Comparison, March 2007). 
202 Exhibit Bra-675 (Updated Program Crop Comparison, March 2007). 
203 Compare Exhibit Bra-675 (Updated Program Crop Comparison, March 2007) to U.S. 2 response to 
question 53, para. 101. 
204 See, e.g., Brazil's attempt to obtain this data thr ough a Freedom of Information Act request was 
rejected.  See Exhibit Bra-689 (Freedom of Information Act Rejection Letter).  WT/DS267/RW 
 Page D-479 
 
 
compliance Panel.  Based on the data available to  the original panel, it correctly rejected the 
United States attempt to argue that counter-c yclical payments were "decoupled" from production.205  
Instead, it found a "strongly positive relationship"206 between historic upland cotton producers 
receiving upland cotton counte r-cyclical subsidies and current  upland cotton producers.  It also found 
that these subsidies allowed U.S. producers to re main farming upland cotton because they were an 
important contributor to the total cost of production.207  None of the studies of counter-cyclical 
subsidies discuss such crucial data.  133. In response to this finding, the United States now  claims that the fact that 96 percent of U.S. 
upland cotton is produced on fa rms with upland cotton base acres
208 should not be surprising because 
upland cotton was grown historically, and continues to  be grown today, on land particularly suited for 
upland cotton.209  Yet, this is precisely the basis for the or iginal panel's finding that the high per-acre 
upland cotton counter-cyclical paym ents were connected with the current  production of upland 
cotton.210  By this admission, the United States confirms that when Congress set very high per-acre 
payments for upland cotton base acres, it did so inte nding that the payments would be used to allow 
producers of upland cotton to cover their high costs of production.  That is exactly what the National 
Cotton Council asked for prior to the FSRI Act of 2002.211  Congress would not provide counter-
cyclical subsidies to historic cotton producers that are seven  times higher per-acre than those for 
historic soybean producers if it thought that the upland cotton producers would grow soybeans.212   
 134. Thus, the structure, design and operation of the counter-cyclical subsidies is to specifically 
enable farmers that historically had planted high-cost  upland cotton to continue to plant upland cotton.  
This is exactly what has happened.  Almost all ( 96 percent) of U.S. upland cotton continues to be 
grown on farms with upland cotton base acres.
213  These farmers know that the counter-cyclical 
subsidy will be paid if the pri ce received by the U.S. producer falls below the target price of 
$0.724 per pound.  And the average U.S. upland cotton farmer covered 10 percent of its total cost of 
production with counter-cyclical payments over the life-time of the FSRI Act of 2002.214  T h i s  
evidence, not studies of counter-cyclical subsidies for other crops, demonstrates the linkage between 
U.S. counter-cyclical subsidies, upland cotton plantings, supply and world market prices.  
 
58. The Unites States stated that the key consid eration in assessing a farmer's decision to grow 
upland cotton is whether the farmer has been coveri ng his variable costs of production. In this 
connection, it presented upland cotton costs and returns estimates for marketing years 1999-2005 
(Exhibit US-47).  Brazil has disputed the absence of  certain items – land, labour and capital recovery 
costs - in the US calculations of variable costs.   In response, the United States has referred to the 
Commodity Costs and Returns Estimation Handbook (Exh ibit US-88) prepared by a Task Force of the 
American Agricultural Economics Association as the basis for leaving out these items in its 
                                                      
205 Panel Report, U.S. – Upland Cotton , paras. 7.634-7.647. 
206 See, e.g., Panel Report, U.S. – Upland  Cotton , paras. 7.6377.1362. 
207 The original panel stated that "United States upland cotton producers would not have been 
economically capable of remaining in the production of upland cotton had it not been for the United States 
subsidies at issue and that the effect of the subsidies was to allow United States producers to sell upland cotton 
at a price lower than would otherwise have been n ecessary to cover their total costs."  Panel Report, U.S. – 
Upland  Cotton , para. 7.1353. 
208 Brazil's Rebuttal Submission, Table 3 at para.157.  Results are from U.S. First Written Submission, 
table at para. 224. 
209 U.S. 2 April response to question 54, para. 115. 
210 Panel Report, U.S. – Upland  Cotton , para. 7.1362. 
211 Exhibit Bra-109 (Testimony (Full) of Robert  McLendon, Chairman, NCC Executive Committee, 
Before the House Agricultural Committee. National Cotton Council (NCC)). 
212 Exhibit Bra-675 (Updated Program Crop Comparison, March 2007). 
213 Brazil's Rebuttal Submission, Table 3 at para.157.  Results are from U.S. First Written Submission, 
table at para. 224. 
214 See Exhibit Bra-477 (U.S. Upland Cotton Costs and Returns). WT/DS267/RW  
Page D-480  
 
calculations.  However, the Task Force which authored the Hand book does not use the categories 
"fixed" or "variable" costs and in fact recommends  that the microeconomic concepts of fixed and 
variable costs not be used in preparing and reporting cost and return estimates.  Page 2-67 of the Handbook states: 
 
The Task Force therefore recommends that costs should be categorized only as to 
whether they are associated with expendable  factors or the services of capital assets.  
The division of costs into categories such as fixed and variable should generally be avoided in preparing CAR estimates. For the purpose of preparing CAR estimates for specific enterprises, the Task Force recommends  that all the costs of all expendables 
be allocated to the generic group OPER ATING COSTS and that all other costs be 
allocated to the group ALLOCATED OVERHEAD.  
 Would  the United  States  clarify  whether  the categories  "operating  costs " and "allocated  
overhead " correspond  to the economic  concepts  of fixed  and variable  costs?   In particular , are 
"operating  costs " variable  costs  or not?  Would  the United  States  please  indicate  whether , and if
 so, 
where , the Handbook  makes  these  clarifications  or distinctions .   
 
135. Brazil welcomes the United States' acknowledge ment that operating costs are distinct from 
variable costs.215  However, having done so, the United St ates continues to blur the distinction 
between the two.  For example, the United States claims that "Brazil has attempted to include as 'variable' or 'operating'
 costs, costs that are not in fact 'expe ndable in a single defined period' including 
land, unpaid labor, and capital recovery costs."216  
 136. This statement is not consistent  with the earlier U.S. acknowledgment
217 that "operating 
costs" and "variable costs" are distinct economic c oncepts.  Nor is it correct.  To clarify, Brazil does 
not consider land, unpaid labor and capital recovery  costs to be "operating costs".  Brazil does, 
however, consider these costs to be w holly, or in part, "variable costs".218  Brazil's approach is entirely 
consistent with the approach detailed in the Am erican Agricultural Economics Association ("AAEA") 
Handbook.  137. Brazil also welcomes the United States acknow ledgment that "allocated overhead" differs 
from "fixed costs".
219  The United States then criticizes Brazil's inclusion of fixed costs and/or 
imputed (or non-cash) cost as part total costs in  its cost of production and planting decision 
analyses.220  Brazil responds to these arguments in its comments on the U.S. response to question 59, 
below, in which Brazil address comprehensively issues related cost of production and plantings 
decisions that the United States raised in its 2 April responses to questions.  59. In discussing the impact of long-term costs of  production (and hence long-term profitability) 
of upland cotton production on farmers' decisions to exit cotton farming, the United States argues that 
income from other crops and off-farm income must  be into account.  Why does the United States 
consider these issues relevant given the original Panel's decision that "off farm income" is not a 
legally relevant consideration.  (Panel Report,  para. 7.1354, footnote 1470)  Please respond to 
Brazil's arguments on this matter in paragr aphs 249-253 of its Rebuttal Submission.   
 
                                                     
 
215 U.S. 2 April response to question 58, para. 132. 
216 U.S. 2 April response to question 58, para. 134 (emphasis added). 
217 U.S. 2 April response to question 58, para. 133. 
218 Brazil's Rebuttal Submission, paras. 254-283.  
219 U.S. 2 April response to question 58, para. 136. 
220 U.S. 2 April response to question 58, paras. 135-136.  WT/DS267/RW 
 Page D-481 
 
 
138. In response to a limited question by the compliance Panel concer ning income from other 
crops and off-farm income, the United States launches into a lengthy discussion of farm 
bankruptcy.221  The United States response misses the point of the compliance Panel's question.   
 139. Contrary to the U.S. response, Brazil do es not assert that the major issue before this 
compliance Panel is whether upland cotton farmers would exit farming altogether but for marketing 
loan and counter-cyclical subsidies.  Rather, the rele vant question, as stated in question 59, is whether 
farmers would exit "cotton farming," that is, woul d they discontinue planting upland cotton.  The 
evidence presented by Brazil demonstrates that a signi ficant percentage of U.S. upland cotton farmers 
would exit the production of upland cotton.
 222  
 
140. Throughout this proceeding, the United St ates, understandably, has sidestepped the $12.4 
billion gap between upland cotton producers' total costs of production and market returns over the 
past seven years.  U.S. arguments have shifte d from highlighting the importance of whole-farm 
costs223, to relying on cost and return data in the high price year of MY 2003224, and finally, to 
attacking USDA's own cost of production data itself.225  Yet, none of these arguments individually or 
collectively explains how an industry that would have lost $12.4 billion w ithout subsidies over the 
past seven years226 is economically viable.  
 
 (a) Whole Farm Costs Are Irrelevant  
 141. The U.S. argument that whole-farm costs are relevant to upland cotton production decisions
227 
is simply not logical.  Why would a farmer cross- subsidize the production of upland cotton – in effect 
subsidizing foreign purchasers of low-priced/high-co st U.S. upland cotton – with income from other 
crops or from off-farm income?  The United States does not answer that question.  Instead, it 
highlights studies which find that farmers increas ingly supplement their income with off-farm 
work.228  Brazil does not dispute these studies or this trend.  Yet, the fact that U.S. upland cotton 
farms earn income from growing other crops or in other sectors of the economy is not relevant to these proceedings.  As the original panel found, "[ w]e are considering costs and market revenues in 
respect of upland cotton.  Our examination is one of the upland cotton industry … We are not looking into the possibility of cross-subsidization or cr oss-financing of insufficient market revenues for 
upland cotton that may have come from other United States industries."
229  Moreover, as the studies 
submitted by the United States point out, the issue of off-farm income is of particular importance for 
small farms.230  And as these studies also point out, most  U.S. upland cotton production occurs on 
                                                      
221 U.S. 2 April response to question 59, paras. 137-142. 
222 See Brazil's First Written Submission, Section 7.11;  Brazil's Rebuttal Submission, Section 2.3.6;  
Brazil's Opening Statement, Section 2.4;  and Braz il's Comments on U.S. Oral Statements, Section 4. 
223 U.S. First Written Submission, paras. 293-297;  U.S. Rebuttal Submission, paras. 344-348;  and 
U.S. 2 April response to question 59, paras. 155-157.  
224 U.S. Rebuttal Submission, para. 337;  U.S. Opening Statement, paras. 11-13;  and U.S. 2 April 
response to question 59, paras. 144-145. 
225 U.S. 2 April response to question 59, paras. 147-154. 
226 Brazil's Oral Statement, para. 57. 
227 U.S. 2 April response to question 59, paras. 155-157. 
228 The United States repeatedly quotes a portion of one of these studies whic h finds that "[o[ff-farm 
work could hypothetically effect exits in two ways" (U.S. Answers to Second Set of Questions, para. 156).  As explained above, the question before this compliance Panel is not whether farmers would go bankrupt.  It is 
whether a farmer would stop producing upland cotton.  Furthermore, the "hypothe tical" effects of off-farm 
income on farm-exits is no more than a theory.  See Exhibit US-46 (Hoppe, Robert A. and Korb, Penni. 
"Understanding U.S. Farm Exits."  Economic Re search Service Report 21. June 2006, p. 20). 
229 Panel Report, U.S. – Upland  Cotton , para. 1354, footnote 1470.  
230 U.S. 6 March response to question 31, para. 30. WT/DS267/RW  
Page D-482  
 
farms that have very big commercial operations.
231  The U.S. argument is, therefore, not even relevant 
to the vast majority U.S. upland cotton production.   
 (b) MY 2003 Cost Data Is Atypical  
 142. Much of the distorted U.S. analysis of "costs" rests on its reliance on an unusual year – 
MY 2003.
232  This year was unusual because it was the first – and only time – in the history of the 
FSRI Act of 2002 (and the first time in eight years) that U.S. farmers actually earned a profit ($65 per 
acre) based solely on market revenue.  The Un ited States understandably focuses its arguments on 
MY 2003 cost of production data in its Rebu ttal Submission and subsequent submissions.233  In doing 
so, however, it fails to acknowledge several important points.234  
 143. First, the U.S. MY 2003 cost data is not ma terially different from what Brazil has used during 
this entire proceeding.  The only difference is that it is broken down into three arbitrary cost groups – 
low, medium and high.
235  When all cost groups are aggregat ed, the average acre planted to upland 
cotton made a profit of $65.  Brazil's assertions regarding the seven-year $837 loss on each acre 
planted to upland cotton is based exclusively on USDA cost data and includes  the average profit of 
$65 per acre achieved in MY 2003.236  Therefore, the United States assertion that "Brazil ask[ed] the 
Panel to simply ignore this data"237 is incorrect.  Far from ignoring the data, Brazil used the same  
USDA  data in its First Written Submission, Re buttal Submission and Oral Statement.238 
 
144. Second, the United States failed to acknowledge  that MY 2003 is the only year in the past 
eight in which the U.S. producers covered their total costs of production only with market revenue.  In 
its response to this question, the United States ha s finally acknowledged that "prices in MY 2003 were 
high."239  However, the United States now argues that that most producers nevertheless would have 
covered their total costs in  MY 2004 and 2005 because of, inter  alia, increasing yields.240    USDA 
data squarely contradicts this statement:  the data  clearly show that the average acre planted to upland 
cotton lost $18 in MY 2004 and $88 dollars in MY 2005.241   
 145. Third, U.S. producers' costs are increasing si gnificantly in MY 2006.  National average yields 
are estimated to be 668 pounds per planted acre in MY 2006, far lower than yields of 806 pounds per 
                                                     
 
231 U.S. 6 March response to question 31, para. 30. 
232 U.S. 2 April response to question 59, paras. 144-146. 
233 U.S. Rebuttal Submission, para. 337;  U.S. Opening Statement, paras. 11-13;  and U.S. 2 April 
response to question 59, paras. 144-145. 
234 U.S. Opening Statement, paras. 11-12;  U.S. 6 March Response to Question 29, para. 20;  and U.S. 
2 April response to question 59, paras. 144-146. 
235 Brazil notes that the U.S. also adjusts the data  to exclude costs and returns associated with 
cottonseed.  
236 See Exhibit Bra-477 (U.S. Upland Cotton Costs and Returns);  see also Exhibit Bra-475 (U.S. 
Cotton Producers Costs and Returns Per Planted Acre, Excluding Government Payments, Economic Research 
Service, USDA, accessed October 2006 at http:// www.ers.usda.gov/data/cost sandreturns/testpick.htm ). 
237 U.S. 2 April response to question 59, para. 145. 
238 See, e.g., Brazil's First Written Su bmission, paras. 156-164. 
239 U.S. 2 April response to question 59, para. 145. 
240 U.S. 2 April response to question 59, para. 145. 
241 Exhibit Bra-477 (U.S. Upland Cotton Costs and Returns);  see also Exhibit Bra-475 (U.S. Cotton 
Producers Costs and Returns Per Planted Acre, Excluding Government Payments, Economic Research Service, 
USDA, accessed October 2006 at http://www.ers.usda.gov/data/c ostsandreturns/testpick.htm ).  Brazil notes that 
USDA's use of harvest period prices underestimates lo sses in MY 2004.  The harvest period (Oct-Nov) farm 
price of upland cotton was 51 cents per pound (Exhibit Bra-477), while the marketi ng year average farm price 
was just 42 cents per pound (Exhibit Bra-448 (Cotton and Wool Situation Outlook and Yearbook, USDA, 
November 2005, p. 38, accessed October 2006 at http://usda.mannlib.cornell .edu/usda/current/CWS-
yearbook/CWS-yearbook-11-25-2005.pdf )).  WT/DS267/RW 
 Page D-483 
 
 
planted acre in MY 2004 and 799 pounds per acre in MY 2005.242  Further, U.S. producers are faced 
with significantly higher seed, fertilizer, a nd fuel costs in MY 2006 than in MY 2003-2005.243  Total 
costs in MY 2006 are forecasted to be 10 percent higher than their MY 2003-2005 average.244  With 
market prices remaining low throughout the first eight months of MY 2006245, the loss based on 
market revenue is expected to significantly widen in MY 2006 compared to MY 2003-2005.246  
 
146. Fourth, the United States makes the remarkable a ssertion that "there is no basis to assume that 
the [MY 2003] results would have been s ubstantially different in later years"247 However, unlike 
MY 2003, when the average U.S. farm price was $0.62 per pound248, the average farm price was 
$0.416 per pound in MY 2004 and $0.477 per pound in MY 2005.249  The current average farm price 
for MY 2006, as of April 2007, is $0.472 per pound.250  Thus, there is no way that the average 
"mid-cost" producer, with total costs of $0.57 per pound, covered his or her total costs of production 
in those years.  Nor will those costs be covered in MY 2007.251  
 147. In any event, breaking upland cotton farms into  arbitrary cost groups is neither necessary nor 
particularly relevant.  It is far more appropriate fo r this compliance Panel, like the original panel, to 
examine national average cost of production data to get a complete picture of the U.S. upland cotton 
industry.  Indeed, the Appellate Body in Canada Dairy (21.5 II)  found that 
 
[i]t, therefore, seems to us that the benchmark should be a single, industry-wide cost of production figure, rather than an indefi nite number of cost of production figures 
for each individual producer.  The industry -wide figure enables cost of production 
data for producers, as a whole, to be aggreg ated into a single, national standard that 
can be used to assess Canada's complian ce with its international obligations.
252 
148. Using national average data certainly does not "obscure" cost of production data as the 
United States suggests.253  Brazil, the United States and the compliance Panel are all aware that 
upland cotton farmers have different co st structures.  In any given year , about half of the acres planted 
to upland cotton have costs that are higher than th e national average, while the other half has costs 
that are less than the national average.  This is nothing  more than basic statistics.  It follows, therefore, 
that in years when the average acre planted to upland cotton lost mone y (six of the past seven years) 
more than half of the acreage planted to upland cotton suffered a loss.  In this context, it is import to 
recall that Professor Sumner's analysis suggests that 17-19 percent of U.S. production of upland 
                                                      
242 For yields in MY 2004 and 2005, see Exhibit Bra-562 (Cotton and Wool Situation Outlook and 
Yearbook, USDA, November 2006, Table 2, available at http://usda.mannlib.cornell.edu/usda/current/CWS-
yearbook/CWS-yearbook-11-21-2006.pdf ).  For yields in MY 2006, see Table 1 from the April 2007 Cotton and 
Wool Outlook, accessed April 2007 at http://www.ers .usda.gov/Briefing/Cotton/ Data/COTTONT ABLE1.xls .  
243 Compare  seed, fertilizer and fuel costs in Exhibit Bra-475 (U.S. Cotton Producers Costs and Returns 
Per Planted Acre, Excluding Government Payments , Economic Research Service, USDA, accessed 
October 2006 at http://www.ers.usda.gov/data/costsandreturns/testpick.htm ) and Exhibit Bra-575 ("Cost-of-
production forecasts fo r U.S. major field crops, 2 006-2008F," Economic Research Service, USDA, accessed 
January 2007 at http://www.ers.usda.gov/data/costsandr eturns/data/Forecast/cop_forecast.xls ).  
244 Exhibit Bra-634 (Analysis of Planting Decisions Based on Expected Returns). 
245 See Brazil's Comments to Question 82 below.   
246 Based on partial year USDA and FAPRI data, the loss is expected to be $116 per acre, see Exhibit 
Bra-648 (Actual Costs and Returns Analysis).   
247 U.S. 2 April response to question 59, para. 145. 
248 U.S. 2 April response to question 59, para. 145. 
249 Exhibit Bra-562 (Cotton and Wool Situation Outlook and Yearbook, USDA, November 2006, p. 36, 
available at http://usda.mannlib.cornell.edu/usda /current/CWS-yearbook/CWS-yearbook-11-21-2006.pdf ) 
250 See Table 1 from the April 2007 Co tton and Wool Outlook, accessed at 
http://www.ers.usda.gov/Briefing /Cotton/Data/COTTONTABLE1.xls . 
251 See Brazil's comments on the U.S. response to question 82, below.   
252 Appellate Body Report, Canada  – Dairy  (21.5 II), para. 96. 
253 U.S. 2 April response to question 59, para. 144. WT/DS267/RW  
Page D-484  
 
cotton would cease without marketing loan and counter-cyclical subsidies.
254  This is consistent with 
the notion that only higher-cost U.S. producers would exit upland cotton production without these subsidies.    149. Thus, the various U.S. cost-related arguments  based on MY 2003 data are entirely misplaced.  
The reference period of MY 2005 demonstrates signi ficant losses by the average acre of upland cotton 
of $88 per acre.  These losses are set to increase to an estimated $116 per acre in MY 2006.
 255  These 
are significant losses and above the average $65 per acre loss per year over the lifetime of the FSRI 
Act of 2002.256 
  (c) USDA's Total Cost of Production Data is Relevant and Appropriate 
 
150. For the first time in this proceeding, the United States attacks the total cost of production data 
itself, arguing that it "provides a stylized, abstract view"
257 and is used by Brazil in a way in which "it 
was never intended."258  These criticisms echo similar arguments made by the United States in the 
original proceeding.259  These old U.S. arguments attacking its own USDA cost data were properly 
rejected by the original panel.260  The renewed arguments should again be rejected by this compliance 
Panel.  151. The United States criticism of USDA's  own total cost data is two-fold.
261  First, the U.S. 
criticizes the method by which USDA values non-cash costs, such as imputed farm labor and land 
ownership costs.262  Second, the United States argues that USDA's  total cost data is not an appropriate 
indicator of the financial viability of upland cotton farming because it includes non-cash costs.263  
Both criticisms of USDA's co st data are without merit. 
 152. The United States challenge to USDA's analysis  of non-cash costs squarely contradict basic 
economic and accounting principles.  Non-cash costs, such as ownership costs and opportunity costs, 
are real, not imaginary, costs, as the U.S. suggests.  Indeed, USDA explains that:   
 
[c]ommodity costs and retu rns include estimates of both cash expenditures and 
noncash costs.  Cash expenditures are incurred when factors of production are 
purchased or rented. Noncash costs occur when  factors are owned.  For example, if a 
farmer fully owns the land used to produ ce corn, he/she would have no expenditure 
for land rental or for loans to pay for the purchase of land.  Yet, an economic  cost 
arises .  By owning  the land and using  it to grow  corn, the farmer  foregoes  income  
from  other  uses of the land, such as renting  it to another  producer .  These  costs  come  
about  because  production  resources  are limited  
and have  alternative  uses.  If a 
farmer uses savings to pay for operating inputs, such as seed, fertilizer, chemicals, 
and fuel, and thus pays no interest on ope rating loans, the farmer still incurs an 
economic cost because the savings could have earned a return in another use.  Likewise, the farmer has an opportunity cost of his/her labor used in the production of 
                                                     
 
254 Brazil's First Written Submission, para. 167. 
255 Market returns minus total costs was reduced by the product of 5 percent and total costs, see Exhibit 
Bra-648 (Actual Costs and Returns Analysis). 
256 Exhibit Bra-477 (U.S Upland Cotton Costs and Returns). 
257 U.S. 2 April response to question 59, para. 147. 
258 U.S. 2 April response to question 59, para. 143. 
259 See e .g., Section F of U.S. Further Rebuttal Submission from the original proceeding, 
18 November 2003 . 
260 Panel Report, U.S. – Upland Cotton, paras. 7.1353-7.1354. 
261 U.S. 2 April answer to question 54, para. 119. 
262 U.S. 2 April answer to question 54 and 59, paras. 119, 147-151. 
263 U.S. 2 April answer to question 54 and 59, paras. 119, 152-154.  WT/DS267/RW 
 Page D-485 
 
 
the commodity because it could have been used on another farm or in off-farm employment.
264 
153. The need to cover total costs of production,  including both cash and non-cash costs, is an 
economic reality facing all farmers.  No farmer wo uld or could repeatedly plant his fields with a 
chronically loss-making crop.  There is no basis for the U.S. assumption that farmers do not take into 
account non-cash "opportunity" costs when making produc tion decisions.  This assumption is directly 
contradicted by USDA economists who include both cash  and non-cash costs in their cost and returns 
estimates.  154. The need for producers to cover total cost s of production was recently highlighted by the 
Appellate Body in EC – Sugar .  The Appellate Body found that   
 
in the ordinary course of business, an ec onomic operator makes a decision to produce 
and sell a product expecting to recover the total cost of production
 and to make 
profits .  Clearly, sales below total cost of production cannot be sustained in the long 
term, unless they are financed from some  other  sources .265   
155. The "some other sources" in this case that c over total costs of production are marketing loan 
and counter-cyclical subsidies.  Without such s ubsidies, average seven-year losses totalled $837 per 
acre.  With these two subsidies, the average acr e showed a seven-year profit of $104 per acre.266   
 156. As noted by the Appellate Body, not only is  an economic operator expected to cover his or 
her total costs of production, but he or she is also  expected to make a profit.  Brazil notes that USDA 
also recognizes the need for farmers to make a prof it.  USDA defines "residual return to management 
and risk" as follows:  
[r]esidual  returns  to management  and risk is the difference between the gross value 
of production and total economic costs.  The return to management and risk indicates 
the extent to which longrun production co sts are covered by production valued at 
average harvest-month prices.
267 
157. The Appellate Body's findings in EC – Sugar  and USDA's definition of residual returns to 
management and risk demonstrate the importance of  not only covering costs, but also of generating 
profits from farming.  The ability of upland cotton farm ers to cover their variable costs, let alone total 
costs, is not sufficient to show that marketing loan and counter-cyclical subsidies do not impact 
production.  158. Brazil's cost of production analysis has not previously factored in the obvious need to make profits on the farmers' investments.  This is because the huge losses based only on market revenue 
readily demonstrate the decisive role played by marketing loans and counter-cyclical subsidies in 
sustaining revenue and large amounts of upland cotton production.  But if the compliance Panel were 
to consider the need for farmers to generate some  reasonable profit, the gap between market returns 
and such a profit margin obviously would be even greater.  For example, assuming even a fairly low 
profit margin of only 5 percent, the average  gap between market revenue and the five percent profit 
would increase to $1,017 per acre in the seven y ear period of MY 1999-2005 .  For MY 2005 alone, 
                                                     
 
264 See Commodity Costs and Returns:   Methods, Economic Res earch Service, USDA, accessed 
April 2007 available at h ttp://www.ers.usda.gov/Data/C ostsAndReturns/methods.htm  (emphasis added).  
265 Appellate Body Report, EC – Sugar , para. 266 (emphasis added). 
266 Exhibit Bra-477 (Upland Cotton Costs and Returns). 
267 See Definition of Residual Returns to Management  and Risk, Economic Re search Service, USDA, 
accessed April 2007 available at http://www.ers.usda.gov/ data/CostsAndReturns/Glossary/def_resr.htm ).  WT/DS267/RW  
Page D-486  
 
the gap would be $115 per acre – not the $88 per acre based on a break-even methodology.
268  The 
projected gap in MY 2006 would be $144 per acre, based on a five percent profit margin.269  
 159. Next, the new U.S. criticism of USDA's valu ation methodologies ignores the fact that they 
were conceived by the American Agricultural Economics Association and implemented by USDA.
270  
The data are based off of surveys that are ge nerated in the ordinary course of USDA business.271  The 
methods and data used to generate cost of pr oduction data are objective and appropriate.  USDA 
explains that four approaches are used to estimat e commodity costs, including (1) direct costing, 
(2) valuing input quantities, (3) indirect co sting and (4) allocating whole-farm expenses.272  T h e  
United States singles out only the fourth element for its criticism – not the other three.   
 
160. Brazil notes that "allocat ing whole-farm expenses"273 is only used by USDA to determine 
"general farm overhead" and "taxes and insurance."274  These costs account for about 5 percent of 
upland cotton producers' total costs of production.275  The other valuation methodologies used by the 
USDA cost survey are also properly used to addr ess the question before this compliance Panel.  
USDA explains that "[u]npaid labor hours are valued  using an estimate of the wages earned off-farm 
by farm operators"276 and that "[l]and is valued according to the average cash rental rate for land 
producing the commodity in the particular area." 277  These relatively straightforward methodologies 
in no way distort or undermine an assessment of the financially viability of upland cotton farming 
using total costs of production.    
161. Finally, the United States criticizes Brazil' s use of USDA total costs of production data by 
highlighting the fact that the total cost of producti on was greater than market returns for nearly all 
U.S. field crops in MY 2005.  Based on this fact , the U.S. argues that Brazil's planting decision 
analysis is "absurd"
278  and "fundamentally erroneous."279  Neither Brazil nor the U.S. Congressional 
Research Service ("CRS"), an agency of the U.S. Government, would agree with this latest U.S. 
assertion.  In fact, CRS confirms that "it is only with  the aid of subsidies that a substantial portion of 
                                                      
268 Annual market returns minus total costs were reduced by the product of 5 percent and total costs, 
see Exhibit Bra-477 (Upland Cotton Costs and Returns). 
269 Market returns minus total costs was reduced by the product of 5 percent and total costs, see Exhibit 
Bra-648 (Actual Costs and Returns Analysis). 
270 See Commodity Costs and Returns:   Methods, Economic Res earch Service, USDA, accessed 
April 2007, available at http://www.ers.usda.gov/Data /CostsAndReturns/methods.htm . 
271 The data are collected in Agricultu ral Resource Management Surveys, s ee Commodity Costs and 
Returns:  Methods, Economic Research Serv ice, USDA, accessed Ap ril 2007 available at 
http://www.ers.usda.gov/Data /CostsAndReturns/methods.htm . 
272 See Commodity Costs and Returns:   Methods, Economic Res earch Service, USDA, accessed 
April 2007, available at http://www.ers.usda.gov/Data /CostsAndReturns/methods.htm .  
273 U.S. 2 April answer to question 59, paras. 148-150. 
274 See Commodity Costs and Returns:   Methods, Economic Res earch Service, USDA, accessed 
April 2007, available at http://www.ers.usda.gov/Data /CostsAndReturns/methods.htm .  
275 Exhibit Bra-475 (U.S. Cotton Producers Costs and Returns Per Planted Acre, Excluding 
Government Payments, Economic Research Se rvice, USDA, accessed October 2006 at 
http://www.ers.usda.gov/data/costsandreturns/testpick.htm ).  In any event, it is appropriate to allocate costs to 
different crops based on their contribution to a farm's operating margin.  It is the most reliable method of 
allocating costs that must be accounted for. 
276 See Commodity Costs and Returns:   Methods, Economic Res earch Service, USDA, accessed 
April 2007,  available at http://www.ers.usda.gov/Data /CostsAndReturns/methods.htm .  
277 See Commodity Costs and Returns:   Methods, Economic Res earch Service, USDA, accessed 
April 2007, available at http://www.ers.usda.gov/Data /CostsAndReturns/methods.htm .  
278 U.S. 2 April response to question 59, para. 143. 
279 U.S. 2 April response to question 53(c), para. 102.  WT/DS267/RW 
 Page D-487 
 
 
U.S. production [of all crops] is made economically viable."280  CRS's analysis relied upon a graph of 
total costs versus market returns in selected periods281 with and without subsidies as set out below:   
 
Figure 5 – Excerpt from CRS Report to Congress282 
162. Based on this chart calculated from USDA da ta, CRS concluded that "the substantial 
contribution of subsidies toward covering otherw ise unmet production costs implies a high chance for 
adverse rulings for any of the major covered commodities."283 
 163. Indeed, data on farm income from USDA's Economic Research Service ("ERS") shows that, 
in MY 2005 as well as in previous years, the U.S. farm sector as a whole, i.e., including crop and 
livestock production, has been viable based on an assessment of costs, farm-related revenues and
 
government subsidies.284  As the ERS Agricultural Income and Finance Outlook of November 2006 
                                                      
280 Exhibit Bra-577 (Schnepf, Randy, Potential Cha llenges to U.S. Farm Subsidies in the WTO, 
Congressional Research Service Report for Congress, 25 October 2006, p. 23). 
281 The periods vary across commodities based on the consistency of program operations and the 
availability of data.  Corn and sorghum are for the period 1996-2004, soybeans and cotton are for the period 
1997-2004, wheat is for the period 1998-2004, rice is for the period 2000-2004, and peanuts are for the period 2002-2004.  See Exhibit Bra-577 (Schnepf, Randy, Potential Ch allenges to U.S. Farm Subsidies in the WTO, 
Congressional Research Service Report for Congress, 25 October 2006, p. 25). 
282 Exhibit Bra-577 (Schnepf, Randy, Potential Cha llenges to U.S. Farm Subsidies in the WTO, 
Congressional Research Service Report for Congress, 25 October 2006, p. 23). 
283 Exhibit Bra-577 (Schnepf, Randy, Potential Cha llenges to U.S. Farm Subsidies in the WTO, 
Congressional Research Servi ce Report for Congress, 25 October 2006, p. 23).  Brazil notes that consistent with 
the analysis conducted by CRS, bo th sorghum and wheat acreage has d eclined.  Sorghum planted acreage 
declined by about 50 percent from MY 1996 to MY 2005.  See USDA's Feedgrains database, available at 
www.ers.usda.gov/data/feedgrains. 
284 For detailed income data for 2003-2007, see www.ers.usda.gov/briefing/farmincome/data/nf_t2.htm , 
accessed April 2007. 
Figure 1.  U.S. Revenue Components as Share of Total Costs, Selected Program 
Commodities
Subsidy Component
Market Returns 
Source:  Calculated by CRS from USDA data. Soybeans   Corn    Sorghum   Peanuts    Wheat     Cotton      Rice Percent of Total Costs WT/DS267/RW  
Page D-488  
 
points out, this is the case primarily due to record subsidy payments of $24.3 billion in MY 2005, with 
a significant portion of these payments received from "ad hoc and emergency programs".
285   
164. USDA data shows a profit of $222 milli on in MY 2005 from the production of soybeans, 
corn, sorghum, peanuts, wheat, upland cotton and rice – taking into account total costs, market returns 
and revenue from the marketing loan, counter-cyclical  and direct payment program as well as crop 
insurance subsidies.286  Production of certain crops in MY 2005,  including upland cotton, resulted in 
losses based on market revenue alone.287  Citing low prices in MY 2005, the United States 
government provided additional very high em ergency payments amounting to $3.2 billion.288  These 
additional subsidies are not accounted for in the abov e assessment of the overall financial viability of 
these seven crops.   
 
165. Thus, the United States is incorrect when asser ting that "U.S. farmers would have lost money 
across the board  from producing any of these crops".289   
 166. To allow a more comprehensive assessment of the role of U.S. subsidies in ensuring the 
financial viability of U.S. program crop production,  Brazil also provides the compliance Panel with 
data for the other years under the FSRI Act of 2002.  Between MY 2002 and 2005, the gap between 
total costs and market returns for soybeans, co rn, sorghum, peanuts, wheat, upland cotton and rice 
was $43 billion.
290  Marketing loan, counter-cyclical, direct and crop insurance subsidies to the same 
crops amounted to $53 billion, providing a $10 billion offset to shortfalls in revenue.291  In addition, 
U.S. farmers received large emergency and disast er payments in totaled $8.5 billion over the 
MY 2002-2005 period.292  This evidence demonstrates that large portions of U.S. program crop 
production, including upland cotton, are profitable only due to large U.S. subsidies.  
 167. In sum, in view of tens of billions in va rious forms of subsidies provided to program crops 
under the FSRI Act of 2002, CRS's and Brazil's conclu sion reached based on USDA's cost and returns 
data are neither absurd nor unexpected.  The United States' claim that Brazil's and CRS's methodology 
of assessing USDA's cost and return data would lead to the conclusion that all of U.S. agriculture is 
not viable even with subsidies is simply wrong.  The USDA data discussed above shows that certain 
sectors of U.S. agriculture are not viable but for
 U.S. government subsidies.  It also confirms Brazil's 
analysis293 and the findings of the original panel294 with respect to the profitability of growing upland 
cotton in the United States.    
 
60. In its Rebuttal Submission, the United States argues that Prof. Sumner's description of the 
model that appeared in a recent CATO publication is not "appropriate" for use in a WTO dispute 
involving claims of serious prejudice.  Professo r Sumner has since introduced "more empirical and 
institutional detail" to the model used in th is dispute.  These changes are described in 
paragraphs 111-117 of Br azil's Opening Statement.  Does th e United States view these changes as 
being sufficient to make the model appropriate for u se in a WTO dispute involving claims of serious 
                                                      
285 See ERS Agricultural Income and Finance Outlook of November 2006, p. 4-5 accessible at 
http://usda.mannlib.cornell.edu/usda/current/AIS/AIS-11-30-2006.pdf , accessed April 2007. 
286 Exhibit Bra-690 (Crop Losses and Profits 2002-2005). 
287 See Exhibit Bra-690 (Crop Losses and Profits 2002-2005). 
288 See ERS Data on Direct Government Payments 2002-2007 at 
www.ers.usda.gov/Briefing/FarmIncome/Data/Government%20payments0207.xls , accessed April 2007. 
289 U.S. 2 April response to question 53, para. 101. 
290 See Exhibit Bra-690 (Crop Losses and Profits 2002-2005). 
291 See Exhibit Bra-690 (Crop Losses and Profits 2002-2005). 
292 See ERS Data on Direct Government Payments 2002-2007 at 
www.ers.usda.gov/Briefing/FarmIncome/Data/Government%20payments0207.xls , accessed April 2007.  
293 See Brazil's First Written Submission, Section 7.11;  Brazil's Rebuttal Submission, Section 2.3.6;  
Brazil's Opening Statement, Section 2.4;  and Braz il's Comments on U.S. Oral Statements, Section 4. 
294 Panel Report, U.S. – Upland  Cotton , para. 7.1353.  WT/DS267/RW 
 Page D-489 
 
 
prejudice?  If not, what modifications does the United States think should have been made to the 
model? 
 
168. Brazil also notes that, in response to this question, the United States once again repeats its 
summary and general criticism of Professor Sumner's simulation model.  However, the United States 
does not even attempt to rebut any of the specific  arguments, explanations and rebuttals submitted by 
Brazil and Professor Sumner in the many submissions since the beginning of this proceeding.295  
 
2. Increase in world market share - Article 6.3(d) of the SCM  Agreement   
 
Questions to the United States 
 75. Could the United States explain further the textual basis of its argument that "Article 6.3(d) is not concerned with absolute market share and wheth er or not in any given year a member's market 
share would have been lower if subsidies were remo ved"?  (Rebuttal Submission of the United States, 
para. 401)   
169. The U.S. response provides no clear guidance with respect to the textual basis for its 
argument regarding the first element of Article 6.3(d), i.e., whether there has been an increase in the 
world market share for the year in question compared  to the previous three-year average.  Nor does 
the United States elaborate, either in this respon se or in any of its other submissions, on what it 
believes to be the required proof with respect to the first element of Article 6.3(d).  Rather, the United 
States vaguely asserts that "what is at issue is move ment, not something static like the absolute level 
of market share in a particular year."
296  The United States then concludes that "the upward movement 
[] itself [must be] proven to be 'the  effect' of a challenged subsidy." 297   
 
170. It is difficult to respond to such vague argu ments.  Yet, using the terminology in the U.S. 
response, Brazil has demonstrated that the "movement" ( i.e., the increase in MY 2005 compared to 
the previous three year average of MY 2002-MY 200 4) was the effect of marketing loan and counter-
cyclical subsidies.  Brazil proved this by showing that but for the marketing loan and counter-cyclical 
subsidies, the U.S. world market share in MY  2005 would not have increased, but would have 
decreased  compared to the MY 2002-MY 2004 three-year average.298  This is not a "static" analysis, 
as asserted by the United States.299  Rather, this assessment co nstitutes a dynamic comparison 
between two time periods demonstrati ng that it was the effect of the two challenged subsidies that led 
to the increase in the U.S. world market share in MY 2005 compared to its previous three-year 
average.300   
 
171. Finally, Brazil refers the compliance Panel to its response to question 76, in which it 
addresses in detail the absence of any textual basis for the U.S. argument regarding the second  
element of Article 6.3(d) – the consistent tre nd.  The U.S. response to question 75 provides no 
additional textual basis or argument to support its ne w and erroneous interpreta tion of the "consistent 
trend."    
                                                     
 
295 See, e.g., Brazil's Comments on U.S. Oral Statements, paras. 35-56. 
296 U.S. 2 April response to question 75, para. 175. 
297 U.S. 2 April response to question 75, para. 175. 
298 Brazil's Rebuttal Submission, paras 348-349;  Br azil's First Written Submission, paras. 214-226;  
230-236. 
299 U.S. 2 April response to question 75, para. 175. 
300 Brazil's Rebuttal Submission, paras 348-349;  Br azil's First Written Submission, paras. 214-226;  
230-236. WT/DS267/RW  
Page D-490  
 
C. C
LAIM OF BRAZIL REGARDING THREAT OF SERIOUS PREJUDICE  
 
Questions to both parties 
 
78. Could both parties comment on the statements of Canada that "(a)t issue is whether these 
programmes....threaten to cause serious prejudice si mply by virtue of their existence" and that 
"(c)ertain subsidy programs, by their very nature, gi ve rise to a constant likelihood of support that 
results in a permanent threat of serious prejudice"?  (Third Party Submission of Canada, paras. 9-10) 
 
172. As set out in Brazil's answer to this question,  Brazil is not asserting that the existence of the 
marketing loan and counter-cyclical subsidy programs, in and of themsel ves, causes a threat of serious 
prejudice.    173. Brazil notes the U.S. assertion in its response that  a challenge to the very "existence" of such 
programs would be "extraordinary" and "remarkable."  In effect, what the United States asserts is that 
"per se" challenges – i.e., challenges to the very existence – of subsidy programs under Articles 5 
and 6.3 of the SCM  Agreement  are, as a practical matter, simply not viable.  Yet, the United States' 
preliminary ruling arguments in this case seek to require the categorization of Article 6.3 claims in strict "per se" and "as applied" terms.  According to the United States, "as applied" claims could only 
be asserted against the application  of subsidies, i.e., the payment of subsidies for a specified period of 
time.
301  And the only implementation obligation regardi ng such subsidies that cause adverse effects, 
according to the United States for such subsidies, is to remove the effects of such historical subsidy 
payments  (i.e., the "application").302  On the United States view, a Member can take no action when 
recurring payments are found to cause adverse effect s because the "effects" of past payments are 
wiped away by new payments that, it contends, ca nnot be regarded as "measures taken to comply", 
even though they have an extremely close connection to the DSB's recommendations and rulings 
regarding past payments.  Brazil addresses this i ssue further in its comments on the United States' 
response to question 45, above.  174. In its response to question 78, the United States has now confirmed its views of the practical impossibility ("extraordinary" and "remarkable") of  establishing a "per se" violation of Articles 5 
and 6.3 of the SCM  Agreement .  Yet, in doing so, the United States has also confirmed that its 
arguments reduce the obligation in Article 7.8 of the SCM Agreement  to inutility where a Member 
grants annual recurring payments to support the pr oduction of an annual crop.  Under its strict 
segmentation of serious prejudice claims into "per se" and "as applied" categories, this remedy becomes meaningless.  Indeed, acceptance of such  a strict categorization would prevent Members 
suffering serious prejudice from securing any prospectiv e relief for the future application/payment of 
recurring subsidies under such programs.  This is because, as the United States has argued, only "per 
se" challenges can result in any obligation to cha nge the statutory or regulatory provisions mandating 
subsidies.
303  Members seeking relief by challenging, "as applied", the application of those statutory 
and regulatory provisions would, in the case of recurring annual payments, have to continually 
institute new WTO proceedings, but would never ha ve any right to take "countermeasures" because 
there would never be any compliance measures.304  As Brazil has demonstrat ed, such an interpretation 
is neither justified nor mandated by the text, contex t, and object and purpose of Articles 5 and 6 of the 
SCM  Agreement .305  
 
                                                      
301 U.S. Rebuttal Submission, paras. 20-28.  
302 See U.S. 2 April response to questions 47 and 48, paras. 53-57;  U.S. 27 February response to 
question 17(b), para. 32.  
303 See e .g., U.S. Rebuttal Submission, paras. 20-28.  
304 See Brazil's comments on the U.S. 2 Apr il answer to question 45, above. 
305 Brazil's 27 February response to questions 11 and 12, para. 83-116;  Brazil's comments on U.S. 
27 February response to question 17, paras. 27-31.    WT/DS267/RW 
 Page D-491 
 
 
79. Could the parties state their views on th e analysis of the ordinary meaning of the term 
"threat" in paras. 15-28 of the Third Party Submission of Canada?  
175. The United States' response reaffirms its attempt to import the "imminent and clearly 
foreseen" standard of threat in Article 15.7 into Part III of the SCM  Agreement .306  Brazil has 
explained in its response to this question and in its First Written Subm ission why this is contrary to 
the text, context, and object and purpose of Articles 5 and 6 of the SCM  Agreement .  In this comment, 
Brazil addresses briefly a number of points raised by the U.S. response.    176. The United States is incorrect in asserting that  footnote 5/Article 6 and Article 15.7 of the 
SCM  Agreement , together with Article 4.1 of the Safeguards  Agreement  "serve a similar function."
307  
Brazil explained in detail in its response to this question308 that the "imminent and clearly foreseen" 
threat standards in Article 15.7 and Ar ticle 4.1 serve a distinct function, i.e., regulating unilateral 
action by investigating authorities of imminent surges of imports .309  By contrast, Part III of the 
SCM  Agreement  deals with the far broader object of protecting against the effects  of subsidies  in a 
multilateral  dispute settlement context.  Such effects may or may not involve the imminent shipment 
of goods.  Thus, as Brazil has argued, a threat standa rd such as "significant likelihood" is consistent 
with both the slower pace of WTO dispute settlement  procedures and its the associated remedies, as 
well as the time it takes for the effects of certa in types of subsidies to materialize.   
 177. The United States' response distinguishes between a temporal  ("imminent") and a probability  
of occurrence  ("clearly foreseen") component of threat under Article 15.7.  The United States asserts 
that Canada's (and Brazil's) approach ignores the temporal element altogether.
310  This is not correct.  
Rather, Brazil asserts that the notion of "imminent" is appropriate given the ability of investigating 
authorities (under Article 17 of the SCM  Agreement ) to take rapid action against subsidized imports.  
Yet, such a standard is not appropriate in a multila teral proceeding.  In effect, the United States is 
requesting the compliance Panel to adopt a "temporal " standard that will force WTO Members to wait 
just until subsidies are about to cause serious pr ejudice before asserting their multilateral rights.  
Brazil has explained why application of the particular  "temporal" element ("imminent") of Part V into 
Part III of the SCM  Agreement  is inconsistent with rules of treaty interpretation. 
 178. However, Brazil emphasizes again th at it does not suggest that there be no temporal element 
to a threat standard in Part III of the SCM  Agreement .  Rather, Brazil's "significant likelihood" 
standard incorporates the notion that the threat must  be real, not be based on allegation, conjecture or 
remote  possibility.  In sum, the temporal element should be tailored to the particular object and 
purpose and remedies and procedures applicable to multilateral disputes settlement proceedings 
applicable to Part III of the SCM  Agreement , not blindly imported from the different context in Part V 
of the SCM Agreement .  
 
Questions to the United States 
 
80. How does the United States address the argument of Japan that in view of the different 
purposes of Parts III and V of the SCM Agreement th e standard for determining threat of material 
                                                     
 
306 See U.S. Rebuttal Submission, para. 410 ("There is no reason why the elaboration  of the term 
"threat" in Article 15.7 of he SCM  Agreement  and Article 4.1(b) should not be used as contextual guidance in 
interpreting the same term in footnote 13 of the SCM  Agreement .").  The "elaboration" advanced by the 
United States is the "imminent an d clearly foreseen" standard.   
307 U.S. 2 April response to question 79, para. 184. 
308 Brazil's 2 April response to question 86, paras. 172-177.  
309 See Article 15.7 ("No one of these factors by itsel f can necessarily give d ecisive guidance but the 
totality of the factors considered must lead to the conclusion that further  subsidized  exports  are imminent  and 
that, unless protective action is taken, material injury would occur. ").   
310 U.S. 2 April response to question 79, para. 181.  WT/DS267/RW  
Page D-492  
 
injury in Article 15.7 of the SCM Agreement is  an inappropriate standard for determining the 
existence of a threat of serious prejudice under Pa rt III of the SCM Agreement?  (Third Party 
Submission of Japan, paras. 8-12.) ' 
179.   Brazil believes that Japan has correctly identified significan t differences between Parts III 
and V of the SCM  Agreement  that demonstrate the inappropriateness of importing the "imminent and 
clearly foreseen" standard of Article 15.7 into Part III of the SCM  Agreement .  Brazil therefore 
disagrees with the primary point made by  the United States in this response, i.e., that there is no 
difference between the function, object, and pu rpose of Article 15.7 and Part III of the 
SCM  Agreement . 
 
180. The United States suggests that "there is  no basis for understanding the same terms in 
[Article 5/footnote 13 and Article 15.7] to have different meanings based on the an assumption that 
national authorities are necessarily prone to 'misusing' their discretion whereas WTO panels are not."
311  This is a false argument.  Neither Brazil nor  Japan "assumes" that investigating authorities 
will misuse their discretion.  Instead, Brazil em phasizes that there are c onsiderably different 
"temporal" considerations for such authorities compared to a WTO panel.   
 181. While the United States champions the "temporal" element of "imminent", the U.S. argument ignores the vastly different temporal  periods involved in a rapid un ilateral provisional remedy based 
on Part V and years of WTO dispute settlement proceeding under Part III of the SCM  Agreement .   
 
182. It is entirely appropriate that investigating authorities armed with rapid provisional remedies 
to control imports be compelled to make a finding th at such imports are "imminent."  The purpose of 
the rapid provisional remedies under Articles 17 and 15.7 of the SCM  Agreement  ensure that the 
domestic industry need not suffer material injury while waiting for remedies to take effect.  Those 
rapid remedies available in the unilateral trade re medy context explain why the drafters used an 
"imminent" temporal standard of threat.   
 183. But the situation in a challenge under Part III of the SCM  Agreement  is totally different.  
Part III is not focused on controlling subsidized imports  but rather on the adverse effects of any 
subsidy.  Even the expedited di spute settlement procedures potentially available (but seldom used) 
under Article 7 of the SCM  Agreement  require at least 18 months of litigation time before a ruling and 
implementation can take place.  No provisional "sel f-help" remedies are available under these rules.  
If "imminent" threat were the standard, then a WTO panel could be confronted with facts 
demonstrating that the threat was "clearly foreseen " but was not "imminent" because the effect of the 
subsidies would not take place for another year or two.
312  (By contrast, a domestic industry could 
petition investigating authorities only months before  major shipments of subsidized goods were 
scheduled to be shipped and obtain relief under pr ocedures sanctioned by Articles 15.7 and 17 of the 
SCM  Agreement .)  The complaining WTO Member would, in effect, be left without a remedy for 
future serious prejudice that was real, but not "imminent."    184. The United States asserts that both Article 15. 7 and footnote 13/Article 5 strike a balance 
between disciplining and permitting subsidization.
313  Yet, if the real balance between disciplining 
subsidies and permitting their use is to  be maintained, the concept of th reat must be flexible enough to 
allow the disciplining of the effects of subsides – in practical terms – well before  subsidized products 
are about to hit the market.  Avoiding  real and foreseen future adverse effects in the form of material 
                                                      
311 U.S. 2 April response to question 80, para. 192.  
312 By contrast, a domestic industry could petition investigating authorities only months before major 
shipments of subsidized goods were scheduled to be shipped and obtain relief under procedures sanctioned by Articles 15.7 and 17 of the SCM  Agreement .   
313 U.S. 2 April response to question 81, para 192 (c laiming that both Article 15.7 and Part III function 
to establish a balance between the right to subs idized and the right to discipline subsidies).  WT/DS267/RW 
 Page D-493 
 
 
injury and serious prejudice is the object of both Article 15.7 and Part III of the SCM  Agreement .  
However, the entirely different temporal aspects of these two different remedies and procedures compel the use of different threat standards to maintain that balance.  Otherwise, the U.S. 
interpretation creates far greater an opportunity for subsidizing Members to cause serious prejudice 
without any effective multilateral relief.  This ap pears to be the main objective of the Japanese 
arguments and is one that Brazil supports. 
 
81. How does the United States respond to the argument of Australia that "it is beside the point 
for the United States to argue that the programm es under consideration are due to expire in late 
2007"?  (Third Participant Oral Statement of Australia, para. 13) 
 
185. The United States' response repeats its erroneous  assertions that there is no threat of serious 
prejudice because the FSRI Act of 2002 will allegedl y expire by the end of marketing year 2007, i.e., 
31 July 2008.
314 
 
186. Brazil disagrees that the alleged expiration of th e FSRI Act of 2002 in th e end of July 2008 is 
a relevant fact before the compliance Panel.315  The "matter" before the compliance Panel with respect 
to Brazil's threat of serious prejudice claim is wh ether marketing loan and counter-cyclical subsidies 
for MY 2006 and MY 2007 cause a threat of serious prejudice.  MY 2006 is the relevant year to 
consider whether threat of serious prejudice presen tly exists.  It will not end until 31 July 2007, i.e., 
after the compliance Panel issues its determinati on.  MY 2007 will not end for another 16 months, i.e., 
on 31 July 2008.  The FSRI Act of 2002 re mains in effect until the end of MY 2007.316  Brazil's threat 
of serious prejudice claims in this proceeding involve the determination of whether there is a threat of 
serious prejudice today, not at the end of MY 2007 or beyond.    187. Yet, having asserted (incorrectly) that the expi ration of the FSRI Act of 2002 is a relevant fact 
by suggesting that marketing loans and counter-cycli cal subsidies may also  completely expire, the 
United States is in no position to then assert that it is entirely irrelevant  for the compliance Panel to 
consider whether the marketing loan and counter-cyc lical subsidies will continue, in some form or 
another, in the next U.S. Farm Bill.
317  It is undisputed that there will be some  new Farm Bill that will 
be enacted at some time in the future  after these proceedings have finished.318  The marketing loan 
program for upland cotton has been in existence si nce 1986 and, since, has been a key component of 
U.S. farm legislation.  The current USDA proposal calls for a continuation of both the marketing loan 
and the counter-cyclical payment programs with certain changes.319  Thus, Australia is certainly 
correct when it states that "there is no guarantee that [the marketing loan and counter-cyclical 
programs] will not be rolled over or maintain ed in another form with adverse effect."320  T h e  
compliance Panel cannot, of course, determine the exact scope of the marketing loan and counter-
cyclical provisions that will exist in the next U.S. farm bill.   
 
                                                      
314 U.S. 2 April response to question 81, para. 195. 
315 U.S. Rebuttal Submission, para. 415.  
316 For counter-cyclical payment provisions , see Section 1108 of the 2002 FSRI Act ("This subtitle 
shall be effective beginning with the 2002 crop year of each covered commodity through the 2007 crop year.").  
Exhibit Bra-29 ( 2002 Farm Security and Rural Investment Act ).  For marketing loan provisions , see 
Section 1207(a)(1) of the 2002 FSRI Act ("During the period beginning on the date of the enactement of this 
Act through July 31, 2008, the Secretary shall issu e marketing certificates or cash payments …").  
Exhibit Bra-29 ( 2002 Farm Security and Rural Investment Act ). 
317 U.S. 2 April response to question 81, para. 197.  
318 See, e.g., CRS Report for Congress, "Farm Bill Proposals and Legislative Action in the 
110th Congress," available at http://www.nati onalaglawcenter.org/a ssets/crs/RL33934.pdf , accessed April 2007.  
319 USDA's Farm Bill proposal is available at http://www.usda.gov/doc uments/07finalfbp.pdf , accessed 
April 2007.   
320 Oral Statement of Australia, para. 13.  WT/DS267/RW  
Page D-494  
 
188. Finally, whether the provisions of any ne w Farm Bill fully remove the serious prejudice 
caused by the FSRI Act of 2002, or the ongoing threat thereof, cannot be determined at this time.  However, the United States is incorrect to suggest th at the mere expiration of the FSRI Act of 2002 in 
the future would represent a "withdrawal" of the subsidy.
321  If the marketing loan program and the 
counter-cyclical payment programs remain in some form in the new Farm Bill – or are replaced by 
programs with similar effects – then these subsidies will not have been withdrawn, within the 
meaning of Article 7.8 of the SCM  Agreement .322 
 
82. Could the United States comment on the proj ections of marketing loan and counter-cyclical 
payments in Table 26 of Brazil's First Writte n Submission and on the projections of prices and 
subsidy payments in Table 27 of Brazil's First Wr itten Submission?  Could the United States explain 
how the data in these Tables support its argument that producers are likely to expect low or no marketing loan payments in MY 2007?  (Rebuttal Submission of the United States, para. 418)   
189. In its answer to this question, th e United States focuses on projections of prices
323 to derive 
projected subsidies and downplays projections of subsidy  outlays  itself (what it terms "aggregate 
figures"324), arguing that it is "difficult to fit these projections"325 with the projections of prices.  This 
is highly misleading and contrary to basic accounting principals used and espoused by USDA.326  
Projections of prices and subsidy outlays are, in fact, entirely consistent, as explained below.   
 190. Consider the following simplified example, as articulated by Professor Sumner in Exhibit 
Bra-659.   
 
But, let us take the case of a farmer with  the following view of the future AWP.  He 
considers that there is a 40% chance of an AWP of 42 cents, a 20% chance of an 
AWP of 52 cents and a 40% chance of an AWP of 62 cents.  The expected value is 
exactly 52 cents.  He expects no marketing lo an payout, but the value of the program 
is 4 cents per pound to him.  That is 0.4(52-42) = 4 cents.  Only if the farmer was absolutely sure the AWP could not be below the loan rate would the program be of no value.
327 
191. Even if the Adjusted World Price ("AWP") is expected to be $0.52 per pound, or higher, it 
does not mean that the marketing loan program provi des no benefit.  As noted by the Appellate Body, 
even if U.S. upland cotton farmers expected prices to  be above the adjusted world price at the time of 
planting, they "were also aware that if actual prices were ultimately lower, they would be 'insulated' 
by government support, including not only market ing loan program payments but also counter-
cyclical payments, which were based on a target price of $0.724 per pound."328  
 
192. The distinction between the prices farmers e xpect and the marketing loan subsidies they 
expect is akin to the difference between determinis tic and stochastic projections of marketing loan 
subsidy outlays.329  Like farmers, USDA also ascribes value to the marketing loan program even when 
prices are expected to be at or above the loan rate.  For example, USDA's deterministic  projection of 
                                                      
321 U.S. 2 April response to question 81, para. 196.   
322 See Appellate Body Report, U.S. – Softwood  Lumber  IV (21.5), para 77.   
323 U.S. 2 April response to question 82, para. 202. 
324 U.S. 2 April response to question 82, para. 202. 
325 U.S. 2 April response to question 82, para. 202.  
326 See Brazil's 2 April response to question 89, para. 189 ( "deterministic projections, by their nature, 
tend to underestimate outlays"). 
327 Exhibit Bra-569 (Statement of Professor Sumner Concerning Various U.S. Argument, para. 55). 
328 Appellate Body Report, U.S.-Upland  Cotton¸  para. 445 (addressing similar arguments raised by the 
United States in paras 226-235 of its First Written Submission).   
329 For a detailed explanation of the difference be tween deterministic and stochastic estimates, see 
Brazil's Opening Statement, para. 82 and Brazil's 2 April answer to question 89, paras. 189-190.  WT/DS267/RW 
 Page D-495 
 
 
marketing loan subsidies, which is based on pr ice projections, is $0 in MY 2009, while its stochastic  
projection is $468 million.330   
 193. USDA's deterministic projection of marke ting loan subsidies in MY 2007 is $238 million, 
indicating that USDA expects the AWP to be below the loan rate.
331  However, based on the probably 
that prices will be even lower, USDA's stochas tic projection of marketing loan subsidies is 
$798 million.  USDA's latest projection that upla nd cotton production will be 20.7 million bales in 
MY 2007332 suggest per-unit expected marketing loan subsidies of 8 cents per pound333, not 2 cents 
per pound, as put forward by the United States.334 
 
194. In sum, by relying on expected prices, instead  of expected subsidies, the United States is 
repeating a mistake it has made throughout this procee ding.  Only stochastic estimations of marketing 
loan subsidies capture the likelihood that prices w ill be lower and payments higher.  Relying on the 
difference between the expected AWP and the loan rate  does not capture this effect.  As explained by 
USDA, "deterministic projections, by thei r nature, tend to underestimate outlays."335 
 
195. Brazil notes that the United States does cite to FAPRI's July 2006 stochastic projections of marketing loan subsidies.  However, this projec tion of marketing loan payments of 1.9 cents per 
pound
336 is significantly below USDA's own projections of 8 cents per pound.  There is a very good 
reason why USDA estimates are more reliable than th e July 2006 FAPRI projections – they are more 
recent.  USDA estimates are found in USDA's Commodity Estimates Book for the FY 2008 
President's Budget, which was released in Febr uary 2007 – eight months later than the FAPRI 
baseline that the United States relies on.337   
 196. Furthermore, while the complete 2007 FAPRI baseline has not been released
338, the parts that 
have been released confirm that FAPRI's projecti ons of upland cotton prices in July 2006 were too 
high.  For example, FAPRI now projects the MY  2007 U.S. farm price for upland cotton to be 
$0.518 per pound.339  Last July, it predicted the same price to be $0.534 per pound.340  
 197. Current futures prices also indicate that larg e marketing loan and counter-cyclical payments 
can be expected due to expected low prices in MY  2007.  The following chart details daily closing 
prices of the December 2007 contract for upland cotton. 
 
                                                     
 
330 Brazil's 2 April response to question 89, Table 4 at para. 189. 
331 See U.S. 2 April response to question 82, para. 203. 
332 Exhibit Bra-635 (2002-2007 USDA Agricultural Baseline Projections). 
333 $798 million / (20.7 million bales * 480 pounds per bale) = $0.0803 per pound. 
334 See U.S. 2 April response to question 82, para. 203. 
335 Exhibit Bra-460 (Explanatory Notes for Stochastic Budget Outlay Estimates, Farm Service Agency, 
accessed October 2006 at http://www.fsa.usd a.gov/Internet/FSA_File/msrexplain.doc ). 
336 Exhibit Bra-479 (2006 Baseline Update for U.S. Agricultural Markets,  
FAPRI-UMC Report 12-06, July 2006,  p. 6, accessed October 2006 at 
http://www.fapri.missouri.e du/outreach/publications/2006/FAPRI_UMC_Report_12_06.pdf ).  
337 Exhibit Bra-639 (Commodity Estimates Book for FY 2008 President's Budget) 
338 Unfortunately, relevant portions of the latest 2007 FAPRI Agricultural Outlook" has not yet been 
released, but the FAPRI "World Agricultural Briefing Book" has been released, see 
http://www.fapri.iastate.edu/brfbk07/ .  
339 FAPRI World Agricultural Outlook Briefing Book, World Cotton, available at 
http://www.fapri.iastate.edu/b rfbk07/CottonTables2007.pdf .  
340 Exhibit Bra-479 (2006 Baseline Update for U.S. Agricultural Markets,  
FAPRI-UMC Report 12-06, July 2006,  p. 6, accessed October 2006 at 
http://www.fapri.missouri.e du/outreach/publications/2006/FAPRI_UMC_Report_12_06.pdf ).  WT/DS267/RW  
Page D-496  
 
Figure 6 – Prices for the December 2007 Upland Cotton Futures Contract
341 
 
 
198. The average January to March closing pri ce of the December 2007 futures contract was 
$0.588 per pound.342  The price of the December 2007 futures contract has since fallen to less than 
$0.57 per pound.  Brazil recalls that marketing loan  subsidies are based off of the adjusted world 
price, which is, on average, 17.3 cents below the average January to March futures price.343  A simple 
linear regression of futures prices and actual market ing loan payments indicates that, based on the 
current futures price of $0.588 per pound for MY 20 07, farmers can expect a marketing loan subsidy 
of 12.3 cents per pound344, or about $1.2 billion.345  This would represent 17 percent of the total 
projected cost of producing a pound of cotton in MY 2007.346 
 
199. In the end, it is impossible to know how larg e marketing loan subsidies will be in MY 2007.  
Brazil notes that the average fu tures price of $0.588 per pound during the planting period of MY 2007 
is similar to futures prices in the pl anting period of MY 2001, 2003 and 2006.347  Actual marketing 
loan subsidies in these years varied widely, ra nging from $2.6 billion in MY 2001, to $757 million 
(projected) in MY 2006 and to  just $184 million in MY 2003.348  The inability of futures prices to 
                                                      
341 See http://www2.barchart.com/dfutpage.asp?sym=CT&code=BSTK .  
342 This figures includes complete data through the end of March ( See Exhibit Bra-691 (Average 
January to March Price of th e December 2007 futures contract)).  Despite  being asked to provide complete data 
by the Panel, the United States only provides data through 9 March in Exhibit US-147.  
343 Brazil's Rebuttal Submission, para. 105. 
344 See Exhibit Bra-621 (Upland Cotton Expected Marketing Loan Program Payments Based on 
Futures Prices). 
345 USDA's 2007 baseline projects 20.7 million bales of production in MY 2007.  See Exhibit Bra-635 
(2002-2007 USDA Agricultural Baseline Projections). 
346 Marketing loan payments (12.3 cents per pound) * expected yield per planted acre (806 pounds per 
acre) / Total costs per acr e (593.5 dollars per acr e) = 16.7 percent.  See Exhibit Bra-634 (Analysis of Planting 
Decisions Based on Expected Returns). 
347 The average January to March closing price of th e December contract was 58.07 cents per pound in 
MY 2001, 59.12 cents per pound in MY 2003 and 59.28 cents per pound in MY 2006.  See Exhibit Bra-621 
(Upland Cotton Expected Marketing Loan Payments Based on Futures Prices.  
348 See Brazil's First Written Submission, Table 6 at para. 111.  For MY 2006, see Brazil's 2 April 
response to question 89, Table 4 at para. 189.  WT/DS267/RW 
 Page D-497 
 
 
predict actual subsidies was even more apparent in MY 2004 and 2005.  The average futures price in 
MY 2004 was $0.674 per pound, while in MY 2005 it was $0.529 per pound.  Yet, in MY 2004, 
marketing loan subsidies amounted to $1.8 billion and were 50 percent greater  than marketing loan 
subsidies of $1.2 billion in MY 2005.349  The following chart shows th e progression of nearby futures 
prices over the past four years: 
 
Figure 7 – Nearby Futures Prices350 
 
 
 
200. In sum, every farmer knows that expectations  based on futures prices, just like USDA and 
FAPRI projections are just that – projections – and that actual  prices and actual  subsidies vary 
widely.  Despite the U.S. focus on "expectations," the underlying reality throughout the life-time of 
the FSRI Act of 2002 has been self-sustaini ng low upland cotton prices and enormous price-
contingent marketing loan and count er-cyclical subsidies.  The evidence in the record fully supports 
the conclusion that such subsidies and their pri ce suppressing effects will continue throughout the 
lifetime of the FSRI Act of 2002.  D. E
XPORT CREDIT GUARANTEES  
 
1. Outstanding export credit guarantees 
 Questions to the United States  
 
91. In paragraph 342 of its First Written Submissi on, Brazil indicates that the total amount of 
guarantees under the GSM 102, GSM 103 and SCGP programs outstanding on 1 July 2005 amounted 
to $8.5 billion.  
                                                     
 
349 See Brazil's First Written Submission, Table 6 at para. 111, as amended by updated marketing loan 
subsidy amounts ( see Brazil's 16 March Comments on U.S. Answer to Question 4, para. 14) and an updated 
counter-cyclical subsidy amount in MY 2005 ( see Brazil's Oral Statement, para. 40).  See also  Exhibit Bra-621 
(Upland Cotton Expected Marketing Loan  Payments Based on Futures Prices. 
350 See http://www.agweb.com/ , accessed April 2007.  WT/DS267/RW  
Page D-498  
 
(c) Please  indicate  what  proportion  of that amount  concerns  exports  of scheduled  
products , and in particular  rice (please  distinguish , in each  case, between  principal  
and interest) .   
 
201. Although the United States asserts that it does not maintain data concerning outstanding ECGs on a commodity-specific basis, FAS' mont hly summaries of GSM 102 program activity is 
recorded on a commodity-specific basis (at least w ith respect to select commodities, such as rice).
351 
202. However, if the United States does not maintain  data regarding ECGs issued and outstanding 
on a commodity-specific basis, this fact is telling, and confirms that there is no factual basis for the 
United States to characterize the measure subject to Brazil's claims of inconsistency with Articles 10.1 
and 8 of the Agreement on Agriculture as "the pig meat and poultry meat GSM 102 guarantees".352  
Neither the amended GSM 102 program in its totality,  nor the individual amendments, set out terms 
or conditions that differ as betw een different eligible products.353  In its response to the compliance 
Panel's question, the United States insists that it does not even maintain data  on GSM 102 ECGs 
issued and outstanding on a product-specific basis. 
 
3. "Benefit" under Articles 1.1 and 3.1(a) of the SCM  Agreement 
 Questions to both parties 
 
95. Brazil has taken the position that "different parties to a transaction involving a GSM 102 
ECG derive different benefits from the GSM 102 ECG,  each of which is potentially subject to 
assessment under Article 1.1(b) of the SCM Agreem ent"  and has indicated that it is, in this 
proceeding, "primarily concerned" with the benefit received by the US  exporter in the form of below-
market fees (para. 404, Brazil's Rebuttal).  The United States has challenged Brazil's approach of 
focusing on fees to the exclusion of other elements of the total cost of the loan.  Please explain, 
referring to the provisions of the SCM Agreement and WTO jurisprudence (if any applicable), your 
position as to whether:  (1) export credit guarantees and other types of subsidies may involve more 
than one type of benefit and/or recipient;  (2) whet her it is up to the complaining Member to decide 
which benefit it chooses to challenge.  
 
203. Contrary to the United States' assertion in its response, Brazil does not ask the compliance 
Panel to "ignore" Article 14(c) of the SCM Agreement  in its assessment of the "benefit" flowing from 
GSM 102 ECGs under the amended GSM 102 fee schedule.
354   
 204. Based on Appellate Body jurisprudence, Braz il has noted the Appellate Body's ruling that 
Article 14 must not be applied "rigidly",  even in disputes under Part V of the SCM Agreement , to 
which the provision explicitly applies.
355  The Appellate Body has held that even in disputes under 
Part V of the Agreement, the provision must be applied flexibly, to account for the "factual circumstances" at hand.
356   
 
                                                      
351 See http://www.fas.usda.gov/excredits/Monthly/ecg.html .  This is unfortunately not so for some 
other commodities, which are grouped into categories ( e.g., feed grains) that do not match the commodity 
categories included in the U.S. Schedule of reduction commitments, making an assessment of circumvention 
under Article 10.1 of the SCM Agreement  impossible in some instances.  It is for this reason that Brazil asked 
the Panel to pose question 7 of the list of questions to th e United States.  Question 7 asks the United States for a 
correspondence table tying the categories of commodities included in FAS' monthly summaries to the categories of commodities included in the U.S. Schedule. 
352 U.S. Rebuttal Submission, para. 10. 
353 See Brazil's 26 February answers to questions, para. 29. 
354 U.S. 2 April answer to question 95, para. 211. 
355 Appellate Body Report, U.S. – Softwood  Lumber  IV, para. 92.  
356 Appellate Body Report, U.S. – Softwood  Lumber  IV, para. 92.   WT/DS267/RW 
 Page D-499 
 
 
205. Preserving this flexibility is even more important in disputes under Part II of the 
SCM Agreement .  In a dispute under Part II, only the existence of some  "benefit" under Article 1.1(b) 
must be established, and not the quantity of that be nefit.  In a passage cited by the United States in 
these proceedings, the original panel considered that imposing the "quantitative focus and more 
detailed methodological obligations of Part V" of the SCM Agreement on disputes preceding under 
Part III of the Agreement  was not appropriate, even where assessing the "magnitude" of the subsidy 
was required.357  For a dispute under Part II of the Agreement, where no assessment of the 
"magnitude" of the subsidy is requi red, much less the calculation of a countervailing duty rate, there is 
no basis whatsoever to impose th e "quantitative focus and more de tailed methodological obligations 
of Part V …. "358 
 
206. In its 2 April response to question 100, Braz il demonstrated the proper role for Article 14(c) 
in these proceedings.  The "factual circumstances"359 in these proceedings under Part II of the 
SCM Agreement  are such that a "particularized showing"360, utilizing data concerning "individual loan 
costs and fees" or "comparable commercial loans and their terms"361, is not necessary.  Proof of some 
"benefit" can be established without the type of  evidence on which the United States insists.   
 207. Indeed, in proceedings involving claims ag ainst government guarantees under Parts II and V 
of the SCM Agreement , panels have already twice ruled that evidence of the type insisted on by the 
United States is not necessary to show that a benefit exists.
362  Rather, evidence far short of that 
produced by Brazil in these proceedings (describ ed in Brazil's 2 April response to question 100363) 
was accepted by these two panels as sufficient to satisfy Article 1.1(b) of the SCM Agreement , as 
informed by Article 14(c).  Each of these two pane ls effectively accepted that, in principle, below-
market fees for government guarantees translate into lower costs for commercial credit, and thus a 
lower total cost of funds – a conclusion rooted  in the basic principles of financial economics 
addressed by Brazil in its 2 April response to question 100.364 
 
208. This does not amount to "ignoring" Article 14(c), as the United States asserts.365  Rather, it 
amounts to putting Article 14(c), and the evidence require d to satisfy it, into the particular context of 
these proceedings.  
96. The parties differ as to whether different types of loans can be compared as long as they have 
the same "average life."  What support (economic literature, etc. ) exists for your position on this 
issue?  
 
209. The United States' position is that two-year bullet loans and three-year amortizing loans are 
equivalent, as long as one averages out the lives of the two loans. 
 
210. Brazil's position is that two-year bullet loans and three-year non-amortizing loans are not equivalent, and that averaging out the lives of the two loans does not make them so, in light of the varying risks of default.  
                                                     
 
357 U.S. 16 March comments, para. 70.  Panel Report, U.S. – Upland  Cotton , para. 7.1177.  See also Id., 
para. 7.1167. 
358 Panel Report, U.S. – Upland  Cotton , para. 1177.  See also Id., para. 1167. 
359 Appellate Body Report, U.S. – Softwood  Lumber  IV, para. 92.  
360 U.S. 6 March Response to Question 41, para. 80.  
361 U.S. Rebuttal Submission, para. 137. 
362 Panel Report, EC – CVDs  on DRAMs , para. 7.189;  Panel Report, Canada  – Aircraft  Credits  and 
Guarantees , para. 7.345. 
363 Brazil's 2 April answer to question 100, paras. 232-262. 
364 Brazil's 2 April answer to question 100, paras. 245-253. 
365 U.S. 2 April answer to question 95, para. 211. WT/DS267/RW  
Page D-500  
 
211. In its response to question 96, Brazil provided support for its position.  Instead of providing 
support for the U.S. position, the United States inst ead ascribes to Brazil positions that Brazil has not 
taken, and argues against those imaginary positions.  The United States' response is nothing more than 
an effort to mislead the compliance Panel, and to deflect attention from the evidence Brazil has 
offered to prove that bullet and amortizing loans do no t have equivalent spreads even if they have the 
same average lives.   
 212. With reference to a simplified example addr essed at paragraphs 220-222 of Brazil's Oral 
Statement, the United States argues that Brazil's pos ition requires the compliance Panel to assume that 
risk "increases over time", such that there is "much higher risk in year 3 of the GSM 102 transaction."  
The United States admonishes Brazil for providing no basis for this "assumption", which it argues is 
"not even sound as a theoretical matter."
366 
 213. This characterization of Brazil's position is so misleading as to be absurd.  Brazil has not asked the compliance Panel to assume  this scenario as a matter of fact, but merely to consider it as 
one hypothetical example.  Other examples, involvi ng alternative patterns of default risk, are also 
considered in paragraphs 31-32 of a statement by Professor Sundaram included as Exhibit Bra-686 to 
Brazil's 2 April responses.  Each of these paragra phs includes two examples;  in one example in each 
paragraph, default risk increases
 over time, while in the other exampl e in each paragraph, default risk 
decreases  over time.  As the examples show, the spread on amortizing loans could be greater or lesser 
than the spread on bullet loans, depending on the pattern of default risk.  That is Brazil's position, and 
it is mathematically proven by Professor Sundaram in Exhibit Bra-686. 
 214. In paragraphs 221-222 of its 2 April response,  the United States provides a reference that in 
fact supports Brazil's position.  The United States c ites a paper finding that for seven-year loans, the 
likelihood of default "in general" increases over time, rather than decreases.
367  This substantiates 
Brazil's argument that since default risk is not constant from year to year, bullet and amortizing loans 
will, in general, have different spreads.368  
 215. Brazil also addresses three other issues raised in the United St ates' response to question 96:  
(i) the use of the average life concep t in the context of mortgage-backe d securities;  (ii) the use of the 
average life concept in pricing swaps in terms of U. S. Treasuries with the same average lives;  and, 
(iii) the use of the average life concept in pricing for an amortizing loan obtained by adding a fixed 
spread to an index.  
Average life in the context of mortgage-backed securities
 
 216. In paragraph 219, the United States suggests that "the concept of average life is commonly 
used for price comparability of investments and de bt-instruments of various terms."  The first 
example in paragraph 219 refers to mortgage -backed securities ("MBS").  Brazil makes two 
observations about this example.  217. First, and most importantly, the referen ce does not address, much less establish, the 
comparability of bullet and amortizing loans with the same average lives, which is the question raised 
by the Panel.  Indeed, in discussing the relevanc e of the average life concept to MBS, the United 
States makes no reference at all to pricing.  The Un ited States does not, for example, suggest that the 
price of an MBS is the price of a simila r bullet security with the same average life. 
                                                     
 
366 See U.S. 2 April answer to question 96, paras. 218, 221, 222. 
367 Exhibit US-152 (Dennis Glennon and Peter Nigro, "Measuring the Default Risk of Small Business 
Loans:  A Survival Analysis Approach," Journal of Money , Credit , and Banking , Vol. 37, No. 5 (October 2005), 
p. 935, 945). 
368 Brazil's 2 April answer to question 96, para. 223.  See also Exhibit Bra-686 (Statement of 
Professor Sundaram).  WT/DS267/RW 
 Page D-501 
 
 
 218. Second, the reference to MBS relies on an in correct understanding of why average life is used 
for MBS.  The biggest risk faced by the holder of an MBS is pre-payment risk , or in other words, the 
risk that some of the individual mortgages underl ying the MBS will be pre-paid by the borrowers.
369  
Thus, the maturity of the MBS is not, in itself, adequate to describe the instrument.  Two MBS may 
have the same maturity, but if one has higher pr e-payment risk than the other (say, because the 
mortgage coupons underlying it are higher), then the cash flows will last for a shorter period of time.  
To restore some kind of comparability between differe nt MBS, investors use models that attempt to 
predict the volume of pre-payments, and calculate an average life accordingly.370  Such an average life 
calculation is unnecessary if there is no prepayment risk. 
 
Average life in pricing swaps  
 
219. In paragraph 219 of its response, the United St ates quotes an article stating that swap dealers 
"'routinely price the fixed rate side of an interest  rate swap as a spread over United States Treasuries 
of a similar average life.'"371  This statement does not provide support for (or even address) the United 
States' assertion that two-year bullet loans and th ree-year amortizing loans with the same credit 
quality have identical credit risk whenever  they have the same "average lives". 
 220. The article cited by the United States describ es a situation in which an institution holding 
fixed-rate amortizing mortgage debt  funded with the issue of floati ng rate short-term debt seeks to 
hedge interest rate risk by using a "swap".  A sw ap is an exchange of cash flows computed at a 
floating rate of interest, for cash flows computed at a fixed rate of interest.  The institution in question 
looks to receive the floating-rate payment from the sw ap seller and make the fixed-rate payment to the 
swap seller so that, taken together with the mortgage  that it holds and the floating-rate debt issued to 
fund that mortgage, the institution's inte rest-rate exposure is only fixed rate. 
 
221. To identify the fixed rate in a swap, dealers generally add a spread to the Treasury yield on a 
bond with the same maturity as the swap.  However, where the notional principal is amortizing, as in 
the example offered in the article quoted by the Un ited States, a problem arises – while the notional 
principal on the mortgage is amortizing, Treasu ry bonds are bullet bonds.  Some adjustment is 
required to equate the differing maturities of amortiz ing and non-amortizing debt.  This adjustment is 
addressed in endnote 4 to the article:  "[a]verage life is used by swap dealers to equate the maturities
 
of nonamortizing Treasury debt and amortizing mortgage debt."372 
 222. The compliance Panel, however, has asked fo r support in the literature for the U.S. assertion 
that non-amortizing and amortizing debt with the same credit quality
 have identical credit risk 
whenever they have the same "average lives" .  This proposition is not even addressed by the example 
offered in the article quoted by the United States,  because the mortgage debt and the Treasury bond in 
the example have different credit qualities , despite the fact that they have the same "average life" .  
                                                      
369 See http://www.riskglossary.com/link/mortgage_backed_security.htm  ("Prepayments intr oduce uncertainty 
into the cash flows of a mortgage pass-through.  The rate at which fixed-rate mortgagors prepay is influenced by 
many factors.  A significant factor is  the level of interest rates.  Mortgagors tend to prepay mortgages so they 
can refinance when mortgage rates drop.  By acting in their own best interest, mortgagors act to the detriment of 
the investors holding the mortgage pass-through.  They tend to return principal to investors when reinvestment 
rates are unattractive, and they tend to not do so  when reinvestment rates are attractive").  See also  
http://personal.fidelity.com/products/fixedincome/pombs.shtml .  In any event, the vast majority of MBS in the 
United States have no default risk, since they are guaranteed by federally-sponsored institutions such as Freddie Mac, Fannie Mae, and Ginnie Mae.  See http://www.sec.gov/answers/mortgagesecurities.htm
.  See also 
http://www.riskglossary.com/link/mortgage_backed_security.htm . 
 370 See http://www.riskglossary.com/link/mortgage_backed_security.htm .  See also 
http://personal.fidelity.com/products/fixedincome/pombs.shtml . 
371 U.S. 2 April answer to question 96, para. 219, quoting  Exhibit US-150. 
372 Exhibit US-150, p. 21 (note 4) (emphasis added). WT/DS267/RW  
Page D-502  
 
The article cited by the United States does not, as a result, provide support for the U.S. assertion that 
two-year bullet loans and three-year amortizing loans with the same credit quality
 have identical 
credit risk whenever they ha ve the same "average lives" . 
Average life in pricing an amortizing loan 
obtained by adding a fixed spread to an index  
 
223. In paragraph 220 of its response, the United St ates offers another example of the "average 
life" concept, in this instance suggesting pricing for an amortizing loan obtained by adding a fixed 
spread to the appropriate index. 
 
224. The example cited by the United States in paragraph 220 and th e website cited at 
Exhibit US-151 do not, as requested by the Panel,  offer support for the U.S. position that two-year 
bullet loans and three-year amortizing loans are e quivalent, as long as one averages out the lives of 
the two loans.  Indeed, Exhibit US-151 and the example included in paragraph 220 of the U.S. response do not address
 the correctness of the U.S. position at all.  
225. The U.S. example demonstrates how a single firm in the industry, Bond Street Capital 
("BSC"), approaches the pricing of its amortized loans.  The example does not involve the use of 
"average lives" to put bullet loans of a particular maturity and amortizing loans of a different maturity 
on equivalent footing, therefore enabling a compar ison of the prices for the two instruments.  The 
example shows that BSC indexes its loans to average lives of U.S. Treasuries or swaps.  It does not 
suggest that BSC considers an amortizing loan with an average life of m years to be equivalent in 
spread to a bullet loan with a life of m years.  Indeed, the example does not even mention how BSC 
would price a bullet loan .  Neither the example, nor the materi al included in Exhibit US-151, exclude 
that BSC would add different spreads to the index for bullet and amortizing loans.  226. Brazil also notes that the "average lives" of the loans included in the example do not comport 
to the common understanding of that concept.  In paragraph 220 of the U.S. response and 
Exhibit US-151, BSC asserts that a "15/15" loan has an  average life of 9 years.  That is simply not 
accurate.  A "15/15" loan has an average life of 8 year s.  One-fifteenth of the capital is repaid in each 
of the fifteen years, so the average life is (1/15) * (1+2+ . . . +15), or 8 years.  Similarly, BSC asserts 
that the average life of a "20/20" loan is  12 years, but it is actually 10.5 years 
((1/20) * (1+2+ . . . +20) = 10.5).  Even if the example served to support the position for which it is 
offered, it is not reliable, as the average life computation is incorrect.  
Questions to the United States  
 
97. Assuming that the Panel accepts the United St ates' argument that "benefit" is to be assessed 
on the basis of the "total costs of funds", what do you consider Brazil must establish in order to meet 
its burden of proof in that respect?  Must Brazil prove that a benefit is conferred in all instances (all 
transactions and all recipients)?  In most instances? 
 
227. In its comment on the U.S. response to qu estion 44, Brazil has addressed the United States' 
professed confusion over whether Brazil is "challengi ng" the GSM 102 program "as such", or instead 
"particular guarantees" under the GSM 102 program.
373  As noted in that comment, Brazil has shown 
that the amended GSM 102 program is an export subs idy.  Separately, Brazil has also shown that the 
GSM 102 program is "applied", via individual GSM 102 ECGs for pa rticular products, in a manner 
that results in circumvention of U.S. export subsidy commitments. 
 
                                                      
373 U.S. 2 April answer to question 97, paras. 224-225.  WT/DS267/RW 
 Page D-503 
 
 
228. In any event, it is not necessary in WTO dis pute settlement to prove that a measure violates 
WTO law in "all" instances.  As the panel in U.S. – Export Restraints  held, it suffices that a measure 
violates WTO laws in some instances.374 
 
98. Does the United States dispute the accura cy of Brazil's comparison of GSM 102 fees with 
Exim Bank fees?  Does the United States agree t hat ExIm Bank and GSM 102 guarantees are (at least 
in certain circumstances) similar or comparable? 
 
229. In its First Written Submission, Brazil dem onstrated that GSM 102 fees are below the fees 
charged by the United States' Export-Import Bank ("Ex Im Bank") for financial instruments that are in 
key respects similar to GSM 102 ECGs – ExIm Bank' s Letter of Credit Insu rance ("LCI") (which 
serves as a reference point for GSM 102 ECGs issued for tenors of up to 360 days ), and ExIm Bank's 
Medium-Term Export Credit Insura nce ("MTI") (which serves as a reference point for GSM 102 
ECGs issued for tenors exceeding 360 days ).375  The results of this comparison between GSM 102 and 
ExIm Bank fees are tracked in Exhibits Bra- 536 (for transactions involving annual repayment of 
principal) and Bra-537 (for transactions invol ving semi-annual repayment of principal). 
 230. The United States argues that GSM 102 ECGs are not similar to ExIm Bank LCI and MTI products, and are therefore not suitable for comparison, for five reasons.  231. Before addressing each of these five reasons, Br azil notes the irony of this situation.  Brazil 
has demonstrated that there is no credit protection product available in the marketplace that is 
comparable to a GSM 102 ECG.
376  Nonetheless, in addition to that showing, Brazil undertook a 
comparison between GSM 102 fees and fees for comparable non-market products offered by ExIm Bank.  In rebuttal, the United States has not offered a single example of a credit protection product 
available in the marketplace .  Brazil's fundamental position – that GSM 102 ECGs confer "benefits" 
per se  because they have no parallel at market – remains unrebutted by the United States with 
anything that resembles evidence, and indeed echoes the position the United States has taken in other disputes.
377 
 232. With that important qualification, Brazil a ddresses each of the five reasons offered by the 
United States in support of its argument that Ex Im Bank LCI and MTI products are not suitable for 
comparison with GSM 102 ECGs. 
 
First U.S. criticism: 
No ExIm Bank MTI cover for agricultural product transactions
 
 233. First , the United States observes that ExIm Bank' s MTI is not available for agricultural 
products, and that it is not therefore comparable to GSM 102.
378   
 234. Brazil has already alerted the Panel to this di stinction.  As Brazil noted in its First Written 
Submission
379, ExIm Bank cover is indeed not, in normal  circumstances, available for agricultural 
                                                      
374 Panel Report, U.S. – Export Restraints , para. 8.78.  
375 Brazil's First Written Submission, paras. 381-406 and Annex IV (Methodology for Comparison of 
GSM 102 Fees with Fees for ExIm Bank Products). 
376 Brazil's First Written Submission, paras. 377-378.  See also Id ., Annex III (Statement of 
Professor Rangarajan Sundaram), paras. 8-9. 
377 Panel Report, Canada – Aircraft Credits and Guarantees , Annex C-2 (para. 7) ("If the commercial 
market does not offer a particular borrower the exact terms offered by a government, then the government is 
providing a benefit to the recipient whenever those terms are more favorable than the terms that are available at 
market.  A government entity 'operating on commercial principles' is still a government entity.  It is not the 
commercial market."). 
378 U.S. 2 April answer to question 98, para. 227. 
379 Brazil's First Written Submission, paras. 389-393. WT/DS267/RW  
Page D-504  
 
export transactions with tenors exceeding 180 days or, exceptionally, 360 days.
380  T h e  minimum 
tenor for a transaction to qualify for MTI cover is 360 days.  Thus, MTI cover is not available for 
agricultural products.  235. Brazil fails to see how this criticism aids the United States' defense.  All the U.S. observation 
establishes is that it is not even possible to identify a non-market instrument distorted by government 
intervention  to serve as a benchmark for GSM 102 ECGs issued for tenors exceeding, at most, 
360 days, let alone a market instrument.  The compliance Panel will recall that in Congressional 
testimony, the Chairman of CoBank stated that GSM 102's three-year tenor "is critical to the program's success," and that the program "provides for tenors that are typically unavailable in the 
market and this is a crucial strength of the program."
381 
 236. In any event, as Brazil has already explained a nd the United States has ignored, the fact that a 
financial instrument does not apply to agricultura l products does not undermine the comparability of 
its fees to GSM 102 fees, and in fact reveals that the ExIm Bank comparison is overly generous to the 
United States.
382   
 237. There is no reason why guarantees for agricultu ral products should be less risky than credit 
protection for transactions involving capital goods a nd products.  If anything, making agricultural 
products subject to ExIm  Bank's MTI cover would increase  MTI fees.  In an agricultural export 
transaction, the value of the product sold holds little  value for the guarantor as a security against 
default by the foreign obligor.  Shortly after sale, an  agricultural commodity is likely to be (and short 
of preservation may indeed have to be) consumed;  th e value of any security interest in the commodity 
will be short-lived, and usually far less than 360 days .  In contrast, an industrial product is generally 
more durable and lasting, and as such is more susc eptible to use as security for performance by the 
foreign obligor, should the guarantor wish to do so.  The availability of this option may lower the risk 
associated with default faced by the guarantor a nd, as a consequence, lower the fees necessary to 
offset that risk.  Where this option is not viable, th e loss in the event of default is greater, as will be 
the fees necessary to offset the corresponding risk.    
Second U.S. criticism: 
No ExIm Bank MTI cover for repayment terms between 360 days and 2 years
 
 
238. Second , the United States appears to suggest that unlike GSM 102, which applies for 
repayment terms of up to three years and in "hund reds of … transactions" for less than two years, 
ExIm Bank's MTI is only availa ble for repayment terms of more than  two years.383  While not 
expressed clearly, the U.S. allegation appears to be  that Brazil has not offered a valid comparison for 
GSM 102 fees for transactions involving repayment terms of between 360 days and two years. 
 239. To isolate with precision the U.S. criticism, Brazil notes that the criticism does not affect the 
comparability of GSM 102 fees and ExIm LCI fees for transactions involving repayment terms of 360 days or less.  Nor does it affect the comparability of GSM 102 fees and ExIm MTI fees for transactions involving repayment terms of  between two and three years.   
 
                                                     
 
380 See Exhibit Bra-532 (ExIm Bank, "Standard Repaymen t Terms," Chart II, accessed October 2006 at 
www.exim.gov/tools/exposure/ebd-m-26.html).  See also  Exhibit Bra-533 (ExIm Bank export credit insurance 
product description, accessed October 2006 at  http://www.exim.gov/products/insurance/index.cfm).   
381 See Exhibit Bra-528 ("GSM Programs Benefit U.S. Agriculture and the Rural Economy", 
Testimony of Otis Molz, Chairman of the Board of CoBank, to the U.S. Senate Committee on Agriculture, 
Nutrition and Forestry, 18 July 2000, accessed November 2006 at 
http://agriculture.senate.gov/Hearings/H earings_2000/Untitled/00718mol.htm). 
382 Brazil's First Written Submission, para. 443. 
383 U.S. 2 April answer to question 98, para. 227.  WT/DS267/RW 
 Page D-505 
 
 
240. The United States assertion that MTI cover is not available for repayment terms of between 
360 days and two years is, to put it bluntly, untru thful.  ExIm Bank documents expressly state that 
MTI coverage is available for repayment terms of 1-5 years.384  The ExIm Bank calculator with which 
Brazil generated the MTI fees track ed in Exhibits Bra-536 and Bra-537 also specifically permits the 
user to control for repayment periods of  between 360 days and two years (and beyond).385   
 
241. In any event, the vast majority of GSM 102 EC Gs are indeed issued for transactions involving 
repayment terms in excess of two years – to wh ich the United States acknowledges ExIm Bank's MTI 
policies apply.  The United States notes that "hundreds of GSM-102 transactions, totalling hundreds of millions of dollars are in fact for terms of less than 2 years."
386  When the figures offered by the 
United States are compared to total GSM 102 ECGs  issued in FY 2003-2006 (as well as part-year 
totals for FY 2007), however, the compliance Pa nel will note that they compose approximately 
8 percent of the nearly $10 billion in GSM 102 ECGs issued in that period.387  Thus, the vast majority 
of GSM 102 ECGs – 92 percent – are issued for repa yment terms of over two years, which even the 
United States acknowledges matches the repa yment terms for ExIm Bank MTI cover. 
 
242. The United States deliberately withheld its comments on Brazil's ExIm Bank comparison until this late stage of the proceedings, having foregone  the opportunity to do so in the 7 submissions 
it made prior to its 2 April answers and subsequent  to Brazil's proffer of the comparison in Brazil's 
First Written Submission.  When it finally offers  comment, it misleads the compliance Panel with 
inaccurate factual statements contradicted by the very U.S. government doc uments and data on which 
the United States relies.  As well as being tardy, th e United States' criticisms of Brazil's ExIm Bank 
comparison are not credible.  
Third U.S. criticism: 
Differing interest coverage as be tween GSM 102 and ExIm Bank products
 
 
243. Third , the United States argues that Brazil's comp arison fails to account for differing levels 
of interest coverage by GSM 102, on the one ha nd, and ExIm Bank's LCI and MTI policies, on the 
other.388   
 244. Once again, had the United States taken th e opportunity to raise this concern in the 
7 submissions it made prior to its 2 April answers, it could have been resolved in a timely manner.  
Nonetheless, to answer the United States' concer n, Brazil has re-run its ExIm Bank comparison to 
account for differing levels of interest covera ge under GSM 102 and ExIm Bank's LCI and MTI 
policies.  The results show that given the mass ive gap between GSM 102 fees and ExIm Bank fees, 
differing interest cover has no material impact on the results of the ExIm Bank comparison tracked in 
Exhibits Bra-536 and Bra-537 .   
 245. The benchmarking exercise tracked in Exhi bits Bra-536 and Bra-537 yields a total of 1071 
comparison points between GSM 102 and ExIm Bank fees;  in 97.76 percent of those comparisons (1047 of 1071 comparison points), GSM 102 fees fall below ExIm Bank fees.
389  Taking account of 
the differing interest cover noted by the United States means that GSM 102 fees fall below ExIm 
                                                      
384 See Exhibit Bra-534 ("ExIm Bank Repetitive Sales Ba nk-to-Bank Export Credit Insurance Policy", 
Form EIB 99-10, p. 1, accessed November 2006 at http://www.exim.gov/pu b/ins/pdf/eib99-10.pdf ) ("The policy 
covers credit sales in which payment terms range between one and five years (exceptionally 7 years).").   
385 See http://www.exim.gov/tools/fee_calc.html . 
386 U.S. 2 April answer to question 98, para. 227 (and note 236). 
387 Compare  figures provided in footnote 236 of U.S. 2 April answer to question 98 with GSM 102 
totals recorded in end-of -fiscal-year Monthly Summaries of Export  Credit Guarantee Program Activity for 
FY 2003-FY 2006, provided, respectively, in Exhibits Bra-518, Bra-510, Bra-511 and Bra-523.  The March 2007 monthly summary is available at http ://www.fas.usda.gov/excr edits/Monthly/ecg.html
. 
388 U.S. 2 April answer to question 98, paras. 229-235. 
389 Brazil's First Written Submission, para. 395. WT/DS267/RW  
Page D-506  
 
Bank fees in 97.2 percent of the 1071 comparis on points (or 1041 of 1071 comparison points).
390  In 
other words, what the United States characterizes  as "[t]he most significant" difference between 
GSM 102 ECG cover and ExIm Bank LCI and MTI cove r that "Brazil has failed to address" changes 
the result of Brazil's comparison for a grand total of six out of 1071 comparison points .391 
 
246. Brazil now describes how it has factored the diffe ring interest coverage into the comparison, 
and explains why even the meagre impact just de scribed is likely exaggerated in the United States' 
favour.    247. As noted by the United States, in the event of default, GSM 102, on the one hand, and ExIm 
Bank LCI or MTI coverage, on the other, foresee payment of a share of principal
, and a share of 
interest .   
 248. As far as principal
 is concerned, under both GSM 102 a nd ExIm Bank LCI cover, default 
results in the guarantor having to pay out 98% of the principal amount that is still outstanding;  the 
ExIm Bank fee calculator allows the user to calcu late the applicable MTI fee for 98 percent cover.392 
249. With respect to interest , there are two questions to assess: 
 
• What is the upper limit for interest cove rage under GSM 102, on the one hand, and 
for ExIm Bank LCI and MTI, on the other?  
 
• Where do the actual interest rates on loans secured with GSM 102 or ExIm Bank 
LCI/MTI cover fall relative to these caps? 
 250. These questions are important in determining wh at level of interest coverage must be taken 
into account in comparing the GSM 102 and ExIm Ba nk products.  In sum, for the reasons explained 
below, Brazil has relied on the maximum
 possible difference in interest rate coverage between 
GSM 102 and ExIm Bank LCI, to assess the significan ce of differential interest rate coverage. 
 251. Concerning the first question, the United States asserts, with supporting data, that GSM 102 interest coverage is ca pped at approximately 2.8%
393, meaning that in the even t of default by a foreign 
obligor, the CCC will pay the U.S. bank no more than 2.8% for unpaid interest, even if the interest 
rate on the loan to the fo reign obligor exceeds 2.8%. 
 252. ExIm Bank LCI interest covera ge is capped at the prime rate (the interest rate charged by 
major banks to their most creditworthy customers)  minus 50 basis points ("bps").  Data provided by 
the United States shows that the prime rate less 50 bps is, today, equal to approximately 7.8%.
394  
Again, this means that in the event of default, Ex Im Bank will pay no more th an 7.8% interest cover 
in case of default, even if the in terest rate on the loan subject to LCI cover exceeds 7.8%.  ExIm Bank 
MTI interest coverage is not subject to a cap.395 
 
                                                      
390 The few instances in which GSM 102 fees exceed ExIm Bank LCI or MTI fees does not mean that 
GSM 102 fees do not confer "benefits" relative to the market.  See Brazil's First Written Submission, 
paras. 403-406, and Annex III (Statement of Professor Rangarajan Sundaram), paras. 17-24. 
391 U.S. 2 April answer to question 98, paras. 230, 229, 235. 
392 For GSM 102, see Exhibit Bra-520 ("Export Credit Guar antee Program," USDA FAS Fact Sheet, 
March 2006).  For ExIm Bank LCI, see Exhibit Bra-531 (ExIm Bank Letter of Credit Insurance for Banks, 
ExIm Bank online).  For ExIm Bank MTI,  the fee calculator is available at 
http://www.exim.gov/tools/fee_calc.html . 
393 U.S. 2 April answer to question 98, paras. 231, 233 (and note 243) and Exhibit US-156. 
394 U.S. 2 April answer to question 98, paras. 230, 232 (and note 242) and Exhibit US-154. 
395 U.S. 2 April answer to question 98, para. 230.  WT/DS267/RW 
 Page D-507 
 
 
253. As noted by the United States, maximum inter est coverage is, therefore, higher for the ExIm 
Bank products than for GSM 102 ECGs.  To answer  the United States' concern with Brazil's ExIm 
Bank comparison, Brazil re-ran that comparison to acc ount for differing levels of interest coverage 
under GSM 102 and ExIm Bank's LCI and MTI polici es.  In so doing, Brazil applied the maximum 
interest coverage available under the ExIm Bank LC I cap, and applied the ExIm Bank LCI cap for the 
purposes of MTI cover – or in other words 7.8%.  On  the other side of the equation, Brazil similarly 
applied the maximum interest coverage under the GS M 102 cap – or in other words 2.8%.  The details 
of this comparison, including inter est coverage, are explained below. 
 254. The answer to the second question explains why application of the LCI cap, like Brazil's 
ExIm Bank comparison overall
396, is extremely conservative and favourable to the United States.  In 
short, under both current and historical economi c conditions, actual interest rates by borrowers 
benefiting from LCI or MTI cover fall significantly below the LCI cap.  255. The United States has provided data in these pr oceedings concerning the interest rates secured 
by foreign obligors on GSM 102-guaranteed loans.  The highest interest rate tracked by the U.S. data 
is [[                        ]]
397, which at current levels corresponds to approximately [[       ]].398  A USDA 
FAS publication confirms the U.S. data:  "Typica lly interest rates between U.S. banks and the 
importer's banks are negotiated at Libor, the Lond on Interbank Offered Rate , plus a fraction of a 
percent ."399  GSM 102, ExIm Bank LCI and ExIm Bank MTI products all contribute the same  U.S. 
government credit rating to a transaction.  Therefor e, the rates offered on loans secured with ExIm 
Bank LCI/MTI cover will be the same  as the rates offered on loans secured with GSM 102 cover – 
LIBOR plus a fraction of a percent or, today, approximately [[        ]].400 
 256. This evidence demonstrates th at the rates secured with ExIm Bank LCI or ExIm Bank MTI 
cover do not reach the ExIm Bank LCI cap of 7.8%.  Interest rates on loans subject to ExIm Bank 
LCI/MTI coverage are considerably lower than th e LCI cap.  While the United States argues that the 
absence of an interest cap for ExIm Bank MTI cove r means that "one can only infer the disparity 
between CCC interest cover and [MTI cover] is ev en greater" than the disparity between CCC interest 
cover and LCI cover
401, this is not a logical or reasonable infere nce at all, in light of the fact that 
actual interest rates fall well below even the LCI cap.    
257. Nor have rates secured with ExIm Bank LC I or ExIm Bank MTI cover reached the ExIm 
Bank LCI cap as an historical matter.    258. Over the 10-year period of 1997-present, the prime rate has ranged between a low of 4.0% 
from July 2003-June 2004, to a high of 9.5% from June 2000-January 2001.
402  The compliance Panel 
will recall that according to the United States, the LCI cap is set at the prime rate minus 50 bps.403   
                                                      
396 Brazil's First Written Submission, Annex IV (Met hodology for Comparison of GSM 102 Fees with 
Fees for ExIm Bank Products), para. 6. 
397 U.S. First Written Submission, paras. 122, 125, 129.  See also  Exhibit US-22 (Letter from 
[[                   ]]). 
398 See LIBOR USD rates for the first week of April 2007, available at 
http://www.bba.org.uk/content/1/c4/86/12/Apr07.xls .  Averaging the data for th e first week of April across 
maturities yields approximately 5.3%.  This data is pos ted on the website of the British Bankers' Association 
("BBA"), which itself determines the LIBOR rate  every day by polling international banks.  See 
http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=225&a=1416 . 
399 Exhibit Bra-589 (Foreign Agriculture Service Online, Keys to Successful Trade , p. 5) (emphasis 
added). 
400 See Brazil's 2 April answer to question 100, para. 251. 
401 U.S. 2 April answer to question 98, para. 234. 
402 See http://www.moneycafe.co m/library/prime.htm , reproduced in Exhibit Bra-692 (LIBOR and 
Prime rates, 1997 to the present). WT/DS267/RW  
Page D-508  
 
259. As discussed above, actual interest rates secured with LCI or MTI cover are pegged to 
LIBOR, with the addition of "a fraction of a percent,"
404 or as the United States has shown, around 
[[        ]] bps.405  Over the 10-year period of 1997-present, LIBOR has ranged between a low of 1.09% 
in March 2004 and a high of 6.83% in November 2000.406 
 
260. As both current economic cond itions and historical conditions demonstrate, whether rates are 
high or low, LIBOR and the prime rate move roughly in tandem.407  At no point has the LCI cap of 
prime minus 50 bps come any where close to falling belo w LIBOR plus [[         ]], or even LIBOR 
plus 1 percent (100 bps).  The gap between the lo wer interest rates accessible by borrowers benefiting 
from LCI or MTI cover, on the one hand, and the higher LCI interest coverage cap, on the other, 
always exists. 
 261. Even though actual interest rates accessible by borrowers benefiting from LCI or MTI cover 
have never reached the LCI interest coverage ca p and at present economic conditions fall below the 
cap by [[   ]] bps  (7.8% less [[      ]])408, Brazil has applied the LCI cap as the amount of interest cover 
available with LCI and MTI cover.  Thus, Brazil's asse ssment of the impact of interest coverage is 
extremely conservative and favourable to the United States.    262. Thus, in its revised ExIm Bank comparison, Brazil assumes GSM 102 interest coverage at the 
cap of 2.8%, and ExIm Bank LCI and MTI inte rest coverage at the LCI cap of 7.8%.
409 
 
263. Under these conditions, if default occurs  on a GSM 102-guaranteed loan, the CCC will pay 
100.8% of the remaining principal – 98% towards pr incipal, and 2.8% towards interest.  If default 
occurs on a loan secured with LCI or MTI cover,  ExIm Bank will pay 105.8% of the remaining 
principal – 98% towards principa l, and 7.8% towards interest. 
                                                                                                                                                                     
403 U.S. 2 April answer to question 98, para. 230. 
404 Exhibit Bra-589 (Foreign Agriculture Service Online, Keys to Successful Trade , p. 5). 
405 U.S. First Written Submission, paras. 122, 125, 129.  See also  Exhibit US-22 (Letter from 
[[         ]]). 
406 See http://www.moneycafe.com/library/1mlibor.htm , reproduced in Exhibit Bra-692 (LIBOR and 
Prime rates, 1997 to the present). 
407 Compare  the 1997-present chart tracking evolution of the LIBOR rate, at 
http://www.moneycafe.com/library/1mlibor.htm , with the 1997-present chart tracking evolution of the prime 
rate, at http://www.moneycaf e.com/library/prime.htm .  These charts are reproduced in Exhibit Bra-692 (LIBOR 
and Prime rates, 199 7 to the present). 
408 Over the 10-year period of 1997-present, actual  interest rates on ExIm Bank LCI/MTI cover have 
fallen below the LCI interest coverage cap by between 113 bps (the low, in November 1999) and 326 bps (the 
high, in January 2001).  Compare  the 1997-present chart tracking evolution of the LIBOR rate, at 
http://www.moneycafe.com/library/1mlibor.htm  (plus the [[      ]] bps noted by the United States as the spread 
for loans backed by U.S. government credit protection instruments, with the 1997-present chart tracking 
evolution of the prime rate, at h ttp://www.moneycafe.com/library/prime.htm  (less the 50 bps noted by the 
United States to generate the LCI cap).  These charts are reproduced in Exhibit Bra-692 (LIBOR and Prime 
rates, 1997 to the present).  The third and final chart in Exhibit Bra-692 represents the difference, in each month, 
between the LIBOR and pr ime rates in force. 
409 This is conservative and favorable to the United States for at least two additional reasons.  First, the 
5% gap between the 2.8% GSM 102 cap used by Brazil and the 7.8% LCI cap used by Brazil is greater than the 
4.91% figure cited by the United States as the average size of the gap between GSM 102 and ExIm Bank LCI 
interest coverage for the period 2005-2007.  U.S. 2 April answer to question 98, para. 233.  Second, Brazil 
assumes that interest payments by the borrower on the loan are due annually.  How much interest is owed by the CCC or ExIm Bank at the time of default depends on the contractual frequency of interest payments.  If interest 
is paid annually, then at the time of default, the CCC or ExIm Bank are liable for a fully year's interest.  If 
interest is paid quarterly and default occurs after, for exam ple, the close of the second quarter, then at the time of 
default, the CCC or ExIm Bank are liable for interest on the third and fourth quarters  only.  Because a longer 
interval between interest payments increases the dolla r magnitude of the differences in interest coverage 
highlighted by the United States, Brazil's analysis assumes that interest payments are due annually.  WT/DS267/RW 
 Page D-509 
 
 
264. Let p gsm be the premium charged per dollar of principal for GSM 102 cover, and let p exim be 
the premium charged per dollar of principal for Ex Im Bank LCI or MTI cover.  As noted above, a 
GSM 102 premium pays 100.8% of the remaining principal in the event of default, while an LCI or MTI premium pays 105.8% of the remaining principal in the event of default.  This means that per 
dollar of coverage, CCC charges p
gsm/100.8, while ExIm Bank charges p exim/105.8. 
 
265. If p gsm < [p exim x (100.8/105.8)], then GSM 102 fees are cheaper than LCI or MTI fees even 
after accounting for the differentials in interest coverage.  Since (100.8/105.8) is approximately 
95.3%, wherever GSM 102 fees are less than 95.3% of LCI or MTI fees, GSM 102 fees are below LCI or MTI fees, even accounting for differing interest coverage. 
 
266. On the basis of the GSM 102 and ExIm Bank LCI and MTI fees listed in Exhibits Bra-536 and Bra-537
410, Exhibits Bra-693 (for GSM 102 transactions  involving annual repayment of principal) 
and Bra-694 (for GSM 102 transactions involving sem i-annual repayment of principal) list GSM 102 
fees as a percentage of ExIm LCI and MTI fees.  In every instance in which GSM 102 fees are less 
than 95.3% of LCI or MTI fees, GSM 102 fees ar e below ExIm Bank fees, even accounting for 
differences in interest cover.  As Exhibits Bra- 693 and Bra-694 show, this is  the case in 97.2 percent 
of the 1071 comparison points  (or 1041 of 1071 comparison points).411   
 267. In conclusion, differing interest cover be tween GSM 102 and ExIm Bank products does not 
undermine the validity of Brazil's comparison;  no r does adjusting for those differences materially 
influence the results of that comparison. 
 
Fourth U.S. criticism: 
Differing principal coverage as be tween GSM 102 and ExIm Bank MTI cover
 
 268. Fourth , the United States notes that while GSM 102 offers coverage for 98% of principal, 
ExIm Bank's MTI is available for coverage of up to 100% of principal.
412  In paragraph 390 of its First 
Written Submission, however, Brazil noted that the f ee calculator available at ExIm Bank's website 
allows a user to reduce the amount of coverage, and to calculate the applicable MTI fee for 98 percent 
principal cover, or in other words, equivalent pr incipal cover to GSM 102.  Brazil did so for the 
purposes of calculating the ExIm Bank MTI fees tracked in Exhibits Bra-536 and Bra-537.  Brazil has 
fully controlled for the possible di fference in principal coverage noted by the United States.  Not only 
has the United States waited nearly 5 months to  comment on Brazil's ExIm Bank comparison until 
this late stage of the proceedings, having foregone the opportunity to do so in the 7 submissions it 
made prior to its 2 April answers, but it misleads the compliance Panel by raising an element that was 
controlled for by Brazil, expressly , in that comparison.  
 
                                                      
410 The Panel will recall that wherev er a choice was presented with re spect to variables in the ExIm 
Bank calculator used to generate MTI fees, Brazil adopte d the most conservative optio n available, or in other 
words the option that would result in a lower ExIm Bank fee.  See Brazil's First Written Submission, Annex IV 
(Methodology for Comparison of GSM 102 Fees with Fees for ExIm Bank Products), paras. 7-12. 
411 Instead of in 97.76 percent of those comparisons (1047 of 1071 comparison points), without 
accounting for differences in interest cover, as was the case in Exhibits Bra-536 and Bra-537.  See Brazil's First 
Written Submission, para. 395.  The few instances in wh ich GSM 102 fees exceed ExIm Bank LCI or MTI fees 
does not mean that GSM 102 fees do not co nfer "benefits" relative to the market.  See Brazil's First Written 
Submission, paras. 403-406, and Annex III (Statement of Professor Rangarajan Sundaram), paras. 17-24. 
412 U.S. 2 April answer to question 98, para. 236. WT/DS267/RW  
Page D-510  
 
Fifth U.S. criticism: 
Differing principal coverage as be tween GSM 102 and ExIm Bank LCI cover
 
 
269. Fifth , although not disputing that ExIm Bank's LCI product, like GSM 102, covers 98% of 
principal for transactions involving agricultural products413, the United States appears to assert that 
another feature of the LCI product effectively rai ses principal coverage to 100%.  Specifically, the 
United States alleges that under an  ExIm Bank LCI policy, "'the insu red may arrange recourse or 'pass 
back' to a third party of all or any part of any uninsured amount.'"414  The United States asserts that 
"[t]his is not permitted under GSM 102," and that th erefore, unlike in the case of a holder of an LCI 
policy, a GSM 102 holder is, under the GSM 102 regula tions, not able to insulate itself from exposure 
to default on the 2% of principal, and any per centage of interest, not covered by the GSM 102 ECG.415 
 270. The United States' characteri zation of the GSM 102 regulations is misleading and incorrect.  
The regulations do not support the U.S. contention that the holder of a GSM 102 ECG "is not permitted" to insure the remaining 2% of principa l not covered by the GSM 102 ECG.  In fact, the 
regulations establish exactly the opposite – that a holder of a GSM 102 ECG can insulate itself from 
exposure to default on the 2% of principal, and any percentage of interest, not covered by the 
GSM 102 ECG.  271. The United States asserts that under Section 1493.110(b)(4) of the GSM 102 regulations, included as Exhibit US-142, "[u]pon default the claimant must subrogate to CCC the claim to the 
entire amount in default, not just the guaranteed portion."
416  As noted by the United States, 
Section 1493.110(b)(4)(iv) states that the holder of a GSM 102 ECG must sign an agreement "subrogating to CCC the respective rights of the exporter  and the exporter's assignee, if applicable, to 
the amount of payment in default under the applicable export sale."
417  The United States further 
asserts that under Section 1493.130(a) of the GS M 102 regulations, "CCC then has the right to 
recover from the obligor all moneys in default."418   
 272. In other words, the United States implies that although a GSM 102 ECG only covers 98% of principal, in the event of default and payment by CCC to the holder of the ECG of 98% of principal, 
the CCC enjoys a claim on 100% of any monies recovered from the foreign obligor.    
273. The United States has not been fully forthc oming with the compliance Panel.  As the 
United States is surely aware, Sections 1493.110(b)(4)(iv) and 1493.130(a) are not the end of the story.  Indeed, Section 1493.130(c) directly contra dicts the United States' argument, and show that a 
GSM 102 ECG holder, as in the case of an ExIm Bank LCI policyholder, is indeed able to insulate 
itself from exposure to default on the 2% of principal not covered by the GSM 102 ECG. 
 
274. Section 1493.130(c) provides as follows:  
Recoveries made by CCC from the importer or the foreign bank, and recoveries 
received by CCC from the exporter, the exporter's assignee, or any other source whatsoever, will be allocated by CCC to the exporter or the exporter's assignee and to 
CCC on a pro rata basis determined by their r espective interests in such recoveries.  
The respective interest of each party will be determined on a pro rata basis, based on the combined amount of principal and inter est in default.  Once CCC has paid out a 
                                                      
413 See Exhibit Bra-531 ("ExIm Bank Letter of Credit Insurance for Banks," accessed October 2006 at 
http://www.exim.gov/products /insurance/loc.html). 
414 U.S. 2 April answer to question 98, para. 236. 
415 U.S. 2 April answer to question 98, para. 236. 
416 U.S. 2 April answer to question 98, para. 236. 
417 7 CFR Section 1493.110(b)(4)(iv).  See Exhibit US-142. 
418 U.S. 2 April answer to question 98, para. 236.  WT/DS267/RW 
 Page D-511 
 
 
particular claim under a GSM-102 or GSM-103 payment guarantee, CCC prorates 
any collections it receives and shares these co llections proportionately with the holder 
of the guarantee until both CCC and the holder of the guarantee have been 
reimbursed in full .419 
275. The underscored sentence is particularly signi ficant.  Following default by a foreign obligor 
on a GSM 102-guaranteed loan from a U.S. bank, th e U.S. bank files a claim with the CCC.  Upon 
receipt of the claim, the CCC pays the U.S. bank 98%  of principal and any interest up to the GSM 102 
cap.  Subsequently – "[o]nce CCC has paid out a particular claim"420 – CCC seeks to collect from 
anyone it can.  If the CCC succeeds in securing collecti ons, the regulations state that it "shares these 
collections proportionately with the holder of the guarantee until both CCC and the holder of the 
guarantee have been reimbursed in full."421   
 276. If the United States were correct that the CCC is entitled to 100% of any recoveries it secures 
from the foreign obligor, why would the U.S. exporter,  or more likely the U.S. bank, as the exporter's 
assignee and the holder of the guarantee, be entitle d to a prorated, proportionate share of any 
collections secured by the CCC?  If the United Stat es were correct, once the U.S. bank, as the holder 
of the guarantee, was paid its claim – 98% of principal and any interest up to the GSM 102 cap – it would be entitled to nothing more.  The U.S. bank would at that point "have been reimbursed in full", and any subsequent monies secured by the CCC as part  of its collection efforts would be for the CCC 
to retain.    
277. But the United States is not correct.  Section 1493.130(c) clarifies that if the CCC's collection 
efforts are successful, the holder of the guarantee is indeed entitled to more than its claim to 98% of 
principal and any interest up to the GSM 102 cap.  Out of any collections secured by the CCC subsequent to payment of the U.S. bank's claim, th e U.S. bank is entitled to its "proportionate[]" share 
– presumably, up to the remaining 2% of principal,  and the portion of interest, not covered by the 
GSM 102 ECG.  The U.S. bank need not wait until C CC has been made whole;  rather, CCC's claim 
on recoveries is ranked pari passu  with the U.S. bank's claim on recoveries. 
 278. In other words, the United States has misch aracterized the GSM 102 regulations, asserting a 
difference between GSM 102 and ExIm Bank's LCI cove r that does not exist.  As with ExIm Bank's 
LCI policy, GSM 102 cover allows the holder of a GSM 102 guarantee to recover amounts in excess 
of 98% of principal and any interest up to the cap.   
 279. In fact, GSM 102 may well be superior
 to ExIm Bank's LCI cover in this regard.  
Section 1493.130(c) of the GSM 102 regulations, quot ed at length above, provides that after CCC has 
paid a claim, it shares recoveries on a pro rata basis with the U.S. bank.  This means that CCC's claim 
on recoveries is ranked pari passu  with the U.S. bank's claim, rath er than senior to the U.S. bank's 
claim.    280. In contrast, under ExIm Bank's LCI, were the exporter or the U.S. bank to arrange cover with 
a third party for 2% of the principal and any porti on of interest not covered by the ExIm Bank LCI 
policy, that third party's claim may well rank junior
 to ExIm Bank's claim.  In that case, 
Section 1493.130(c) of the GSM 102 regulations would mean that GSM 102 provides a superior  
product from the exporter or the U.S. bank's standpoint.  With a GSM 102 ECG, the exporter or the U.S. bank does not stand in line behind the CCC to recover the 2% of principal and any portion of 
interest not covered by the GSM 102 ECG;  rather, out of the first and last dollar of recoveries secured 
by the CCC, the exporter or the U.S. bank gets its pro rata share.  If anything, this means that 
                                                     
 
419 7 CFR Section 1493.130(c) (emphasis added).  See Exhibit US-142.  
420 7 CFR Section 1493.130(c).  See Exhibit US-142. 
421 7 CFR Section 1493.130(c).  See Exhibit US-142. WT/DS267/RW  
Page D-512  
 
GSM 102 fees should be even higher than ExIm Ba nk LCI fees, rather than the reverse, as the 
United States asserts.    281. Even if this is not the case, however, as Brazil has explained above, Section 1493.130(c) of 
the GSM 102 regulations means, at the very least , that the difference between GSM 102 and ExIm 
Bank's LCI cover alleged by the United States does not exist.  Having foregone the opportunity to 
comment on Brazil's ExIm Bank comparison in the 7 submissions it made prior to its 2 April answers and subsequent to Brazil's profer of the comparison, the United States' misleading and inaccurate characterization of its own regulations at this late  stage of the proceedings is disappointing and not 
credible.  
 
99. Please comment on Brazil's argument that th e GSM 102 fees are not sufficiently scaled to 
take into account country risk (i.e. they vary only mi nimally according with country risk) (see, inter 
alia, paras. 410-412 Brazil 's First Written Submission). 
 282. The United States argues that there is "no basis in the text" of the SCM Agreement  for Brazil's 
assertion that GSM 102 fees are insufficiently scaled to account for risk.
422  The United States notes 
that it "is not aware of any provision of the SCM Agreement that establishes what constitutes 
'sufficient' scaling."423   
 283. The United States may be unaware of Article 1.1(b) of the SCM Agreement , which has been 
interpreted by the Appellate Body to require a co mparison between the terms offered a recipient for a 
government financial contribution,  and the terms available to the recipient for a comparable 
instrument secured at market.
424  Brazil has demonstrated that there is no credit protection product 
available in the marketplace that  is comparable to a GSM 102 ECG.425  Nonetheless, Brazil has 
additionally undertaken a comparison between GSM 102 fees and fees for comparable non-market 
products offered by ExIm Bank.  
 284. That comparison exercise, undertaken methodically on a country-by-country, tenor-by-tenor basis, demonstrates that GSM 102 fees are consistent ly below ExIm Bank fees.  At paragraph 400 of 
its First Written Submission, Brazil also demonstr ated graphically that ExIm Bank fees rise much 
more sharply than GSM 102 fees in response to incr eased transaction risks, even if ExIm Bank fees 
do not represent the market.  Consistent with fundamental  tenets of corporate finance, as maturity and, 
in particular, country risk, increases, the rate at which ExIm Bank fees rise increases significantly.  
The same cannot be said of GSM 102 fees, which are ba rely responsive to increased risks arising from 
longer maturities and/or increased country risk.  
285. In other words, by comparison to other si milar instruments, GSM 102 fees are insufficiently 
scaled to account for transaction risks that ev en non-market entities take into account.  The 
comparison exercise undertaken by Brazil enjoys a basis in the relevant provisions of the 
SCM Agreement  – specifically, Article 1.1(b) of the Agreement , as interpreted by the Appellate Body. 
 
4. Item (j) of the Illustrative List 
 
Questions to both parties 
 
102. What, in your view, explains the different results achieved by the two methods advocated, on 
the one side, by the United States in paragraphs 87- 89 of its First Written Submission and by Brazil in 
                                                     
 
422 U.S. 2 April answer to question 99, paras. 237, 238. 
423 U.S. 2 April answer to question 99, para. 237. 
424 Appellate Body Report, Canada – Aircraft , para. 157. 
425 Brazil's First Written Submission, paras. 377-378.  See also Id ., Annex III (Statement of 
Professor Rangarajan Sundaram), paras. 8-9.  WT/DS267/RW 
 Page D-513 
 
 
Exhibit Bra-613 (other than the United States' cr iticism that Brazil has not taken recoveries 
corresponding to pre-1992 guarantees into account in its "cash basis" accoun ting calculations, of 
which the Panel is already aware)? 
286. The United States suggests that Brazil is back ing away from net present value accounting as a 
reliable way to measure the long-term costs of the GSM 102 program.426  If it is not already 
abundantly clear to the United States427, Brazil agrees that net present value accounting is a reliable 
way to account for the costs of contingent liabilities.    287. Using a net present value methodology, the CCC  has, in every year since the inception of 
credit reform in 1992 (including in budgets for FY 2006, 2007 and 2008
428, under the amended 
GSM 102 fee schedule), projected that costs and losses for the "cohort" of ECGs issued in the coming 
fiscal year would, at closing, exceed projected fe es, penalties and recoveries.  Using the same net 
present value methodology, CCC's 2006 audited fina ncial statements state that the CCC does not 
anticipate covering the costs and losses of the ECG programs across all outstanding cohorts of ECGs issued since 1992.
429 
 
288. As noted in Brazil's 2 April response to questio n 105 (at paragraphs 283-307), it is the United 
States that is backing away from the net presen t value methodology, while trying to give the 
impression that it embraces that methodology.    289. First, in these proceedings, the United St ates consistently derides the net present value 
methodology required by U.S. law as "unreliable", because it allegedly does not reflect the CCC's 
particular experience
430 – a proposition with which USDA and FAS disagree, outside the context of 
WTO litigation.431   
 290. Second, although the projections of long-t erm losses included in the 2006 CCC financials, 
and in the U.S. budgets for GSM 102 ECGs issued in fiscal years 2006, 2007 and 2008, are calculated 
using the net present value methodology mandated by U.S. law, the United States derides these projections as not reflective of "actual" results.
432  The United States' objection that this evidence does 
not reflect "actual" results most clearly dem onstrates its abandonment of the net present value 
approach.  By definition, net present value calculations are projections  of future results, discounted 
back to present value terms.  The only wa y the United States will accept a net present value 
                                                      
426 U.S. 2 April answer to question 102, paras. 240-242. 
427 Brazil's First Written Submission, paras. 433-437;   Brazil's Rebuttal Submission, paras. 483-484, 
501-511;  Brazil's Oral Statement, paras. 252-254, 257-260. 
428 Exhibit US-71. 
429 Exhibit Bra-585 (Audit Report, Commodity Credit Corporation's Financial Statements for Fiscal 
Years 2005 and 2006, Report No. 06401-21-FM, November 2006, p. 11, 26 of Notes to the Financial 
Statements) (identifying a USD 220 million "credit guar antee liability", defined as representing "the estimated 
net cash outflows (loss) of the guarantees on a net present value basis."). 
430 U.S. Rebuttal Submission, paras. 111-125. 
431 Exhibit Bra-588 (Agricultural Export Credit Guarantee Program s Assessment, ExpectMore.gov, 
Section 3.CR2, accesse d January 2007 at 
http://www.whitehouse.gov/OMB/expect more/detail.10002020.2005.html ) (the "credit models used to calculate 
the subsidy for the guaranteed credits were revised in FY2001 and FY2003 and currently provides reliable 
estimates ", and identifies the model applied specifically as "[t]he USDA model ") (emphasis added);  Exhibit 
Bra-616 (U.S. Department of Agriculture, Office of the Chief Financial Officer, Credit, Travel, and Accounting 
Division, Agriculture  Financial  Standards  Manual  (May 2004), p. 121, accessed December 2006 at 
http://www.ocfo.usda.g ov/reports/index.htm ) ("In estimating default costs, the following risk factors are 
considered:  (1) loan pe rformance experience ….").  
432 See U.S. Rebuttal Submission, para. 88;  U.S. 2 April answer to question 108, paras. 276-277. WT/DS267/RW  
Page D-514  
 
methodology is if it is converted into a retros pective, cash-basis accounting methodology, by taking 
account of re-estimates.
433  This amounts to a rejection of the net present value approach. 
 
104. Must a risk-based fee necessarily take into  account foreign obligor risk? Please discuss and 
provide any relevant support for your position. Can foreign obligor risk be treated differently than 
country risk in this respect, and if so, why?  
291. The United States argues that there is "no basis in the text for the obligation" to taken into 
account foreign obligor risk in setting an ECG fee.
434   
 
292. The United States may be unaware of item (j) of the Illustrative List, which requires an 
assessment of "premium rates" for an ECG program , and "long-term operating costs and losses" of the 
program.  As noted by the original panel, item (j ), "where a programme does not provide for premium 
rates that are fully reflective of the risks of a partic ular transaction, this might be one indicator that the 
programme was set up in such a way that its long-te rm operating costs and losses have to be borne, in 
total or in part, by the government."435  The United States may also be unaware that Article 1.1(b) of 
the SCM Agreement defines a subsidy as a government financia l contribution provided on terms that 
are better-than-market.  Market-based institutions do  not provide credit protection instruments without 
taking account of foreign obligor risk.    293. Brazil has submitted evidence demonstrating that  to be "fully reflective of the risks of a 
particular transaction"
436, ECG fees must be set to take account of foreign obligor risk.437  The 
United States has offered no evidence to rebut Brazil's showing that market-based financial 
institutions (let alone other U.S. government entiti es providing credit protection instruments similar to 
GSM 102 ECGs438) do not rely on exposure limits alone to adequately manage risk. 
106. The parties disagree as to whether Brazil should include recoveries for pre- 1992 guarantees 
in its cash basis accounting formula (Exhibit Bra- 613).  Is the Panel correct in understanding that 
Brazil's formula does not includes amounts for (1 ) claims paid after 1992 under pre-1992 guarantees;  
(2) fees paid on pre-1992 guarantees? If so, pl ease explain the relevance or non-relevance of 
including recoveries under pre-1992 guarantees in light of the non-inclusion of  costs and other revenues related to the same guarantees.  
 294. In paragraph 266 of its 2 April response, the United States addresses CCC's recent, massive 
write-offs of uncollectible amounts attributed to pre-1992 ECGs, as recorded in the United States' 
"liquidating account".  In Brazil's view, these write -offs offer an additional reason why the liquidating 
account does not turn a cash-basis assessment of program losses into program profits, as the 
United States has asserted.
439  Writing off billions of dollars worth of losses does not make a program 
profitable.440 
 
                                                      
433 See, e.g., U.S. First Written Submission, para. 87;  U. S. 2 April answer to question 102, para. 244. 
434 U.S. 2 April answer to question 104, para. 251. 
435 Panel Report, U.S. – Upland Cotton , para. 7.805. 
436 Panel Report, U.S. – Upland Cotton , para. 7.805. 
437 See Brazil's Rebuttal Submission, para. 498 and Exhibit Bra-615. 
438 See "transaction risk increment" field in the U.S.  Export-Import Bank fee calculator, defined at 
http://www.exim.gov/tools/calchelp.cfm . 
439 U.S. Rebuttal Submission, paras. 97-99. 
440 See Brazil's Oral Statement, paras. 261-263.  WT/DS267/RW 
 Page D-515 
 
 
Questions to the United States 
 
107. What can explain the discrepancy between th e "credit guarantee liability" recorded in the 
CCC's financial statements (which suggest that the program is provided at a net cost to the US 
government) and the evidence presented by the US in para. 87 of its First Written Submission? 
 
295. Please see Brazil's comment on the U.S. response to question 108.  
108. Please explain why the "liability" figure in the CCC's financial statements should not be 
considered by the panel to provide, if not the amount  of actual losses, at least a reliable estimate of 
the CCC's own perception of the cost to the government  of the programmes since their inception. Is 
the Panel wrong in understanding that a "credit guarantee liability
" in this context means that the 
CCC considers that the programmes will not cover their costs and losses in the long term? 
 
296. The United States misrepresents the significance of the "credit guarantee liability" figure in 
the 2006 CCC financial statements.  
 297. The United States' response ignores altogether  the definition of "credit guarantee liability" 
included in the financial statements itself.  The definition reads as follows:  
Credit guarantee liabilities represent the estimated net
 cash outflows (loss) of the 
guarantees on a net present value basis.  To this effect, CCC records a liability and an 
expense to the extent, in management's estimate, CCC will be unable to recover claim payments under the Credit Reform Export Credit Guarantee programs.
441 
298. The bold, underlined word "net" belies the U.S. assertion that the credit guarantee liability 
figure in the CCC financial statements includes only a "liability for which there is an offsetting 
balance sheet entry of an asset."442  By the express terms of this definition, the credit guarantee 
liability figure in CCC's financials  represents "net" cash outflows or losses – meaning that having 
netted expected cash inflows against expected cash  outflows on a net present value basis, the CCC 
expects that the latter will exceed the former, and that it will therefore experience a "loss" (another 
term expressly used in the definition).  
299. As acknowledged by the United States, the orig inal panel, in its adopted findings, agreed.  
The United States notes the original panel's findi ng that "the credit guarantee liability represented a 
prospective estimate of anticipated experience under the program".
443  This is somewhat of an 
understatement.  Citing the credit guarantee liab ility figures from the 2002 and 2003 CCC financial 
statements, the original panel stated as follows: 
 
[W]e note that the CCC financial statements for the years 2002 and 2003 indicate a "credit guarantee liability" of $411 million and $22 million, respectively.  The CCC defines the term "credit guarantee liability"  as the estimated cash outflows of the 
guarantees on a net present value basis.  "Lia bility" is defined as "...a probable future 
                                                     
 
441 See Exhibit Bra-585 (Audit Report, Commodity Credit Corporation's Financial Statements for Fiscal 
Years 2006 and 2005, Report No. 06401-21-FM, November 2006, p. 11, 26 of Notes to the Financial 
Statements) (emphasis added).  This is virtually identical to the net present value formula called for by the U.S. 
Federal Credit Reform Act.  Exhibit Bra-656 (2 U.S.C. 661 a(5)(C)) ("The cost of a lo an guarantee shall be the 
net present value, at the time when the guaranteed loan is disbursed, of the following estimated cash flows:  
(i) payments by the Government to cover defaults and delinquencies, interest subsidies, or other payments;  and 
(ii) payments to the Government including originatio n and other fees, penalties and recoveries . . .").   
442 U.S. 2 April answer to question 108, para. 268. 
443 U.S. 2 April answer to question 108, para. 277, citing  Panel Report, U.S. – Upland Cotton , 
para. 7.855. WT/DS267/RW  
Page D-516  
 
outflow or other sacrifice of resources as a result of past transactions or events."  We observe that these amounts are not actual losses.  They are but another indicator, used and relied upon by the United States government, to assess the estimated long-term cost to the United States government of export credit guarantees.  They are consistently positive, indicating to us that the CCC believes, based upon its own 
assessment, that it may not, even over the l ong term, be able to operate the export 
credit guarantee programmes without some net cost to government.
444 
300. In its response, the United States not only ask s the compliance Panel to revisit the original 
panel's adopted findings regarding what the credit guarantee liability figure represents, but further 
challenges the reliability of the credit guarantee liabi lity figure as a basis on which to make an item (j) 
assessment of long-term costs and losses, because it is a future-oriented assessment of long-term 
losses on a net present value basis rather than  an "actual" or "retrospective" loss.445  The United States 
made the same arguments during the original proceedings.446  The original panel and the Appellate 
Body rejected the U.S. arguments, and accepted a forward-looking approach to the assessment of the 
ECG programs under item (j).447 
 
301. These adopted findings should be followed by th e compliance Panel.  Prior adopted panel and 
Appellate Body reports create "legitimate expect ations" among WTO Members, and should be taken 
into account by panels when they are relevant to the resolution of a dispute.448  Further, where the 
issues before a panel are the same as those previous ly examined by the Appellate Body, it is "not only 
appropriate," but to "be expected," that the panel would follow the Appellate Body's earlier 
conclusions.449   
 302. With respect to compliance proceedings, in particular, the Appellate Body has stated that 
"Article 21.5 proceedings do not occur in isolation but are part of a ' continuum of events .'"
450  The 
Appellate Body observed that "doubts could arise about the objective nature  of an Article 21.5 panel's 
assessment if, on a specific issue, that panel were to deviate  from the reasoning in the original panel 
report in the absence of any change in the underlying evidence."451   
 303. Nothing about the way in which the credit gua rantee liability figure is defined in the CCC 
financial statements, or calculated, has changed from the original proceedings.
452  To find now that the 
                                                      
444 Panel Report, U.S. – Upland Cotton , para. 7.855 (footnotes omitted). 
445 U.S. 2 April answer to question 108, paras.  275-276. 
446 The United States appealed this specific element of  the original panel's analysis.  U.S. Appellant's 
Submission in U.S. – Upland  Cotton , paras. 407 and 410-413 (and note 419), available  at 
http://www.ustr.gov/assets/Trade_Agreements/Monitori ng_Enforcement/Dispute_Settlement/WTO/Dispute_Set
tlement_Listings/asset_upload_file938_5598.pdf .  For U.S. arguments before the original panel, see U.S. 
11 July 2003 First Written Submission, paras. 176-178 ;  U.S. 11 August 2003 Answers to Panel Questions, 
paras. 157, 159, 170 and 173;  U.S. 22 August 2003 Rebuttal Submission, paras. 161-162, 167, 171;  U.S. 
30 September 2003 Further Submission, para. 151;  U.S. 18 November 2003 Further Rebuttal Submission, paras. 196-199;  U.S. 22 December 2003 Answers to Panel Questions, paras. 86, 90, 91-95, 96-99, 100-101, 
103, 117-121 and U.S. 11 February 2004 Answers to Further Panel Questions, para. 21. 
447 Appellate Body Report, U.S. – Upland  Cotton , paras. 763-764 and Panel Report, U.S. – Upland  
Cotton , paras. 7.842-7.843.  See also Id., para. 7.835 ("[T]he item (j) analysis need not be a purely retrospective 
one …."). 
448 Appellate Body Report, U.S. – Softwood  Lumber  V, para. 111. 
449 Appellate Body Report, U.S. – OCTG  Sunset  Reviews , para. 188. 
450 Appellate Body Report, U.S. – Softwood  Lumber  IV (21.5), para. 103 (emphasis added) citing 
Appellate Body Report, Mexico  – Corn  Syrup  (21.5), para. 121.   See Brazil's First Written Submission, 
para. 28. 
451 Appellate Body Report, U.S. – Softwood  Lumber  VI (21.5), para. 103 (emphasis added). 
452 The United States' argument that the credit guarantee liability figure in the CCC financial statements 
includes only a "liability for which there is an offsetting balance sheet en try of an asset" does not represent a 
change to the definition or calculation of the credit guarantee liability figure  since the original proceedings.   WT/DS267/RW 
 Page D-517 
 
 
figure is unreliable would involve a significant departure from the findings in the original proceedings, with no valid basis for that change.  It  would also involve a violation of the principle of 
res judicata , because the reliability of the estimates has been definitively resolved for purposes of this 
dispute.  As noted by the panel in U.S. – Gambling (21.5) , "[a] re-assessment in a compliance 
proceeding of an issue that had already been ru led upon in an original proceeding in an adopted 
report, even with better arguments by the respondent but without a change relevant to the underlying 
facts in the intervening period, would run c ounter to the prompt settlement of disputes."
453  T h e  
United States is not entitled to re- litigate an issue that has been de finitively resolved for purposes of 
this dispute.  
 
 
                                                                                                                                                                    
 
Rather, it is simply a new argument by the United States, and one that, as addressed above, is belied by the very 
definition of "credit guarantee liability" included in CCC's financial statements and relied on by the original 
panel.  
453 Panel Report, U.S. – Gambling (21 .5), para. 6.53. WT/DS267/RW  
Page D-518  
 
ANNEX D-15 
 
UNITED STATES' COMMENTS ON THE RESPONSES  
OF BRAZIL TO THE PANEL'S SECOND SET  
OF QUESTIONS 
 
(24 April 2007) 
  
TABLE OF CONTENTS  
 
Page
 
 
TABLE OF EXHIBITS  520 
 
I. GENERAL COMMENTS REGARDING BRAZIL'S ANSWERS  521 
 
A. B RAZIL HAS NO BASIS TO CHALLENGE MEAS URES THAT WERE NEITHER ORIGINAL 
MEASURES SUBJECT TO ANY FINDING OF WTO- INCONSISTENCY OR 
DSB RECOMMENDATIONS AND RULINGS NOR ME ASURES TAKEN TO COMPLY WITH 
ANY RECOMMENDATIONS AND RULINGS   521 
 
1. Neither GSM 102 guarantees in respect of exports of pig meat and 
poultry meat nor Brazil's claims with respect to them are within the 
scope of this proceeding  521 
 
2. The marketing loan and counter-cyclical payment programs, 
payments made thereunder after MY  2002, and Brazil's claims in 
respect of those measures are outside the scope of this proceeding  523 
 
B. M ARKETING LOAN AND COUNTER -CYCLICAL PAYMENT PROGRAMS ARE NOT 
CAUSING ANY PRESENT SIGNIFICANT PRICE SUPPRESSION WITHIN THE MEANING OF 
ARTICLES  5(C) AND 6.3( C) OF THE SCM  AGREEMENT  526 
 
C T HE EFFECT OF THE MARKETING LOAN AND COUNTER -CYCLICAL PAYMENT 
PROGRAMS IS NOT ANY "PRESENT " INCREASE IN THE U.S.  SHARE OF THE WORLD 
MARKET FOR UPLAND COTTON WITHIN THE MEANING OF ARTICLES  5(C) AND 6.3( D) 
OF THE SCM A GREEMENT .  530 
 
D. N EITHER THE MARKETING LOAN AND COUNTER -CYCLICAL PAYMENT PROGRAMS – 
NOR ANY PAYMENTS THEREUNDER – ARE CAUSING A "THREAT " SIGNIFICANT PRICE 
SUPPRESSION UNDER ARTICLES 5(C) AND 6.3( C) OF THE SCM  AGREEMENT  531 
 
E. T HE UNITED STATES IS PROVIDING GSM  102 GUARANTEES IN RESPECT OF 
EXPORTS OF RICE AND UNSCHEDULED PRODUCTS CONSISTENTLY WITH 
ARTICLES  10.1  AND 8 OF THE AGREEMENT ON AGRICULTURE AND 3.1 AND 3.2 OF 
THE SCM  AGREEMENT  532 
II. SPECIFIC COMMENTS REGARDING BRAZIL'S ANSWERS  534 
 A. S
COPE OF THIS PROCEEDING  534 
  WT/DS267/RW 
 Page D-519 
 
 
B. C LAIMS OF BRAZIL REGARDING PRESENT SERIOUS PREJUDICE  537 
 
1. Significant price suppression - Article 6.3(c) of the SCM Agreement   537 
 
2. Increase in world market share - Article 6.3(d) of the SCM Agreement   558 
 
C.  C LAIM OF BRAZIL REGARDING THREAT OF SERIOUS PREJUDICE  560 
 
D. E XPORT CREDIT GUARANTEES  565 
 
1. Outstanding export credit guarantees  565 
 
2. Legal Bases for Brazil's export subsidies claims  566 
 
3. "Benefit" under Articles 1.1 and 3.1(a) of the SCM Agreement   567 
 4. Item (j) of the Illustrative List  
570 WT/DS267/RW  
Page D-520  
 
TABLE OF EXHIBITS 
 
 
Exhibit 
US- Title  
165 "China:  Cotton import quotas of 1.5mn tons to be issued," available at 
www.fibre2fashion.com  (April 24, 2007). 
166 U.S. Export Sales for Week Ending 4.12.2007, available at 
www.fas.usda.gov/export-sales/cottfax.htm  
167 U.S. Export Sales Weekly Export Performance Indicator for Week Ending 
4.12.2007, available at http://www.fas.usda.gov/esrquery/esrpi.aspx . 
168 NASS March 2007 Cotton Ginnings Report 
169 N.Y. Futures After Issuance of Planting Intentions Report  WT/DS267/RW 
 Page D-521 
 
 
1. In its answers to the second set of questions fro m the Panel, Brazil has reasserted many of the 
same unfounded arguments presented in its earlier submissions, which the United States has already 
addressed and rebutted.  Many of Brazil's answers to questions also repeat the same information.  The 
United States does not intend to resubmit all of the se U.S. arguments in response.  Rather, for the 
convenience of the Panel, the United States first offers one general comment regarding Brazil's 
answers to each major section of the Panel's questi ons.  The United States then proceeds to address 
those aspects of Brazil's answers that are either ne w or call for further comment.  Where possible, the 
United States refers the Panel to its prior submissi ons where Brazil's arguments have been addressed.   
 2. To the extent the United States does not address a particular answer or a particular aspect of 
an answer, this is not intended as – and should not  be understood to be – agreement with Brazil's 
position.  
I. GENERAL
 COMMENTS  REGARDING  BRAZIL'S  ANSWERS 
 
A. B RAZIL HAS NO BASIS TO CHALLENGE MEASURES THAT WERE NEITHER ORIGINAL MEASURES 
SUBJECT TO ANY FINDING OF WTO- INCONSISTENCY OR DSB  RECOMMENDATIONS AND 
RULINGS NOR MEASURES TAKEN TO COMPLY  WITH ANY RECOMMENDATIONS AND RULINGS1 
 
3. Brazil repeats in its answers to Questions 44 to  46 the incorrect argument that it is entitled to 
renew in this  "compliance" proceeding under Article 21.5 of the Understanding on Rules and 
Procedures Governing the Settlement of Disputes  ("DSU") claims against measures (a) that were 
never found to be WTO-inconsis tent and were never subject to any DSB recommendations and 
rulings;  and (b) that are not measures taken to  comply with any recommendations and rulings.2  
These measures include the GSM 102 export credit guarantees in respect of exports of pig meat and poultry meat.  They also include the marketing loan and counter-cyclical payment programs and 
payments made under the program in years beyond MY  1999-2002.  Brazil's arguments continue to be 
unavailing.  
1. Neither GSM 102 guarantees in respect of exports of pig meat and poultry meat 
nor Brazil's claims with respect to them are within the scope of this proceeding  
 
4. Brazil's assertion of an "entitlement" to ma ke a claim against GSM 102 guarantees in respect 
of exports of pig meat and poultry meat rests on two untenable grounds.  First, Brazil asserts 
erroneously that any changed measure may be challenged in  a compliance proceeding regardless of 
whether it was "taken to comply" with an y recommendations and rulings of the DSB.3  And, second, 
Brazil asserts that a complaining party may renew in a compliance proceeding any claims that were 
not "definitively resolved" in the original proceeding.4  Neither proposition finds support in the DSU. 
 5. Contrary to Brazil's assertions, the test of wh ether a measure is properly within the scope of 
an Article 21.5 compliance proceeding is not simp ly whether it has changed since the original 
proceeding.  That would effectively write out of Article 21.5 the requirement that the measure be "taken to comply" with the DSB's recommendations and rulings.  Rather, under the express terms of 
Article 21.5, the touchstone of what is and is not a "measure taken to comply with the 
                                                     
 
1 The United States does not submit comments regard ing Brazil's claims in respect of compliance in 
past periods as none of Brazil's answ ers to the second set of questions relate to that issue.  For the U.S. 
arguments in respect of those claims, the United States respectfully refers the Panel to the U.S. First Written 
Submission, paras. 49-56, U.S. Rebuttal Submission, paras. 64-71, U.S. Answers to Parts A-C of First Set of 
Panel Questions, paras. 45-46, U.S. Comments on Br azil's Answers to First Set of Panel Questions, 
paras. 104-111, and U.S. Answers to Sec ond Set of Panel Questions, paras. 54-61. 
2 See Brazil Answers to Second Set of Questions, paras. 1-35. 
3 See e.g.,  Brazil Answers to Second Set of Questions, para. 6, 34. 
4 See e.g.,  Brazil Answers to Second Set of Questions, para. 7. WT/DS267/RW  
Page D-522  
 
recommendations and rulings" of the DSB is – necessar ily – the DSB's recommendations and rulings.   
Where the DSB's recommendations and rulings di stinguish between different components of a 
measure or different measures, that distinction is determinative for purposes of the compliance proceeding as well. 
 
6. Here, the DSB's recommendations and rulings  clearly distinguish "export credit guarantees 
under the GSM 102, GSM 103 and SCGP e xport credit guarantee programmes . . . in respect of 
exports of upland cotton and other unschedul ed agricultural products supported under the 
programmes, and in respect of one scheduled product (rice) "5 from other export credit guarantees 
under those programs.  As Brazil's response to Ques tion 44 confirms, this distinction goes to which 
measures  were found to be WTO-inconsistent ( i.e., which measures the United States was obligated to 
bring into compliance with its obligations under Articles 10.1 and 8 of the Agreement on Agriculture  
and Articles 3.1(a) and 3.2 of the SCM Agreement ).  The question for this compliance Panel, then, is 
whether Brazil has demonstrated either that th e United States has (a) not brought those measures 
(export credit guarantees in respect of rice and unsche duled products) into conformity with the DSB's 
recommendations and rulings or (b) that those meas ures – as modified – are inconsistent with the 
provisions of the WTO Agreement cited by Brazil.6 
 
7. Brazil has attempted to obscure this distincti on by insisting variously that (a) the original 
panel's findings were made with resp ect to the GSM program as a whole7 and that guarantees 
thereunder are not even "measures" for purposes of WTO dispute settlement8, (b) that it is Brazil's 
claims  and not the measures challenged that are "product specific;"9 (c) that the United States has 
made changes across the entire GSM 102 program incl uding with respect to export credit guarantees 
in respect of exports of pig meat and poultry meat10, and (d) and that the GSM 102 program applies in 
                                                      
5 Upland Cotton (Panel) , para. 8.1(d) (emphasis added).  This is because the original panel found that 
Brazil had only made its case under Articles 10.1 and 8 of the Agreement on Agriculture  and Articles 3.1(a) 
and 3.2 of the SCM Agreement with respect to export credit guarantees provided in respect of exports of rice and 
unscheduled products. 
6 There can be no presumption that the U.S. measur es taken to comply are inconsistent with its WTO 
obligations;  the burden is on Brazil to prove inconsistency. 
7 As the United States has explained, this argument is inconsistent with Brazil's prior arguments and the 
original panel's resolution of Brazil's claims. See U.S. Comments on Brazil's Answ ers to First Set of Panel 
Questions, paras. 12-15.  This even contradicts Brazil's own clarification in its rebuttal submission that " Brazil 
does not assert that the GSM 102 program itself circumvents the United States' export subsidy commitments, 
within the meaning of Article 10.1 of the Agreement on Agriculture ."  Brazil Rebuttal Submission, para. 378 
(emphasis added). 
8 See, e.g.,  Brazil Responses to Panel Section A-C Questions, para. 29.  This argument is at odds with 
Brazil's arguments elsewhere that an a contrario  reading of item (j) would prevent a Member from challenging 
specific export credit guarantees ( i.e., as opposed to the export credit guarantee programs  generally).  See U.S. 
Comments on Brazil's Answers to First Set of Panel Questions, paras. 10-11.  If specific guarantees cannot even 
constitute "measures," as Brazil now asserts, Brazil's co mplaints about being able to make claims against 
specific guarantees would be entirely m oot.  Brazil's argument is also inconsistent with the clarification by the 
Appellate Body that a "measure" for purposes of WTO dispute settlement may encompass "[i]n principle, any 
act or omission attributable  to a WTO Member. . . ."  United States – Corrosion-Resistant Steel (AB) , para. 81. 
9 Calling Brazil's claims "product-sp ecific" does not change the fact that only particular guarantees – 
those provided in respect to the particular "product" at issue – are the subject of the claims.  Where those 
guarantees were not the subject of any DSB recommendati ons and rulings and are not measures taken to comply 
with any DSB recommendations and rulings – as in the case of the GSM 102 export credit guarantees in respect 
of exports of pig meat and poultry meat – there is no basis for a claim to be considered with respect to them in a 
DSU Article 21.5 proceeding.  See U.S. Comments on Brazil's Answers to First Set of Panel Questions, 
paras. 16. 
10 See e.g.,  Brazil Answers to Second Set of Panel Questions, para. 6.  As the panel in EC – Bed 
Linen (21.5)  recognized the mere fact that improvements have been made to more than just the original 
measures subject to findings of WTO-inconsistency and DSB recommendations and rulings does not render all 
changed measures "measures taken to comply."  See U.S. U.S. Answers to Second Set of Panel Questions, 
paras. 1-16 (discussing EC – Bed Linen (21.5) (Panel) , paras. 6.9-6.22)).  WT/DS267/RW 
 Page D-523 
 
 
the same way regardless of what products are involved.11  As the United States has explained12, 
however, not only are certain of these assertions wrong, they do not alter the conclusion that GSM 102 export credit guarantees in respect of exports of  pig meat and poultry meat are not within the 
scope of this proceeding.  
2. The marketing loan and counter-cyclical payment programs, payments made 
thereunder after MY 2002, and Brazil's claims in respect of those measures are 
outside the scope of this proceeding  
 
8. In its response to Question 45, Brazil conti nues to press the Panel impermissibly to expand 
the scope of this compliance proceeding to includ e claims against the marketing loan and counter-
cyclical payment programs and payments made thereunder in periods after MY 2002.  Brazil's 
arguments turn on its own pronouncements that the original panel did in fact find the Step 2, 
marketing loan, and counter-cyclical payment progr ams to be causing "present" serious prejudice and 
that it similarly found payments a llegedly "mandated" to be made thereunder in MY 2003-2007 to be 
causing "present" serious prejudice (though, of course, such payments had not even been made as of 
the time the matter was referred to the original panel).  These pronouncements are flatly contradicted 
by the facts and the express language of the original panel report.  9. Brazil's approach in Question 45 – as it has been throughout this proceeding – consists of 
cherry-picking individual sentences of the panel report and imposing upon them a strained reading 
that is neither supported by the context nor consiste nt with the most basic principles of WTO dispute 
settlement (e.g., that a panel cannot make the claim for a complaining party, let alone make claims 
never presented by a complaining party).  As the Un ited States has explained, there is no merit to 
these arguments.
13 
 
10. In fact, it is remarkable that, in its resp onse to Question 45 from the Panel, Brazil accuses the 
United States of "mischaracteriz[ing] the or iginal panel's findings from beginning to end."14  Not only 
is this untrue, but the ir ony of the accusation is that Brazil has never even attempted to reconcile its 
arguments with the "original panel's findings from beginning to end."  So, for example, Brazil has 
never explained what legal basis this Pa nel has for ignoring the original panel's actual  conclusion on 
present serious prejudice: 
 
In conclusion, in light of all of these cons iderations, 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.15 
This conclusion on its face  contradicts Brazil's assertion that "the United States . . . wrongly 
assumes that 'U.S. subsidies' does not include the le gislative and regulatory pr ovisions – the subsidy 
                                                      
11 See e.g.,  Brazil Answers to Second Set of Panel Questions, para. 4.  Contrary to Brazil's assertions, 
the U.S. argument is not premised on the assumption "that different ECG measures apply to different products."  
Brazil Answers to Second Set of Panel Questions, para. 4.  As the United States has explained, this is irrelevant 
to the U.S. arguments. 
12 U.S. First Written Submission, paras.24-30, U.S. Rebuttal Submission, paras. 10-15, U.S. Answers to 
Parts A-C of First Set of Panel Questions, paras. 17-2 6, U.S. Comments on Brazil's Answers to First Set of 
Panel Questions, paras. 8-44, and U.S. Answers to Second Set of Panel Questions, paras. 1-16 and 42-48.  
13 U.S. First Written Submission, paras. 31-48, U.S. Rebuttal Submission, paras. 16-63, U.S. Answers 
to Parts A-C of First Set of Panel Questions, paras. 27 -44, U.S. Comments on Brazil' s Answers to First Set of 
Panel Questions, paras. 45-103, and U.S. Answers to Second Set of Panel Questions, paras. 17-41. 
14 Brazil Answers to Second Set of Panel Questions, para. 12. 
15 Upland Cotton (Panel) , para. 7.1416. WT/DS267/RW  
Page D-524  
 
programs – mandating the subsidy payments."
16  The language confirms that  the United States has not 
assumed  – let alone wrongly  assumed – what the "U.S. subsidies" are, as Brazil charges. 
 11. To the contrary, as the original panel clearly st ates, the "United States subsidies at issue"  . . . 
[are] marketing loan programme payments , user marketing (Step 2) payments , MLA payments , and. . . 
CCP payments ."  There is no other way to understand th e language in between the dashes in the 
conclusion or the fact that the original panel u ses the introductory phrase "that is" – a phrase used for 
clarification of what a term means – to explain that the "subsidies at issue" are marketing loan 
programme payments , user marketing (Step 2) payments , MLA payments , and counter-cyclical 
payments .  Brazil has never reconciled its theory – that  the "subsidies at issue" include the programs 
providing for these payments – with this language or with the scores of other clear indications by the 
original panel that the subsidies subject to its "p resent" serious prejudice examination were payments 
made in MY 1999-2002 under, inter alia , the Step 2, marketing loan, and counter-cyclical payment 
program.  
12. Nor has Brazil offered any credible explanation for: 
 
• How the original panel could have made a finding of present  serious prejudice against 
either the Step 2, marketing loan, and counter-cyclical payment programs or payments allegedly "mandated" to be made th ereunder in MY 2003-2007 when it did not 
recognize Brazil as even presenting a claim  of "present" serious prejudice with respect 
to either group of measures.
17 
 
• Why the original panel identifie d only "user marketing (Step 2) payments to domestic 
users and exporters;  marketing loan programme payments ;  PFC payments ;  
MLA payments ;  DP payments ;  CCP payments ;  crop insurance payments ;  and 
cottonseed payments "18 as the "challenged measures" that were alleged to be the 
"subsidies" for purposes of Brazil's "present" serious prejudice claim.  The panel only found that those measures constituted subs idies within the meaning of Articles 1 
and 2 of the SCM Agreement .
19  The panel did not conduct any assessment as to 
whether the statutory/regulatory provisions authorizing these payments were also "subsidies." 
 
• How the original panel could have made findings of WTO-inconsistency with respect 
to the Step 2, marketing loan, and count er-cyclical payment programs or future 
payments allegedly "mandated" to be made under the programs without addressing 
the extensive arguments that the parties ma de, and without making any of the factual 
                                                      
16 Brazil Answers to Second Set of Panel Questions, para. 13. 
17 The United States recalls  that the panel set out th e claims presented by Brazil as follows:  (a) claims 
of "present" serious prejudice with respect to "U.S. subsidies provided during MY 1999-2002";  (b) claims of 
threat of serious prejudice with respect to "U.S. subsidies mandated to be provided in MY 2003-2007;" and (c) per se  claims of threat of serious prejudice against "sel ected provisions of the FSRI Act of 2002 and the ARP 
Act of 2000" providing for these subsidies, to the extent relevant to upland cotton, and their implementing 
regulations.  Upland Cotton (Panel) , para. 3.1(vi) – 3.1(viii).  The original panel did not identify a "present" 
serious prejudice claim under Article 5(c) and 6.3(c) of the SCM Agreement as one of the claims "concerning 
selected provisions of the FSRI Act of 2002 and the ARP Act of 2000."  Nor did the original panel identify "selected provisions of the FSRI Act of 2002 and the ARP Act of 2000" as part of the measures subject to 
Brazil's claims of "present" serious prejudice under Articles 5(c) and 6.3(c) of the SCM Agreement . 
18 Upland Cotton (Panel) , para. 7.1120.  The original panel ultimately found that these constituted 
"subsidies" within the meaning of Article 1 of the SCM Agreement because they were "financial contributions" 
(mostly in the form of "grants") conferring a "benefit."  Upland Cotton (Panel) , paras. 7.1112-7.1120. 
19 Upland Cotton (Panel) , para. 7.1112-7.1120.  WT/DS267/RW 
 Page D-525 
 
 
findings that Brazil conceded would be necessary to support an affirmative finding of 
WTO-inconsistency in respect of those measures.20 
 13. And Brazil has not addressed the other clear text ual signals that – consistent with the claims 
presented to it – the original panel's findings of "p resent" serious prejudice were made with respect to 
payments made in MY 1999-2002.  This includes: 
 
• The fact that the original panel's prohibited subsidy-related conclusions and 
recommendations regarding the Step 2 program, as such , expressly refer to 
"section 1207(a) of the FSRI Act of 2002 pr oviding for user marketing (Step 2) 
payments to exporters of upland cotton"21 and "section 1207(a) of the FSRI Act of 
2002 providing for user marketing (Step 2) payments to domestic users of upland 
cotton."22  If the conclusions regarding "present" serious prejudice in 
paragraphs 8.3(d) and 8.1(g)(i) of the origin al panel report also pertained to the Step 2 
program, as such , together with the marketing loan program and counter-cyclical 
payment program, the panel would certainly have included the same specific kind of 
reference, rather than a reference to "user marketing (Step 2) payments. ." 
 
• The fact that in Section VII:D of the Pa nel Report, dealing with the evaluation of 
domestic support measures under Article 13 of the Agreement on Agriculture , the 
original panel expressly stated that, "[i]n this Section of our report, the Panel will 
consider the current programmes 'as applie d' and 'as such' together.  Therefore, 
references to marketing loan programme, u ser marketing (step 2), direct, counter-
cyclical and crop insurance 'payments' include the legislative and regulatory 
provisions authorizing those payments unless otherwise indicated."23  N o  s i m i l a r  
statement can be found in Section VII:G, which is the section including the original 
panel's analysis of the effects of the subsid ies alleged to be causing serious prejudice.  
In fact, the original panel in Section VII:G clearly distinguishes payments from 
provisions providing for those payments.  Nor is there any similar statement made in connection with the recommendation in para graph 8.3(d) of the panel report (or 
paragraph 8.1(g)(i), which contains the conclusion on actionable subsidies to which 
the recommendation relates). 
 
• The panel's clarification that it was not precluded from considering whether 
production flexibility contract and market loss assistance payments  were causing 
"present" serious prejudice even though th e legislative and re gulatory provisions 
authorizing those payments had expired ev en before Brazil made its request for 
                                                      
20 For example, Brazil conceded in th e original proceeding that "[i]t is established under WTO law that 
a Member can only challenge measures of another Member per se  if such measures mandate a violation of the 
WTO Agreement."  Brazil First Submission in Original Panel Proceeding, para. 244 (citing US – 1916 Act (AB) , 
para. 88).  Thus, in the case of its cl aims against the ch allenged programs, per se , Brazil asked the Panel "to find 
that the mandatory provisions of the 2002 FSRI Act and the 2000 ARP Act together with their implementing regulations, as listed above, cannot be applied in a WTO consistent manner ."  Brazil's 9 September 2003 Further 
Submission, para. 435-436.  Explaining what this would mean in the context of this dispute, Brazil argued 
"[f]irst, the Panel needs to evaluate whether the U.S. subsidies will necessarily threaten  to cause serious 
prejudice at price levels below the trigger prices of the U.S. subsidies.  Second, the Panel needs to consider 
whether the U.S. subsidies thr eaten to cause serious prejudice even at price levels at which only crop insurance 
subsidies and direct payments are made ."  Brazil's September 9, 2003 Furt her Submission, para. 426 (emphasis 
added).  The Panel neither conducted the requested evaluations, nor made any findings along the lines requested 
by Brazil. 
21 See Upland Cotton (Panel) , paras. 8.3(b) and 8.1(e). 
22 See Upland Cotton (Panel) , paras. 8.3(c) and 8.1(f). 
23 Upland Cotton (Panel) , para. 7.337(ix), n. 466. WT/DS267/RW  
Page D-526  
 
consultations.
24  If the original panel's findings w ith respect to "payments" – and the 
DSB's recommendations and rulings on the b asis thereof – were to be understood to 
automatically refer also to the programs au thorizing those payments, as Brazil urges, 
the recommendation with respect to "MLA payments" in the panel's "present" serious prejudice conclusion would necessarily be a recommendation also with respect to the 
"MLA program" as such (an expired measure).  This would be inconsistent with the 
original panel's express clarification that it was not making any findings of WTO-inconsistency or any recommendations and ru lings with respect to expired programs, 
as such
25 as well as with the Appellate Body's subsequent clarification that "there [is] 
an obvious inconsistency" between a findi ng that a measure has expired and a 
"subsequent recommendation that the . . . DS B request the United States to bring the 
[expired measure] into conformity with its WTO obligations."26 
 14. In short, Brazil has not – and cannot – reconcile  its own arguments to the "the original panel's 
findings from beginning to end."
27  Brazil's does not offer any cohere nt interpretation of the original 
panel report that addresses and takes into account all of  the facts discussed above and in the prior U.S. 
submissions.  Simply ignoring the facts or making accusations that the United States is "mischaracteriz[ing] them" does not allow Brazil to overcome that fatal deficiency.  It remains, 
therefore, that Brazil's claims against the marketing loan and counter-cyclical payment programs and any payments made under the programs post-MY 200 2 are outside the scope of this proceeding. 
 
B. M
ARKETING LOAN AND COUNTER -CYCLICAL PAYMENT PROGRAMS ARE NOT CAUSING ANY 
PRESENT "SIGNIFICANT " PRICE SUPPRESSION  WITHIN THE MEANING OF ARTICLES 5(C) 
AND 6.3( C) OF THE SCM  AGREEMENT  
 
15. For the reasons set out above and in the prio r U.S. submissions, Brazil's claims of "present" 
serious prejudice under Articles 5(c) and 6.3(c) of the SCM Agreement against the marketing loan and 
counter-cyclical payment programs and/or any presen t payments thereunder are not within the scope 
of this proceeding.  Were they to have been w ithin the scope, they would nonetheless fail because 
they are bereft of a basis in the facts.  16. Indeed, a substantial part of Brazil's res ponses to the Panel's Questions 51 and 62-74 are 
devoted to attempts to explain away this failing.  Brazil complains, on the one hand, that it should not 
be required to provide "direct evidence of what  would actually happen to U.S. acreage, production, 
exports, and world prices"
28 without marketing loan and counter-cyclical payments and it complains, 
on the other, that the United States has "ignore[d] the hundreds of exhibits and circumstantial evidence presented by Brazil."
29  Both assertions are baseless.   
 
17. Brazil – as the complaining party – bears the burden of proving its claims with evidence and arguments that actually support the claim for which they are offered .  It has not done so.  Further, in 
observing this, the United States has not "ignored" any argument or exhibit submitted by Brazil.  To the contrary, the United States has painstakingly ex amined and addressed – over the course of two 
written submission, the presentation before the Panel,  three set of responses to questions from the 
                                                     
 
24 Upland Cotton (Panel) , para. 7.108 ("The Panel notes that Brazil pursues claims only in respect of 
the subsidies and domestic support provided under the expi red programmes and authorizing legislation, in other 
words, the payments themselves .  Brazil does not seek any relief in respect of the PFC and MLA programmes or 
authorizing legislation 'as such.' Therefore, the Panel on ly considers whether the payments are within its terms 
of reference.") (italics added). 
25 Upland Cotton (Panel) , para. 7.111. 
26 Upland Cotton (AB) , para. 272 (citing U.S. – Certain EC Products  (AB), paras. 81-82). 
27 Brazil Answers to Second Set of Panel Questions, para. 12. 
28 Brazil Answers to Second Set of Panel Questions, para. 91. 
29 Brazil Answers to Second Set of Panel Questions, para. 90.  WT/DS267/RW 
 Page D-527 
 
 
Panel, comments on Brazil's "oral" presentation to  the Panel, and now two sets of comments on 
answers – every argument made by Brazil and de monstrated that these do not, individually or 
collectively, support Brazil's claims of "significant" price suppression.30 
 18. Brazil's assertions about the removal of the St ep 2 program are unsubstantiated, internally 
contradictory, and inconsistent with arguments made by Brazil in the original proceeding:  Brazil's 
claims are premised on the assertion that removal of the Step 2 program has not removed the adverse effects of the package of payments found by the original panel to be causing "present" serious 
prejudice.  However, Brazil's assertions about th e effects of removing the Step 2 program are 
unsubstantiated, internally contradi ctory, inconsistent with arguments made by Brazil in the original 
proceeding, and contradicted by the empirical evidence.
31 
 19. Thus, for example, having proclaimed to the or iginal panel that "it is difficult to imagine how 
a subsidy could be more  of an export subsidy than the Step 2 export provisions" and that "[the 
program] plays an important role in stimulating and maintaining the present record high U.S. upland 
cotton world export market share,"
32 Brazil has no basis now to allege that "removal of the Step 2 
program does [not] result in any significan t or long-term reduction of U.S. exports."33  The United 
States notes the irony in Brazil's assertion here that  a "long-term" assessment of the effects of the 
removal of the Step 2 program is appropriate while in its analysis of the marketing loan and counter-
cyclical payment program it insists that "the assessment is necessarily of a short-term, not a long-term nature."
34  This is yet further evidence that Brazil's positions on such fundamental questions as the 
appropriate analysis under the SCM Agreement shift simply depending on its preferred outcome.  
Moreover, the United States notes that Brazil's a sserted bases for this assertion do not withstand 
scrutiny.   20. Indeed, while Brazil attempts to assert as ev idence a statement by a National Cotton Council 
("NCC") representative that in MY 2007, "NCC sees U. S. exports recovering to 16.22 million bales as 
foreign mill use increases," Brazil fails to quote for the Panel the statement immediately prior to this 
one in which the same representative notes that:    
the 2006 marketing year is the first of the post-Step 2 era, and the impact on exports has been evident. Through mid-January, e xport commitments of upland cotton totaled 
roughly 6 million bales. This time a year ago, total commitments had surpassed 
10 million bales.
35 
                                                      
30 In fact, if the United States were in fact "igno r[ing]" Brazil's arguments, one can only wonder why 
Brazil has repeatedly attempted over the course of this  proceeding to attempt to cut U.S. opportunities for 
response:  for example, arguing at the start of the proceeding that the United States should be given no more 
than two weeks to respond to Brazil's nearly 200-pa ge first written submission and;  arguing that the 
United States should not be permitted to address Brazil' s contingent "threat" claim in its rebuttal submission;  
arguing that the United States should be given no oppor tunity to respond to Brazil's unsolicited third written 
submission submitted under the guise of an "exhibit" to Brazil's "oral" presentation;  and in its latest attempt to 
obtain an unfair procedural advantage, arguing against the grant of any additional time for submission of these 
comments. 
31 The full U.S. arguments in this respect are set out  at U.S. First Written Submission, paras. 149-195, 
U.S. Rebuttal Submission, paras. 175-214, and U.S. Oral Statement, paras. 54-59. 
32 Brazil's Rebuttal Submission to the Panel Re garding the "Peace Clause" and Non-Peace Clause 
Related Claims," para. 128 (22 August 2003) (emphasis in original). 
33 Brazil Answers to Second Set of Panel Questions, para. 90. 
34 Brazil Answers to Second Set of Panel Questions, para. 131. 
35 "US Cotton Industry To Face Challenges In Global Market," 2006 AgWeb.com (Exhibit BRA-679). WT/DS267/RW  
Page D-528  
 
The United States recalls Brazil's assertion that in assessing the effects of payments "the 
views of their recipients constitute particularly relevant evidence."
36  Brazil would presumably attach 
similar importance to the NCC statement it neglected to cite. 
21. In any event, the possibility of an increase in the export volume in MY 2007 in absolute  terms 
does not change the analysis regarding the effects of removing the Step 2 program.  As the 
United States explained in its rebuttal submission37, such factors as China's import needs may have 
contributed in part to the decline in the level of U.S. exports as of August, 2006.  And as there are 
changes in those factors, there may well be effect s in the level of U.S. exports.  However, those 
factors do not account for the entire decline.  Thus, for example, primarily in connection with the pending release of import quota by China
38, there have been recent purchases of some 
795,800 running bales of U.S. cotton.39  This represents a marketing-year high.  Yet, even with these 
purchases, total export commitments, both sales and sh ipments, are 31% and 15% below last year's 
total and the 5-year average, respectively.40  The fact that U.S. export volume may recover somewhat 
in the future, thus, does not suggest that export leve ls would not have been even higher had the Step 2 
program been in effect. 
 
22. In the face of such empirical data at odds w ith its assertions (for purposes of this proceeding) 
about the alleged effects of eliminating the Step 2 program, Brazil urges the Panel, in its response to 
Question 74, to consider MY 2005 – a year in which Step 2 payments were still in effect  – as the 
relevant period for purposes of its analysis of th e effects of removal of the Step 2 program.  
Presumably, the Panel would then have to accept Br azil's assertions (for purposes of this proceeding) 
about what the effects of that program would or woul d not have been in that year rather than relying 
on the actual evidence thereof.  Neither this sugg estion by Brazil nor its unsubstantiated assertions 
about the effects of removing the Step 2 program may be credited.  23. Brazil does not show that marketing loan and counter-cyclical payments cause "present" 
serious prejudice:  Citing the original panel, Brazil argues that  "an examination of the 'effects'" of the 
challenged measures "cannot be conducted in the abstract."
41  Yet, in support of its claims, Brazil 
repeatedly suggests that, even without consideri ng the existing market c onditions (or conducting any 
assessment of what these were lik ely to be) the original panel somehow found marketing loan and 
counter-cyclical payments to be causing significant suppression of world market prices today.42  
Similarly, it makes generic assertions about impacts on wealth and risk aversion that – if credited – 
would effectively preclude any payment to farmers no matter what their form and no matter how 
minimal their impact on planting, production, exports, and prices.43 
 24. Brazil's claim cannot properly rest on these bases.  For one, the original panel did not find that marketing loan and counter-cyclical payment programs caused significant price suppression in 
MY 1999-2002.  Therefore, Brazil is incorrect to assert – in response to Question 69, for example – 
that it could prove significant price suppression in this proceeding merely by asserting
44 that payments 
were made under those programs over the course of the FSRI Act and that "[t]he world market for 
                                                      
36 Brazil Answers to Second Set of Panel Questions, para. 48. 
37 U.S. Rebuttal Submission, paras. 206-213. 
38 "China:  Cotton import quotas of 1.5mn tons to be issued," available at www.fibre2fashion.com  
(April 24, 2007) (Exhibit US-165). 
39 U.S. Export Sales for Week Ending 4.12.2007, available at www.fas.usda.gov/export-sales/cottfax.htm  
(Exhibit US-166). 
40 U.S. Export Sales Weekly Export Performance Indicator for Week Ending 4.12.2007, available at 
http://www.fas.usda.gov/esrquery/esrpi.aspx  (Exhibit US-167). 
41 Brazil Answers to Second Set of Panel Questions, para. 10 (citing Upland Cotton (Panel) , para. 10). 
42 See e.g.,  Brazil Answers to Second Set of Panel Questions, paras. 45, 53-55, 94, 99. 
43 See e.g.,  Brazil Answers to Second Set of Panel Questions, paras. 49, 55, 94. 
44 These are assertions by Brazil, not  "undisputed facts," as it has stat ed.  Brazil Answers to Second Set 
of Panel Questions, para. 95.  WT/DS267/RW 
 Page D-529 
 
 
upland cotton identified by the original panel still f unctions on the same basis as found by the original 
panel."45  The original panel's finding of "present" serious prejudice related to the effects of an 
entirely different set of measures ( payments  not only under the marketi ng loan and counter-cyclical 
payment programs but also under the Step 2 pr ogram) made in a different time period (MY 1999-
2002) and under substantially different market cond itions.  There have been many changes since that 
time.  These include not only the removal of the Step 2 program but many other factors, for example 
production-related technological changes that have had dramatic effects on the cost structure of U.S. 
upland cotton farming (as well as farmers in other c ountries, such as India) and shifts in patterns of 
world trade in upland cotton – shifts that are so significant that even the basis for Brazil's asserted 
"world market price" (the A-Index) has had to be changed (from a Northern Europe basket of quotes 
to a Far Eastern basket of quotes). 
 
25. The original panel did not – and could not – have taken these factors into account in assessing 
the "present" effects of the different package of meas ures at issue in the original proceeding.  And, in 
fact, it is precisely because the original panel could not predict what these changes might be (for 
example, if the United States were to modify the statutory and regulatory provisions providing for 
Step 2, marketing loan, or counter-cyclical payments  in order to implement the Panel's findings), or 
foresee what effect the challenged measures might have under such changed factual circumstances, 
that it declined to make any "threat" finding against either future payments or the marketing loan and 
counter-cyclical payment programs as such. 
 
26. In addition, as explained in the U.S. comme nts regarding Question 62, Brazil's attempts to 
indict support to agricultural producers simply on the basis it contributes to the "wealth" of producers 
and may render them less "risk averse" in their produ ction decisions cannot be credited.  If Members 
had agreed that no domestic support could be provided to agricultural producers, the Agreement on 
Agriculture  could have been a great deal shorter.  The drafters could simply either have inserted one 
provision either in that agreement or the SCM Agreement stating that "no Member shall provide 
payments to any producer of any commodity" as this, inevitably , contributes to the "wealth" of the 
producer and, as such, may also render him less risk  averse.  No such provision exists in either 
agreement because Members have not  agreed to such a prohibition.46 
 
27. What the United States finds instead is clear recognition in the Agreement on Agriculture  and 
SCM Agreement that domestic support to producers of a commodity may have effects that lie 
anywhere in a range from "no or at most minimal, tr ade-distorting effects" to more substantial effects 
that may implicate the reduction commitment obligations in the Agreement on Agriculture  but are not 
of the type to render the domestic s upport an "actionable subsidy" under the SCM Agreement , to the 
kinds of serious effects on trade identified under Articles 5 and 6 of the SCM Agreement .  It is only 
the latter – "adverse effects" to the interests of another Member – that are disciplined under the 
SCM Agreement.   Whether or not a Member may challenge  a measure under the SCM Agreement has 
no bearing on whether it can establish a breach of Ar ticles 5(c) and 6.3(c).  It can only do the latter 
where it proves that "the effect" of a measure found to be a "subsidy" is " significant price 
suppression" within the meaning of Article 5(c) and 6.3(c) of the SCM Agreement . 
 
28. As the United States has demonstrated47, none of the allegedly "abundant and diverse 
evidence" that Brazil asserts in its answers to questions or any of its prior submissions proves that this 
                                                      
45 Brazil Answers to Second Set of Panel Questions, para. 94. 
46 To the contrary, there is one agriculture -specific actionable subsidy provision in the SCM Agreement 
– Article 6.3(d) of the SCM Agreement – and that falls far short of a blanket prohibition on any subsidy that 
increases producer wealth and re nders them less risk averse. 
47 U.S. First Written Submission, paras. 203-331 and Annex I;  U.S. Rebuttal Submission, paras. 215-
404 and Annex I;  U.S. Answers to Parts A-C of First Set of Panel Questions, paras. 27-44;  U.S. Oral Statement, paras. 50-85 and Statement of Dr. Joseph W. Glauber;  U.S. Answers to Parts D-E of First Set of 
Panel Questions, paras. 14-42;  U.S. Comments on Brazil's "Oral" Presentation, paras. 34-91 and Annex I, and 
U.S. Answers to Second Set of Panel Questions, paras. 1-4, and 62-170. WT/DS267/RW  
Page D-530  
 
is "the effect" of the marketing loan and counter-c yclical payments.  What the substantial evidence 
shows, instead, is that any effects of marketing loan and counter-cyclical payments on U.S. planting, 
production, exports or world market prices of upla nd cotton are minimal and not subject to discipline 
under Articles 5 and 6 of the SCM Agreement . 
 
C. T
HE EFFECT OF THE MARKETING LOAN AND COUNTER -CYCLICAL PAYMENT PROGRAMS IS NOT 
ANY "PRESENT " INCREASE IN THE U.S.  SHARE OF THE WORLD MARKET FOR UPLAND COTTON 
WITHIN THE MEANING OF ARTICLES 5(C) AND 6.3( D) OF THE SCM  AGREEMENT  
 
29. Even though Brazil has admitted that "U.S. share  of world production . . . stayed relatively 
stable" over the entire period that th e FSRI Act has been in effect ( i.e., MY 2002-2005), Brazil has 
attempted in this proceeding to assert a breach of Articles 5(c) and 6.3(d) of the SCM Agreement on 
the basis of a slight (0.46 percent) up-tick in the U.S. share of the world market in MY 2005 over the 
average for MY 2002-2004.48  The evidence on the record show s clearly that this increase in 
MY 2005 is part of the ordinary fluctuations in U.S. share of world supply49 and is directly 
attributable to such factors as a sudden shift in acreage from soybeans in certain regions of the United 
States due to concerns about an outbreak of Asian soybean rust at the end of MY 2004.50  Thus, 
Brazil's claim fails – at the outset – because Braz il cannot establish any causal connection between the 
challenged measures and the slight increase in U.S. world market share in MY 2005 ( i.e., it cannot 
prove the first of the two elements under Article 6.3( d), that "the effect" of the U.S. marketing loan 
and counter-cyclical payment programs "is an increase in the world market share" of the United States 
"as compared to the average share it had durin g the previous period of three years.") 
 30. But Brazil's claim also fails on a second basis – namely, Brazil's failure to establish that "this 
increase" – i.e., the "increase in the world market share of the subsidizing Member . . . as compared to 
the average share it had during the previous period of  three years" – "follows a consistent trend over a 
period when subsidies have been granted."  Th is safeguard precludes complaining parties from 
establishing a breach under precisely the kind of factual circumstances before this Panel – where an increase in one year is clearly part of the normal fluctuation of world market share and attributable to any number of factors other than subsidies.  As the United States showed in its first written submission and again in its rebuttal submission
51, the slight increase in U.S. market share above the 
previous three-year average has not followed a "consistent trend over a period when subsidies have 
been granted."  To the contrary, over the entire pe riod that the FSRI Act of 2002 has been in effect 
there were only one year in which this happened – MY 2005.52 
 31. To try to escape this key flaw in its claim, Brazil urges the Panel to adopt an end-point to 
end-point comparison using, as the starting point, MY 1998, a year before the entry into force of the 
                                                     
 
48 Brazil First Written Submission, paras. 222 and 224.  Th is is the figure if one looks at U.S. share of 
world production plus beginning stocks.  If one looks at U.S. share of world production, there was a similarly 
small increase (of 1.53 percent) ov er the average for MY 2002-2004. 
49 See U.S. First Written Submission, paras 332-343. 
50 See U.S. Comments on Brazil's "Oral" Presentation, paras. 70-72. 
51 The United States notes in this regard that Brazil devotes much effort in its answers to 
Questions 76-77 to attempting to characterize the U.S. in terpretation of Article 6.3(d)  as a "new" interpretation 
not previously presented.  This is inexplicable given th at in the U.S. first written submission, the United States 
clearly examined whether the U.S. world market share was higher than the average share of the previous 3-year 
period for each year in the periods MY 1996-2006, MY 1980-2006, and 1960-1996.  This is the exact same 
examination conducted by the United States in its rebuttal submission.  Indeed, Brazil appears to be confusing two separate issues – (a) the question of normal fluctuatio ns in market share, which relates to the question of 
causation and whether in any particular year it is the cha llenged measures that are "causing" an increase over the 
previous three-year average and (b) the question of a "consistent trend" under  the second element of 
Article 6.3(d). 
52 This is true if one looks at world production.  If one looks at world production plus beginning stocks, 
U.S. share of world supply would have been higher th an the previous three-year average also in MY 2002.  WT/DS267/RW 
 Page D-531 
 
 
FSRI Act of 2002 and one in which counter-cyclical payments were not even in existence.  The 
reasons for Brazil approach are patently obvi ous – MY 1998 was a disastrous year for U.S. 
production, in which, as a result of severe drought U.S. abandonment rates skyrocketed and harvested 
area fell more than 2,000,000 acres compared to the previous year.  U.S. production that marketing year was the lowest in almost a decade, by more than 1,500,000 bales, and lower than any marketing 
year since by more than 3,000,000 bales.  By contrast, growers in the rest of the world, unaffected by 
the drought, increased harvested area about 100,000 acres.   As a result, U.S. share of the world market 
was at an extremely low point in MY 1998.  By selecting this year as the starting point of its "representative period,"
53 and drawing a line from this to the U.S. share of production in MY 2005 – 
one which would inevitably  slant upwards – Brazil asserts that it has met its burden of showing that 
"this increase follows a consistent trend over a period when subsidies have been granted" under 
Article 6.3(d) of the SCM Agreement .  Brazil is wrong.  As the United States explains in its comments 
regarding Question 76,  Brazil's argument is prem ised on a fundamentally flawed interpretation of 
Article 6.3(d) of the SCM Agreement .   That interpretation would – if  adopted – effectively write out 
of Article 6.3(d) of the SCM Agreement both the reference to "this" increase and to a "consistent" 
trend.  As Brazil fails to establish either of the two elements required under Article 6.3(d), it fails to 
make any prima facie  of breach of that provision. 
 D. N
EITHER THE MARKETING LOAN AND COUNTER -CYCLICAL PAYMENT PROGRAMS – NOR ANY 
PAYMENTS THEREUNDER – ARE CAUSING A "THREAT " SIGNIFICANT PRICE SUPPRESSION 
UNDER ARTICLES 5(C) AND 6.3( C) OF THE SCM  AGREEMENT  
 
32. There are two fundamental flaws in Brazil's claims of "threat of" significant price suppression under Articles 5(c) and 6.3(c) of the SCM Agreement .  The first is that Brazil's claim is premised upon 
a legally incorrect interpretation of "threat of" signi ficant price suppression.  The second is that Brazil 
has not established as a factual matter that there is a "threat of" significant price suppression as a 
result of either the marketing loan and counter-cyc lical payments programs or any payments under the 
programs.  Brazil's answers to the Panel's questions re garding "threat" focus mostly on the first issue.   
 33. In its response to Questions 86-88, Brazil ur ges the Panel to replace the term "threat" in 
footnote 13 of the SCM Agreement with "significant likelihood," a standard that Brazil admits is "not 
found in the SCM Agreement or any other WTO Agreement."
54  Indeed, the only basis that Brazil has 
ever asserted for grafting a "significant likelihood" standard that drafters did not agree upon into 
footnote 13 is that "the precedent interpreting the terms 'threat' and 'threaten' suggests that the 
appropriate standard of threat in Part III [of the SCM Agreement ] is one in which there is a significant 
likelihood, based on the nature of subsidies and pa rticular conditions of competition, that serious 
prejudice will occur in the future."55  As the United States pointed out in its rebuttal submission, 
however, even leaving aside that there is no basis to  attempt to interpret a treaty in accordance with 
"precedent" rather than "in accordan ce with customary rules of interpretation of public international 
law,"56 Brazil cannot even identify any "precedent" that  "suggests" that the appropriate standard for 
"threat" of serious prejudice is "a significant likelihood."57  
 34. Brazil's proposed "significant likelihood" standa rd injects an entirely new term into the text 
that (a) is not used by the drafte rs either in Article 5(c) of the SCM Agreement or elsewhere to define 
"threat," (b) ignores entirely a critical aspect of the ordinary meaning of the "threat," (proximity in 
time) and (c) itself requires interpretation (e.g., what is a "significant" likelihood of serious prejudice).  
Brazil has provided no basis whatsoever for writing "significant likelihood" into footnote 13 of the SCM Agreement .  And, indeed, to do so would contravene  the express provisions of Article 3.2 of the 
                                                     
 
53 Brazil First Written Submission, para. 227. 
54 Brazil Answers to Second Set of Panel Questions, para. 182. 
55 Brazil First Submission, para. 253. 
56 DSU Article 3.2. 
57 U.S. Rebuttal Submission, para. 413. WT/DS267/RW  
Page D-532  
 
DSU, which provides that "[the dispute settlement system of the WTO] serves . . . to clarify the 
existing provisions of those agreements in accordanc e with customary rules of interpretation of public 
international law ." 
 35. Brazil has also failed to establish an empiri cal basis for a finding of "threat" of serious 
prejudice.  To the contrary, Brazil is asking the Pane l to find that there is such a "threat" even though 
the evidence shows:  
• an expected decline in U.S. planted acrea ge of more than 20 percent in MY 200758;   
 
• an expected decline of 11 percent in U.S. production59 in MY 2006 from year-before 
levels that is expected to continue on into MY 200760  
 
• an expected decline in U.S. share of world production in MY 200761;   
 
• a 31 percent decline in U.S. exports goi ng into the end of MY 2006 (compared to 
MY 2005 levels)62; 
 
• that U.S. producers are likely to cover thei r variable, or operating, costs as well as a 
large share of their total cost s in MY 2007 (even looking at the inflated "total costs" 
that Brazil has attempted to use repeatedly in this proceeding).63 
 
• that marketing loan payments are likely to  be small (at most 2 cents/lb) in MY 2007 
and counter-cyclical payments – which are pa id regardless of what is planted – are 
likely to remain at effectively "fixed" levels64;  and 
 
• the FSRI Act of 2002 is scheduled to expire  in October of 2007 meaning that there 
will be no further payments thereunder as of MY 2008.  
 
There is no basis for a finding of "threat" of serious prejudice under these circumstances. 
 E. T
HE UNITED STATES IS PROVIDING GSM  102 GUARANTEES IN RESPECT OF EXPORTS OF RICE 
AND UNSCHEDULED PRODUCTS CONSISTENTLY WITH ARTICLES 10.1  AND 8 OF THE 
AGREEMENT ON AGRICULTURE  AND 3.1 AND 3.2 OF THE SCM  AGREEMENT  
 36. In its responses to the Panel's questions – in cluding Questions 92, 95, 100 – Brazil continues 
to urge the Panel to ignore the provisions of the SCM Agreement expressly setting out the conditions 
under which export credit guarantees may be found to be export subsidi es and to make a finding that 
the provision of GSM 102 guarantees is prohibited simply because the fees under that program are 
allegedly lower than those charged by Ex-Im Bank for it Letter of Credit Insurance for Banks ("LCI") 
                                                     
 
58 See U.S. Answers to Second Set of Panel Questions, paras. 1-4 (discussing NASS Prospective 
Plantings Report (March 30, 2007) (Exhibit US-140)). 
59 Indeed, just last month, USDA lowered expected production levels for MY 2007 even further.  
According to NASS, the MY 2007 U.S. upland cotton crop is now forecast at 20.8 million bales – down from 
the 21.3 million bales forecast in December 2006 – and approximately 11 percent below MY 2005 levels.  
NASS March 2007 Cotton Ginnings Report (Exhibit US-168). 
60 U.S. Export Sales Weekly Export Performance Indicator for Week Ending 4.12.2007, available at 
http://www.fas.usda.gov/esrquery/esrpi.aspx  (Exhibit US-167). 
61 Cotton This Month, ICAC, p. 4 (February 1, 2007) (Exhibit US-107). 
62 U.S. Export Sales Weekly Export Performance Indicator for Week Ending 4.12.2007, available at 
http://www.fas.usda.gov/esrquery/esrpi.aspx  (Exhibit US-167). 
63 U.S. Rebuttal Submission, paras. 422-425. 
64 See U.S. Answers to Second Set of Panel Questions, paras. 196-199 (showing that both FAPRI and 
CBO project at most a 2 cents/lb ma rketing loan payment for MY 2007.  WT/DS267/RW 
 Page D-533 
 
 
and Medium-Term Export Credit Insurance ("MTI") products.  There is no support in the text or in logic for such a conclusion.  37. As the United States has explained, the drafters  expressly set out in item (j) of the Illustrative 
List the conditions under which e xport credit guarantees may be found to be export subsidies.  Brazil 
has not shown – and cannot show – that GSM 102 guarantees are provided "at premium rates which 
are inadequate to cover the long-te rm operating costs and losses of the" program.  The data show that 
– to the contrary – for cohorts 1992-2002, examined by the original panel, the negative subsidy net of reestimates ( i.e., profit) is now $926,331,216.  For all cohor ts 1992-2006, the negative subsidy net of 
reestimates ( i.e., profit) is $403,714,701.
65  These are the figures under th e U.S. government's credit 
reform accounting, which Brazil champione d in the original proceeding as:   
 
an ideal basis on which to determine whet her the CCC's export credit loan guarantee 
programs are offered at premium rates that are inadequate to cover the long-term operating costs and losses of the programs, within the meaning of item (j) of the 
Illustrative List of Export Subsidies.  It functions as a more sophisticated alternative 
to constructed cost formulas, and thoroughly accounts for all of the premium and operating cost and loss elements required by item (j).  Moreover, it has the virtue of 
serving as the actual, real-world calculation used by the U.S. Congress, the President 
of the United States, and federal agencies like the CCC to "measure more accurately the costs of Federal credit programs."
66 
38. Brazil has no basis for its arguments now – including in response to Question 114 – that the 
Panel should disregard this actual data and should use instead, Brazil constructed cost formula.  The 
"the actual, real-world calculation used by the U. S. Congress, the President of the United States, and 
federal agencies like the CCC to 'measure more accurately the costs of Federal credit programs'"67 
confirms that export credit guarantees under the GSM 102 program are being provided at premiums 
that are well above those that would be required simply  to "cover" long-term operating costs and 
losses.  Under the text of the SCM Agreement , the analysis begins and ends there.  There is no 
"separate" standard under Articles 1.1 and 3.1(a)  for when export cred it guarantees constitute an 
"export subsidy."    39. But even if item (j) did not exist, asserting that Ex-Im Bank charges higher fees for export 
credit guarantees than CCC does under the GSM 102 program would not establish any breach of 
Articles 1.1 and 3.1(a) of the SCM Agreement .  As Article 14(c) of the SCM Agreement makes clear
68, 
a loan guarantee provides a "benefit" recognized under Article 1.1 of the SCM Agreement only where 
it affects the underlying transaction – i.e., where it results in there being a "difference between the 
amount that the firm receiving the guarantee pays  on a loan guaranteed by the government and the 
amount that the firm would pay on a comparable commercial loan absent the government guarantee."  
This makes perfect sense.  Export credit guarantees have  no value in and of themselves;  they simply 
modify and relate to the underlying loan transaction.  It is only when they cause the underlying loan to be more attractive than loans otherwise available on  the market that there is a possibility of trade 
distortion ( i.e., making a particular purchase of U.S. goods more attractive than it would have been 
absent the guarantee).  The fee charged for a guarant ee is passed through by the U.S. exporter to the 
foreign purchaser and becomes part of the overall co st of the financing.  And it is only through the 
comparison of the total cost of loans guaranteed  by GSM 102 guarantees and comparable commercial 
                                                     
 
65 See U.S. Answers to Second Set of Panel Questions, paras. 277-278. 
66 Statement of Brazil - First (Original) Panel Meeting, para. 129 (22 July 2003). 
67 Statement of Brazil - First (Original) Panel Meeting, para. 129 (22 July 2003). 
68 Because it interprets and applies the definition of "b enefit" set out in Article 1.1, Article 14 has been 
relied upon by the Appellate Body as important contextual guidance in interpreting "benefit."  Canada – 
Aircraft (AB) , para. 155. WT/DS267/RW  
Page D-534  
 
loans not guaranteed by GSM 102 guarantees that  one can assess whether the GSM 102 guarantee 
actually rendered particular transactions more a ttractive than they otherwise would have been. 
 40. Brazil has not even attempted to make the ki nd of particularized showing contemplated under 
Article 14(c) of the SCM Agreement ;  it has not shown that the overall cost, including fees, of each of 
the loans guaranteed by the governme nt is less than overall cost of a comparable commercial loan that 
could be obtained without a government guarantee.  Instead, Brazil relies on sweeping and erroneous 
assertions that obligors on loans guaranteed under the GSM-102 program can never  obtain any other 
financing of any kind and that the United States could never  provide an export credit guarantee 
without also providing an export subsidy.  These ar guments simply do not s quare with the evidence 
submitted by the United States showing that such obli gors are in fact able to obtain financing even 
without GSM 102 guarantees and on terms better than those available with GSM 102 guarantees.  The 
declining level of use of the GSM 102 program in recent years is even further evidence of this. 
 41. Brazil's attempts to declare GSM 102 guarant ees export subsidies merely on a comparison to 
fees charged by Ex-Im Bank are contrary to the text and logic of Articles 1.1(a) , 14(c), and item (j) of 
the SCM Agreement .  As the United States has explained, Br azil has not established that the LCI and 
MTI products are even comparable to the GSM 102 guarantees provided by CCC.
69  But, regardless of 
this, the reasoning underlying Brazil's compar ison of these products is unavailing.   
 42. Brazil is effectively asking the Panel to assume  that the LCI and MTI products are themselves 
provided at "below market" rates even though Brazil has conducted no actual comparison vis-a-vis 
any other comparable product available on the mark et.  Following from this assumption, Brazil would 
have the Panel accept that, if the CCC charges lo wer fees than Ex-Im Bank, the fees for the GSM 102 
guarantees must also be "below market."  Br azil's approach is based on unfounded factual 
assumptions and on logic that is not found anywhere in the SCM Agreement .  Member did not agree 
that export credit guarantees could be found to be export subsidies simply if one government entity 
charges fees that are different or lower than anothe r government entity.  Brazil's efforts to establish a 
breach of Articles 1.1(a) and 3.1(a) of the SCM Agreement on that basis are unavailing. 
 
II. SPECIFIC COMMENTS REGARDING BRAZIL'S ANSWERS 
 
A. S
COPE OF THIS PROCEEDING  
 Questions to both parties 
 
 
44. The European Communities argues in resp ect of the preliminary objection raised 
by the United States regarding the claims  of Brazil relating to export credit 
guarantees for pig meat and poultry meat under the GSM 102 programme that "the important issue is the nexus or the degree of interrelatedness or interdependence between different elements of the measure."  (Oral Statement of the European Communities, para. 6)  The European Comm unities submits in this regard that:   
 
"the Panel should examine the original measure at issue and the 'measures taken to comply,' and, with particular reference to the 'elements of the measure' that the United States argues are outside the Panel's terms of reference, en quire into the extent to which 
these are interrelated or interdependent with measures or 'elements 
of measures' that the United States accepts are within the Panel's 
terms of reference."  (Oral Statement of the European Communities, para. 11)   
                                                     
 
69 Brazil First Written Submission, para. 381.  WT/DS267/RW 
 Page D-535 
 
 
Do the parties agree with the approach suggested by the European 
Communities and with the considerations in paragraph 13 of the Oral Statement of the European Communities? 
43. The United States respectfully refers the Panel to its general comments above regarding 
Brazil's claims in respect of exports of pig meat a nd poultry meat as well as to its own response to this 
question.
70 
 
45. Could the parties comment on the observations made by the European 
Communities in paras. 15-24 of its Oral Statement on the issue of whether the marketing loan and counter-cyclical payme nt programmes are within the scope of 
the Panel's proceeding? 
 
44. The United States respectfully refers the Panel to its general comments above regarding 
Brazil's claims in respect of the marketing loan and counter-cyclical payment programs as well as to 
its own response to this question.
71  The United States also submits one additional brief observation 
regarding Brazil's answer to this question. 
 45. The United States disagrees with Brazil's asserti on that a claim about a measure "as such" is 
"typically understood to involve an examination of a general rule or norm in the abstract."
72  An "as 
such" claim relates to whether the application of a measure in all present and future circumstances 
results in a breach of a covered agreement.  This is not an inquiry "in the abstract" but the exact 
opposite, an inquiry across all of the possible factual circumstances that have and are expected to 
arise.  Indeed, the Appellate Body underscore d exactly this aspect of "as such" claims in United States 
– Sunset Reviews on OCTG from Argentina , where it explained that: 
 
By definition , an "as such" claim challenges laws, regulations, or other instruments of 
a Member that have general and prospective application, asserting that a Member's 
conduct – not only in a particular instance that has occurred, but in future situations 
as well  – will necessarily be inconsistent w ith that Member's WTO obligations.73 
The Appellate Body explained that "as such" clai ms were to be considered to be "serious 
challenges" because "[i]n essence, co mplaining parties bringing 'as such' challenges seek to prevent 
Members ex ante  from engaging in certain conduct."74   
 
46. Despite this clarification from the Appellate Body about the caution to be exercised with "as 
such" challenges – and Brazil's own acknowledgment, in response to this question, that a finding 
regarding the effects  of a subsidy under Articles 5 and 6 of the SCM Agreement requires  an 
examination of market conditions and the operation of the alleged subsidy within those conditions – 
Brazil would have the Panel believe that the origin al panel made a serious prejudice finding against 
the statutory and regulatory provisions authorizin g Step 2, marketing loan, and counter-cyclical 
payment programs  without so much as addressing the market co nditions likely to prevail in the future.  
Rather, Brazil urges the Panel to ignore Brazil's own express explanation to the original panel that the 
MY 1999-2002 period was " both the period of time covering the measures challenged by Brazil  as 
well as the period of investigation to examine pres ent serious prejudice caused by the U.S. subsidies 
under Articles 5(c) and 6.3 of the SCM Agreement" and its arguments in this proceeding that the 
MY 1999-2002 period presented an unus ually "dynamic" situation for world market prices and U.S. 
                                                      
70 See U.S. Answers to Second Set of Panel Questions, paras. 1-16. 
71 See U.S. Answers to Second Set of Panel Questions, paras. 17-41. 
72 Brazil Answers to Second Set of Questions, para. 10. 
73 United States – Argentina OCTG Sunset Reviews (AB) , paras. 172. 
74 United States – Argentina OCTG Sunset Reviews (AB) , paras. 172. WT/DS267/RW  
Page D-536  
 
exports.
75  Instead, Brazil would now have the Panel be lieve that the original panel simply used 
MY 1999-2002 as a reference period for the entire peri od of effectiveness of the FSRI Act of 2002.  
The facts simply do not support Brazil's argument.  
46. In its Oral Statement, the European  Communities characteri zes Brazil's and the 
United States' respective approaches as the "measure model" and the "element of 
the measure model" (Oral Statement of the European Communities, para. 7).  
Please discuss whether you agree with this characterization and whether, in your 
view, the application of a measure alleged to be a subsidy to different agricultural 
products relates to a "measure" (or elements thereof) or if, rather it relates to a 
"claim".  Would it be permissible for a compliance panel to examine a "claim" 
that relates to subsidies (granted as part of measures taken to comply) provided to 
agricultural products to which the "initial measure" did not apply?  
 
47. The United States respectfully refers the Panel to its general comments above regarding 
Brazil's claims in respect of exports of pig meat  and poultry meat, its comments regarding Brazil's 
answer to Question 44 above, as well as to its own response to this question.
76 
 Questions to the United States 
  
 
47. The United States has raised a preliminary objection regarding Brazil's claims of 
(threat of) serious prejudice in respect of  the marketing loan and counter-cyclical 
payment programmes.  Is the Panel's understanding correct that, apart from this preliminary objection regarding programmes,  the United States also considers that 
the issue of whether payments made under the marketing loan and counter-cyclical payment programme after 21 September 2005 cause serious prejudice to the 
interests of Brazil is not properly within the scope of this proceeding? 
 48. How does the United States address the argument of Brazil that "[i]f the United 
States were to prevail on its view that su bsequent mandatory and price-contingent 
marketing loan and CCP payments are not properly before this Panel, the grant of annual recurring subsidies becomes 'a moving  target that escape from [the WTO 
subsidy] disciplines'"?  (Closing Statement of Brazil, para. 4) 
 49. Could the United States comment on the argument of the European Communities 
that the text of Article 21.5 of the DSU does not limit the temporal scope of that 
provision in the manner suggested by the United States?  (para. 29 of the Oral 
Statement of the European Communities) 
 
Question to Brazil
 
 
50. Does Brazil maintain its claims with respect to the three unscheduled products 
(lyocell, lysine, wood products) identified  by the United States as falling outside the 
scope of the Agreement on Agriculture? (see paragraph 83 of the United States' 
Rebuttal) 
 
48. In its response, Brazil appears to acknowledge  that lyocell, lysine, and wood products fall 
outside the scope of the Agreement on Agriculture.   By definition, therefore, the provision of GSM 
102 export credit guarantees in respect of lyocell, lysine, and wood products cannot circumvent U.S. 
agricultural export subsidy commitments under that agreement.77  In its request for establishment of a 
                                                      
75 Brazil Rebuttal Submission, para. 236. 
76 See U.S. Answers to Second Set of Panel Questions, paras. 1-16. 
77 U.S. Rebuttal Submission, paras. 81-83  WT/DS267/RW 
 Page D-537 
 
 
panel, Brazil presented claims under Articles 3.1 and 3.2 of the SCM Agreement "as a result and to the 
extent of [the alleged] viola tion of Article 10.1 (and, as a c onsequence, Article 8) of the Agreement on 
Agriculture ."78  As there can be no "violation of Article 10. 1 (and, as a consequence, Article 8) of the 
Agreement on Agriculture ,"79 there can be no claim under the SCM Agreement with respect to the 
GSM 102 export credit guarantees in respect of ly ocell, lysine, and wood products under the express 
terms of Brazil's request for panel establishment.  Where a claim is not set out in the request for panel 
establishment – as here – it is not part of the matter referred to the panel and fa lls outside the scope of 
a panel proceeding.  B. C
LAIMS OF BRAZIL REGARDING PRESENT SERIOUS PREJUDICE  
 
1. Significant price suppression - Article 6.3(c) of the SCM Agreement  
 
Questions to both parties   
 
51. The parties disagree on whether or no t the marketing loan and counter-cyclical 
payments have more than minimal effects on  production of upland cotton.  Could 
each party explain how its approach to the analysis of the impact of these payments on production of upland cotton is supported by the provisions of Articles 5 and 6 of 
the SCM Agreement and by any other relevant WTO provisions?  
 
49. The United States notes that, although the Panel's question asks each party to "explain how its 
approach to the analysis of the impact of [m arketing loan and counter-cyclical] payments on 
production of upland cotton is supported by th e provisions of Articles 5 and 6 of the SCM Agreement 
and by any other relevant WTO provisions," Brazil does not appear to actually answer this question.  
Rather, Brazil devotes almost all of its response to  explaining why even green box measures can be 
subject to challenge under the SCM Agreement .  This is inexplicable because Brazil then asserts that 
(a) the marketing loan and counter-cyclical payment programs are properly viewed as so-called "amber box" measures and (b) in the very next qu estion, concedes that the fact that measures are 
classified in the "amber box" does not mean that they cause adverse effects within the meaning of 
Articles 5 and 6 of the SCM Agreement .  It is difficult to understand, therefore, what – if anything – 
Brazil's answer has to do with explaining whether Brazi l's approach is consiste nt with Articles 5 and 6 
of the SCM Agreement .   
 50. Instead, Brazil's discussion seems to be aime d at suggesting that U.S. marketing loan and 
counter-cyclical payments should be found in breach of Articles 5 and 6 of the SCM Agreement no 
matter how minimal the effects ther eof.  Any such suggestion would be flatly wrong under the terms 
of those provisions.  Only "subsidies" the effect of which is "significant" price suppression are subject 
to discipline by virtue of Articles 5(c) and 6.3(c) of the SCM Agreement .  Whether any measures – 
whether green, blue, amber, or something else – may be challenged  does not change the fact that the 
complaining party bears the burden of proving  through evidence and argument that the challenged 
measures are causing adverse effects within the meaning of Articles 5 and 6 of the SCM Agreement 
(in the present case, "significant" price suppression under Article 6.3(c)).  Where – as here – a 
complaining party fails to do so, its claim cannot succeed. 
 
52. In its Third Party Submission New Zealand observes: 
 
"Marketing loan payments are am ber box measures, the category 
in which are included the non-prohibited measures with the most 
trade distorting effect on produc tion and trade."  (para. 5.19) 
                                                     
 
78 Brazil Request for Panel Establishment, para. 28. 
79 Brazil Request for Panel Establishment, para. 28. WT/DS267/RW  
Page D-538  
 
Do the parties consider that the fact th at under the Agreement on Agriculture a 
subsidy is included in the 'amber box' is relevant to the analysis of the subsidy's 
consistency with Articles 5 and 6 of the SCM Agreement?  
 
51. The United States respectfully refers the Panel to the U.S. comments regarding Brazil's 
response to Question 51 above. 
 Questions to the United States
 
 
53. The United States argues that Brazil has not provided evidence of 'actual 
production inducing' effects of marketin g loan and counter-cyclical payments and 
that Brazil 'purports to demonstrate indi rect production effects through its claim 
that the US planting, production, and exports are not responsive to prices.'  (Opening Statement of the United States at the meeting of the Panel with the parties, paras. 62 and 69, emphasis in original) 
 
(a) Could the United States explain further the distinction between what it 
terms "actual production inducing effects "and "indirect production effects"?  Could the United States also elaborate on how this distinction is legally relevant in the context of Articles 5 and 6 of the SCM Agreement? 
 
(b) What is the response of the United States to the argument that the fact that 
"U.S. upland cotton producers know th at their overall revenue will always 
be protected by marketing loans an d counter-cyclical payments ... plays a 
major role in their planting decisions"?  (Rebuttal of Brazil, para. 185;  see also Third Party Submission of New Zealand, paras 5.20-5.21) 
 
(c) In its Opening Statement at the meeting of the Panel with the Parties, 
Brazil observed: 
 
"...we have demonstrated that these subsidies stabilized cotton producers' revenue despite  wildly fluctuating market 
prices, thereby insulating and numbing acreage response to 
market price signals.  These subsidies also cover the huge long-term gaps between market returns and total costs of production.  Both effects are closely interrelated."  (para.55) 
Is the United States only arguing that Brazil has not empirically substantiated that 
these two "effects" have actually occurred or is it also the position of the United States that these effects are in any event legally irrelevant to an analysis of whether a subsidy causes significant price suppression within the meaning of Article 6.3 (c) of the SCM Agreement?  
 
54. Could the United States explain whether, and, if so, why, it is of the view that this 
Panel should not rely on the findings and analysis by the original Panel regarding the effects of marketing loan and counter-cyclical payments on production and exports?  Please comment in particular on  paras. 7.1291, 7.1295, 7.1302, 7.1349, 
7.1353 of the Panel Report. 
 
55. Can the United States confirm that the figures "$868 million" and "$838 million" 
Brazil cited in para. 40 of its Opening Statement are correct figures if one uses the "Brazil's methodology" and the "Cotton-to-Cotton methodology"?  (Please note that the Panel is not asking whether the US agrees with these methodologies.)  WT/DS267/RW 
 Page D-539 
 
 
56. The United States has cited new empirical research on the production effects of 
counter-cyclical payments.  How does th e United States address Brazil's criticism 
that none of this research has dealt specifi cally with the effects of countercyclical 
payments under the FSRI Act of 2002 on up land cotton?  (Rebuttal Submission of 
Brazil, para. 120)    
 
57. The United States has offered the Lin and Dismukes (Exhibit US-34) and Westcott 
(US-35) studies as examples of new empirical research on the production effects of counter-cyclical payments. 
 
(a) Is it not more accurate to charact erize the Lin and Dismukes study as a 
simulation of the possible effect of countercyclical payments on production rather than a study on the actual impact of the payments since it does not statistically estimate the effect of the actual payments (which began only in 2002) on crop production?  (Please refer to pages 9-12 of the paper which 
describe the data, covering the period 1991-2001, used for the study). 
 
(b) How does the United States deal with Brazil's characterization of the 
Westcott study as offering no new empirical evidence, and instead, being a qualitative discussion, much like that presented to the original panel (see para 128 of Brazil's rebuttal)? 
 
58. The Unites States stated that the key co nsideration in assessing a farmer's decision 
to grow upland cotton is whether the farmer  has been covering his variable costs of 
production. In this connection, it presen ted upland cotton costs and returns 
estimates for marketing years 1999-2005 (Exhibit US-47).  Brazil has disputed the 
absence of certain items – land, labour and capital recovery costs - in the US 
calculations of variable costs.  In res ponse, the United States has referred to the 
Commodity Costs and Returns Estimation Handbook (Exhibit US-88) prepared by 
a Task Force of the American Agricultural  Economics Association as the basis for 
leaving out these items in its calcula tions.  However, the Task Force which 
authored the Handbook does not use the categories "fixed" or "variable" costs and 
in fact recommends that the microeconomi c concepts of fixed and variable costs 
not be used in preparing and reporting cost  and return estimates.  Page 2-67 of the 
Handbook states: 
 
The Task Force therefore recomm ends that costs should be 
categorized only as to whether they  are associated with expendable 
factors or the services of capital a ssets. The division of costs into 
categories such as fixed and vari able should generally be avoided 
in preparing CAR estimates. For the purpose of preparing CAR estimates for specific enterprises, the Task Force recommends that 
all the costs of all expendables be allocated to the generic group 
OPERATING COSTS and that all other costs be allocated to the 
group ALLOCATED OVERHEAD.  
Would the United States clarify whether the categories "operating costs" and 
"allocated overhead" correspond to the eco nomic concepts of fixed and variable 
costs?  In particular, are "operating cost s" variable costs or not?  Would the 
United States please indicate whether, an d if so, where, the Handbook makes these 
clarifications or distinctions.   
 59. In discussing the impact of long-term costs of production (and hence long-term 
profitability) of upland cotton production on farmers' decisions to exit cotton WT/DS267/RW  
Page D-540  
 
farming, the United States argues that income from other crops and off-farm 
income must be into account.   Why do es the United States consider these issues 
relevant given the original Panel's decision  that "off farm income" is not a legally 
relevant consideration.  (Panel Report, para. 7.1354, footnote 1470)  Please respond to Brazil's arguments on this ma tter in paragraphs 249-253 of its Rebuttal 
Submission. 
 60. In its Rebuttal Submission, the United States argues that Prof. Sumner's 
description of the model that appeared in a recent CATO publication is not "appropriate" for use in a WTO dispute involving claims of serious prejudice.  
Professor Sumner has since introduced "more empirical and institutional detail" to 
the model used in this dispute.  These changes are described in paragraphs 111-117 of Brazil's Opening Statement.  Does the United States view these changes as being 
sufficient to make the model appropriate for use in a WTO dispute involving claims of serious prejudice?  If not, what modifications does the United States think 
should have been made to the model? 
 61. With respect to marketing year 2006, the United States has provided some data on 
upland cotton exports (Exhibit US-113),  planted and harvested area and cotton 
production (Exhibit US-114), as well as a copy of the National Cotton Council's 
survey of planting intensions (Exhibit US-115).   The data, all of which have been 
collected through the first half of mark eting year 2006, are variously qualified as 
"estimates" or "projections" or "projected." 
 
(a) Please clarify, as completely as possible, what these various terms mean as they 
apply to US upland cotton exports, acreage and production.   
 
(b) Would the United States be able to provid e the Panel with some information, based 
on the average of the past six marketing years or so, of how final marketing year 
data on these variables, would differ from preliminary estimates, projections and the like, taken at the end of February of the relevant marketing year? 
 
(c) Finally, would the United States be able to update that part of Exhibit US-83 
dealing with futures prices so as to provide the panel with as complete as possible average January to March 2007 New York  futures prices for upland cotton? 
 
Questions to Brazil
  
 
62. How does Brazil rebut the argument of the United States that the fact that 
marketing loan and counter-cyclical pay ment programmes provide income support 
when prices are low is not the key question before this Panel and that while, like any other payments to producers, marketing loan and counter-cyclical payments could affect production, Brazil has not pr ovided any evidence of actual production-
inducing effects?  (Rebuttal Submission of the United States, paras. 222, 287-291;  
Opening Statement of the United States at the meeting of the Panel with the parties, paras. 62-75;  Comments of the United Stat es on Brazil's 'Oral' Presentation in the 
meeting with the Panel, paras. 42-57) 
 52. Brazil's response to the first part of this ques tion highlights that fact that Brazil is attempting 
to have the Panel find income support to agricultura l producers to effectively be a prohibited measure 
under the SCM Agreement .   
  WT/DS267/RW 
 Page D-541 
 
 
53. Indeed, Brazil asserts as "one of the fundamental facts supporting Brazil's adverse effects claims"
80 the mere fact that marketing loan and counter-cyc lical payment programs provide income 
support to U.S. producers at times of low prices.  Si milarly, Brazil argues that it is evidence of price 
suppression under Articles 5(c) and 6.3(c) of the SCM Agreement that U.S. farmers "know" that if 
prices fall below certain levels, they may receive  payments under the marketing loan and counter-
cyclical payment programs.  As the United Stat es explained in its response to Question 53(b), 
however, any eligible recipient of income support "knows" that he or she will receive some income 
protection due to those payments.  That is the very  nature and intent of income support programs – to 
ensure that producers receive some income that they would not otherwise get on the market.   
 
54. In fact, U.S. farmers are even more secure in their "knowledge" that they will receive such 
payments where payments are fixed, as in the case of direct payments ( i.e., as compared to payments 
under the marketing loan and counter-cyclical pa yment program, which depend on U.S. and world 
market prices that are not within the control of  individual farmers and cannot even be known until 
many months after the decision is made whether or not to plant cotton).  Yet, as the original panel 
recognized in the case of direct payments81, the fact that farmers have such "knowledge" does not 
necessarily result in any "adverse effects" with in the meaning of Articles 5 and 6 of the 
SCM Agreement . 
55. As the United States has noted before, most economists agree that direct payments, like 
marketing loan payments, counter-cyclical paymen ts, payments supporting elderly or low-income 
recipients or, for that matter, any type of payment to a producer of agricultural products will have 
some effect on risk and wealth and that this may,  in turn, have some effect on production.  The 
question under Articles 5(c) and 6.3(c) is whethe r Brazil has shown that – taking into account the 
particular structure and design of the programs a nd the way they operate under the market conditions 
prevailing at present – payments under the programs are having  actual effects on production that are 
so substantial that they are resulting in "present" significant price suppression.  It is significant price 
suppression that is precluded under the SCM Agreement, not any possible effect on production or any 
actual effect on production that does not ultimately result in significant price suppression in the 
market identified by the complaining party.  56. Brazil's response to the second part of the Pa nel's question – asking Brazil to respond the U.S. 
observation about the lack of an empirical basis fo r Brazil's claims of "present" serious prejudice – 
confirms that Brazil has not established such actual "p resent" effects.  Thus, for example, Brazil cites 
as "evidence" findings made by the original panel and the Appellate body about the collective effects 
of a different set of measures (Step 2, marketing loan and market loss assistance or counter-cyclical 
payments) in a different period of time (MY 1999-2002) and under different market conditions.
82  
These findings are not directly relevant here.  More over, as the United States explained in its response 
                                                      
80 Brazil Answers to Second Set of Questions, para. 44. 
81 Brazil's assertions about the alleged "key role" th at direct payments allegedly play in "allowing many 
upland cotton farmers to achieve a hea lthy 'profit' from growing upland cotton" – even though direct payments 
are not at issue in the pres ent proceeding – is further evidence of Brazil's efforts to render income support a 
prohibited measure under the SCM Agreement .  Brazil Answers to Second Set of Questions, para. 56.  
According to Brazil, "such profits play an important role in maintaining upland cotton production over the 
longer term by increasing the 'wealth' of producers."  Brazil Answers to Second Set of Questions, para. 56.  
What Brazil asserts is true of any payment to any agri cultural producer;  any such payment would "increas[e] 
the 'wealth' of producers."  This does not mean that all payments to producers are causing "significant" price 
suppression. 
82 As Brazil confirmed in the first (resumed) meeting w ith the original Panel, "[t]he four-year period in 
which these subsidies [the "subsidies provided for the production, export and use of U.S. upland cotton during 
the period MY 1999-2002"] were provided is both the period of time covering the measures challenged by Brazil as well as the period of investigation to examine present serious prejudice cau sed by the U.S. subsidies 
under Articles 5(c) and 6.3 of the SCM Agreement."  Brazil's 7 October 2003 Second Statement at First Panel 
Meeting, para. 3 (emphasis added)  WT/DS267/RW  
Page D-542  
 
to Question 54
83, the factual observations that the original  panel made regarding marketing loan and 
counter-cyclical payments in reaching its conclusi on about the collective effects of the Step 2, 
marketing loan and counter-cyclical payments made in MY 1999-2002 do not support a finding that 
marketing loan and counter-cyclical payments ar e causing "significant" price suppression at present 
under the existing market conditions. 
 
57. Brazil then asserts that a "strong link" "has been recognized" by various entities between the 
programs and payments challenged by Brazil in  this proceeding and upland cotton acreage, 
production, exports, and prices.84  However, not a single one of the sources  Brazil cites actually looks 
to the collective effects of the marketing loan a nd counter-cyclical payments on world market prices, 
let alone looks at whether these effects amount to significant price suppression under the market 
conditions existing in the "present" ( i.e., MY 2006).  Indeed, Brazil even goes as far as to cite as 
"evidence" a U.N. Food and Agricultural Organizati on ("FAO") report that observes that "all of the 
recent studies unambiguously demonstrate that the removal of domestic subsidies in industrialized 
countries  reduces cotton production in and exports from these countries."85  There is no basis 
whatsoever to find that U.S. marketing loan an d counter-cyclical payments are causing "present" 
significant price suppression within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement 
simply on the basis that they are "domestic subsidies in [an] industrialized countr[y]." 
 58. Moreover, contrary to Brazil' s assertions, the FAO report does not suggest that there is a 
"strong link" between the marketing loan and count er-cyclical payments a nd upland cotton acreage, 
production, exports or prices.
86  The FAO report simply reviews a number of different studies 
examining the removal of various domestic support measures and/or tariffs from the cotton sector in a 
number of countries (some even looking at removal of such measures world-wide).  As Brazil has 
acknowledged, the original panel reviewed simila r studies during the course of its analysis and 
"recognized that many of the parameters includi ng magnitude, and time period of the subsidies, 
elasticities, measures, and selection of baselines did not address exactly the time period or legal issues 
before the original panel."87  Accordingly, the only conclusion that the original panel considered 
appropriate to draw from these widely divergent, inapposite studies – according to Brazil – was that 
"subsidies bestowed by Member governments have the potential  to distort production and trade."88  
This does not equate to the r ecognition of any "strong link." 
 
59. Brazil also points to statements by a U.S. trade association made before enactment of 
the 2002 farm bill purporting to show that U.S. farm ers would be "bankrupt" without marketing loan 
and counter-cyclical payments.  Again, not one of these statements pertain to marketing loan or 
counter-cyclical payments.  Rather, they were ma de about emergency relief provided under the FAIR 
Act of 1996 in the period MY 1999-2001.  These st atements – quoted out of context – about an 
entirely different set of measures (including disaster pa yments), offers no insight regarding the role of 
marketing loan and counter-cyclical payments in production decisions or about U.S. farmers' costs 
and revenues today.  Certainly it does nothing to detr act from the actual data regarding "present" costs 
and revenue, which, as discussed in the prior U.S. s ubmissions, flatly contradict Brazil's claims that 
                                                      
83 U.S. Answers to Second Set of Panel Questions, paras. 101-106. 
84 Brazil Answers to Second Set of Questions, para. 45. 
85 Brazil Answers to Second Set of Questions, para. 45. 
86 Brazil Answers to Second Set of Questions, para. 45. 
87 Brazil Rebuttal Submission, para. 309. 
88 Brazil Rebuttal Submission, para. 309.  Indeed, the FAO itself concludes that any potential distortion 
may be minimal.  The FAO estimates price effects of only 3.1 to 5 percent and it does so for " complete 
elimination of domestic subsidies as notified to the WTO and  tariffs ;" in other words, every domestic support  
and every tariff  for every  country in the world that notifies e ither to the WTO.  Poonyth, Daneswar, et al. , "The 
Impact of Domestic and Trade Policies on the World Cotton Market," FAO Commodity and Trade Policy Research Working Paper No. 8, April 2004, p. i (Exhibit US-55).  Any possible effect of U.S. domestic supports 
– let payments under only two of the U.S. programs – would necessarily be substantially less.  This is hardly 
evidence of a "strong link."  WT/DS267/RW 
 Page D-543 
 
 
U.S. upland cotton farmers would be bankrupt wi thout the marketing loan and counter-cyclical 
payment programs.  60. What is conspicuous in its almost complete  absence from Brazil's listing of the evidentiary 
basis for its claims is evidence of any present produc tion-inducing effects of the marketing loan and 
counter-cyclical payments under the market conditi ons prevailing at present and without the Step 2 
program in place.  Indeed, the only argument that Brazil makes about the effects of marketing loan 
and counter-cyclical payments under the current ma rket conditions is that, according to a U.S. 
"market expert," current U.S. stoc ks will allegedly "keep a heavy lid on the market" and, in term of 
prospective plantings, that "any total acreage numb er below 12.5 million acres will be bullish.  The 
lower the intended plantings, the higher the price rally."
89 
 61. Brazil's assertion that this is "evidence" of significant price suppression is misleading.  The question under Articles 5(c) and 6.3(c) is whether U.S. marketing loan and counter-cyclical payments 
significantly suppress world market prices for upland co tton.  Whether or not increased U.S. stocks 
may have some effects on prices does not answer that  question.  Any effects on prices could only be 
attributed to U.S. marketing loan and counter-cyclical  payments to the extent that Brazil proves that it 
was marketing loan and counter-cyclical payments that cause d all of the production that is placed in 
inventory.  Brazil clearly has not done so.
90 
 62. Absent specific evidence rega rding the effects that marketing loan and counter-cyclical 
payments are having at present under the prevailing market conditions, Brazil has no basis for its 
claims of "present" serious prejudi ce under Articles 5(c) and 6.3(c). 
 
63. Could Brazil explain whether or not it considers that whether marketing loan and 
counter-cyclical payments increase acreage is not relevant to the inquiry of whether 
these payments cause significant price suppression within the meaning of 
Article 6.3 (c) of the SCM Agreement?  (para. 56 of the Opening Statement of Brazil)  Could Brazil comment on the points made by the United States in 
footnote 72 of the Comments of the United States on Brazil's "Oral" Presentation in the meeting with the Panel?  
 63. The United States notes that the bulk of Brazi l's answer to this question addresses arguments 
that have never been made by the United Stat es.  The United States has never suggested that 
"Article 6.3 of the SCM Agreement . . . compel[s] a complaining Memb er to produce evidence that the 
challenged subsidies result in a steady increase  in production or acreage."
91  Therefore, it is 
inexplicable why Brazil devotes nearly four pages of argument in an attempt to rebut such an 
assertion. 
 
                                                      
89 Brazil Answers to Second Set of Questions, para. 51. 
90 The market analysis submitted by Brazil actually confirms  that – contrary to Brazil's assertions – 
U.S. production and exports/stocks are not primarily responsible for the upland cotton market trends that are 
currently being observed.  Specifically , the actual planting intentions figures for MY 2007 were far lower than 
those predicted by the "market expert" cited by Brazil – the report forecasted U.S. upland plantings to be only 
11.86 million acres.  NASS Prospective Plantings Repo rt (March 30, 2007) (Exhibit US-140).  This is 
20.7 percent lower than MY2006 acr eage and over 600,000 acres below the point at which the "market expert" 
predicted there would be a "bullish" impact on prices .  Yet, both the May and December futures contracts for 
upland cotton, as quoted by the New York Board of Trade, declined , on average, since the report was issued.  
N.Y. Futures After Issuance of Planting Intentions Repo rt (Exhibit US-169).  This  is hardly the "bullish" 
response predicted and confirms that other factors – such as China's upland cotton trade balance – are very much 
responsible for the world market price phenomenon that experts are trying to understand.  As discussed in response to Question 74 below, Brazil has never properl y accounted for these other factors in its assessment of 
"present" serious prejudice. 
91 Brazil Answers to Second Set of Questions, para. 59. WT/DS267/RW  
Page D-544  
 
64. Rather, as the Panel's question itself reflects in its reference to footnote 72 of the Comments 
of the United States on Brazil's "Oral" Presentation in  the meeting with the Panel, the United States 
has taken issue with Brazil's inexplicable argum ents in its unsolicited third written submission – 
BRA-659 – that the Panel should disregard a number of the studies submitted by the United States because they do "not examine whether CCPs are dec oupled from production.  Rather, [they] examine 
whether CCPs increase acreage."
92 
 65. The United States appreciates Brazil's acknowledgm ent now, in response to this question, that 
its focus on "coupling" in the la nguage cited by the United States was misplaced:  "the notion of 
"coupled" and "decoupled" support in the Agreement on Agriculture . . . is not relevant for the 
assessment of the effects of subsidies under Articles 5 and 6 of the SCM Agreement."
93  Rather, as 
Brazil now concedes the salient question is whethe r marketing loan and counter-cyclical payments 
cause such substantial shifts in  planted acreage that oversupply, export, and ultimately "significant" 
price suppression within the meaning of Articles 5(c) and 6.3(c) of the SCM Agreement result.94  As 
discussed in the prior U.S. submissions95 and above in the general comments of the United States 
regarding Brazil's claims under Articles 5(c) and 6.3(d) of the SCM Agreement , the evidence before 
the Panel does not support Brazil's arguments that the marketing loan and counter-cyclical payments 
are causing any such significantly suppressed world market prices.  
64. Given that Brazil has criticized th e new empirical research cited by the 
United States because it does not deal specifically with the effects of countercyclical 
payments on upland cotton production,  why does Brazil consider that the 
McIntosh, Shogren & Dohlam study (Rebuttal Submission of Brazil, para. 140) is particularly relevant to this case?  Coul d Brazil comment on the arguments of the 
United States in paragraphs 248-249 of the Rebuttal Submission of the United States? 
 
66. Brazil fails to establish why the McIntosh, S hogren & Dohlam study – a study that does not 
address upland cotton specifically and that is prem ised on highly restrictive assumptions about the 
operation of the counter-cyclical pr ogram – is "more applicable to the assessment that the compliance 
Panel is tasked with"
96 than the many studies submitted by the United States.   
 
67. Indeed, it is important to note that – becau se the McIntosh, Shogren & Dohlman study is not 
limited to upland cotton production – its results are presumably supposed to be valid even for 
predicting effects on wheat, corn, and soybean acreage.  However, it comes to directly inconsistent 
conclusions about the effects of counter-cyclical payments on wheat, corn, and soybean acreage than 
the studies submitted by the United States (for example, the Lin & Dismukes study finding that "[t]he 
effect of CCPs on producers' planting decisions . . . appears to be very negligible – an increase in the 
acreage of major field crops of less than 1% . . . .")97 Although Brazil has argued that the Panel should 
ignore those other studies because they are not speci fic to upland cotton, Brazil has never explained 
                                                      
92 Supplementary Statement of Daniel Sumner, para. 21. 
93 Brazil Answers to Second Set of Questions, para. 65 .  Brazil's attempts to attribute the focus on 
"coupling" to the United States in its response is, how ever, patently unfounded, as  the U.S. discussion in 
footnote 72 (reflected above) clearly shows. 
94 Brazil Answers to Second Set of Questions, para. 66. 
95 U.S. First Written Submission, paras. 203-331 and Annex I;  U.S. Rebuttal Submission, paras. 215-
404 and Annex I;  U.S. Answers to Parts A-C of First Set of Panel Questions, paras. 27-44;  U.S. Oral 
Statement, paras. 50-85 and Statement of Dr. Joseph W. Glauber;  U.S. Answers to Parts D-E of First Set of Panel Questions, paras. 14-42;  U.S. Comments on Brazil's "Oral" Presentation, paras. 34-91 and Annex I, and 
U.S. Answers to Second Set of Panel Questions, paras. 1-4, and 62-170. 
96 Brazil Answers to Second Set of Questions, para. 67. 
97 Lin, William and Dismukes, Robert.  "Supply Response Under Risk:  Implications for 
Counter-cyclical Paymen ts' Production Impacts ," Review of Agricultural Ec onomics–Volume 29, Number 1–
Pages 64-86 , forthcoming, p. 83  (Exhibit US-85) (emphasis added).  WT/DS267/RW 
 Page D-545 
 
 
why the McIntosh, Shogren & Dohlman study should be viewed as reliable when it comes to such 
different conclusions about the eff ects of counter-cyclical payments even with respect to the other 
crops.  Indeed, the divergence in the results for wheat, corn, and soybean acreage simply confirm 
what the United States has argued and the author s of the McIntosh, Shogren & Dohlman study 
themselves acknowledge98 – that this study overstates any effects of counter-cyclical payments on 
acreage. 
 68. The authors themselves identify some of the r easons why that particular study overstates any 
effects of counter-cyclical payments on acreage.  Namely:  
Our design did not address two features of the 2002 Act which could affect the 
interpretation of our results.  First, ther e are no adjustments made in our bonuses for 
the fact that direct and counter-cyclical payments are made only on a percentage (85 percent) of base acres. If these adjust ments were incorporated, the lump sum 
bonuses would have been lower, implying our results could overstate the effects of 
CCPs.  Second, we excluded the marketi ng loan program to focus on the basic CCP 
structure—target price, market price, and direct rate. Adding the marketing loan program into our design would temper the basic effects of CCPs by providing an additional price support mechanism.
99 
69. There are other reasons as well that have to do with the kind of laboratory experiments upon 
which the McIntosh, Shogren & Dohlman study is pr emised.  The use of a laboratory experiment may 
allow the researchers to focus on a particular set of problems or issues but necessarily abstracts away 
from other highly relevant factors that also affect a producer's planting decision.  Thus, for example, 
Brazil cites the authors of the McIntosh, Shogren & Dohlman study as noting that "farmers have other 
risk management tools at their disposal;  large and less risk-averse farms tend to dominate production 
of program crops;  and other programs such as marketing loan provisions already offer price 
protection."100  The McIntosh, Shogren & Dohlman st udy excludes these factors in assessing the 
effects of counter-cyclical payments.  Yet, as Paul Westcott  et. al. explained101, it is precisely these 
kinds of factors that mitigate and temper any actual effects of counter-cyclical payments.102  T o  
                                                      
98 McIntosh, Christopher R, Jason F. Shogren and Erik Dohlman,"Supply Response to Counter-
Cyclical Payments and Base Updating under Uncertainty:  An Experimental Study,:  forthcoming paper in the American Journal of Agricultural Economics , November 2006, page 18 (Exhibit BRA-565).  The United States 
notes that this citation is in error since the article  did not appear in the November 2006 issue of the American 
Journal of Agricultural Economics . 
99 McIntosh, Christopher R, Jason F. Shogren and Erik Dohlman,"Supply Response to Counter-
Cyclical Payments and Base Updating under Uncertainty:  An Experimental Study,:  forthcoming paper in the 
American Journal of Agricultural Economics , November 2006, page 18 (Exhibit BRA-565).  The United States 
notes that this citation is in error since the article  did not appear in the November 2006 issue of the American 
Journal of Agricultural Economics . 
100 See Brazil Answers to Second Set of Questions, para . 68, n. 63 (citing McIntosh, Christopher R., 
Jason F. Shogren and Erik Dohlman, "Supply Response to  Counter-Cyclical Payments and Base Acre Updating 
under Uncertainty:  An Experimental Study," Forthcoming paper in the American Journal of Agricultural 
Economics, November 2006, p. 16-17 (See Exhibit BRA-565)). 
101 The original panel found an earlier version of Westco tt's analysis to be persuasive as to the effects 
of counter-cyclical payments. 
102 Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act:  Production Effects 
Likely to be Limited" at 203-205 (Exhibit US-35).  West cott notes in this regard that:  (a) where prices are 
expected to be above maximum threshold – counter-cyclical payments behave just like the fixed direct payments;  (b) "cross-commodity effect[s] suggest[] that  CCPs may provide a general reduction in revenue risks 
rather than a crop-specific effect. Net returns among a lternative crops would remain  the primary consideration 
underlying production choices;" (c) "while a number of studies indicate that farmers are risk averse (Chavas and Holt, 1990, 1996, for example), other risk reduction instruments already exist to manage risks. Thus, with 
revenue risk reduction now provided by CCPs as part of  farm programs, farmers may adjust their use of these 
other farm and nonfarm risk management strategies;" and (d) "a large portion of output in the U.S. agricultural WT/DS267/RW  
Page D-546  
 
ignore these factors is to improperly attribute to co unter-cyclical payments effects that they do not 
actually  have in the real world but only have in so me artificial vacuum created for purposes of a 
laboratory experiment.  It says little about  whether counter-cyclical payments are actually  having the 
kind of production effects alleged by Brazil and whether those effects are actually  lead to the kind of 
price suppressive effects with which Article 6.3(c) is concerned. 
 
70. What Brazil presents – in short – is a hi ghly abstract study with  limited conclusions.
103  The 
laboratory experiment upon which the study is b ased does not reflect the economic conditions of 
actual upland cotton producers.104  Rather, the experiment "mimicked" certain stylized scenarios to 
attempt to isolate and measure the impact risk  aversion and uncertainty might have on production 
decisions.105  In doing so, however, the authors removed from consideration some of the most critical 
factors that affect the degree to which farmers are,  in fact, risk averse, such as the size of the 
enterprise and the availability of other price hedgi ng mechanisms.  Moreover, they exclude important 
factors other than risk that affect a farmer's planting decisions.  When all factors are taken into 
account – as reflected in the empirical data used by some of the other studies submitted by the United 
States – a much more realistic picture emerges of the effects of counter-cyclical payments. 
 71. Brazil also claims that the McIntosh, Shogren & Dohlman study is more relevant because it is 
not confined to the geographic regions of other studies.
106  That is a curious argument given that 
Brazil at once asserts that geographical factors may have some effect on the effects of counter-cyclical payments and asserts that a study that takes none  of these factors into account is somehow the most 
reliable measure of the effects of counter-cyclical pa yments.  In any event, Brazil's criticism that the 
Lin & Dismukes and Goodwin & Mishra studies on co rn, soybeans, and wheat are less relevant to 
upland cotton because supply elasticities for these crops  are much smaller than for upland cotton is 
only valid if one ascribes to the inflated supply elas ticity used by Brazil in its Sumner II (CATO)  
model.  For the reasons explained in the prior U.S. submissions, it is not appropriate to do so.
107 
 
72. Finally, the United States notes that Brazil mi sstates the U.S. arguments.  The United States 
has not criticized the field of behavioral or experimental economics, nor has the United States 
                                                                                                                                                                     
sector is produced by a small share of large producers. . . . Evidence that risk  aversion decreases as income rises 
(Chavas and Holt, 1990, 1996) suggests that risk aversi on may also tend to decline as the size of farms 
increases.  Thus, with larger farms that account for most production being less averse to facing risk, this lowers potential production effects of CCPs due to risk reduction.  And while smaller farms may be more risk averse in 
their farm enterprise, off-farm income may reduce the overall level of household income risk."  Paul A. 
Westcott, "Counter-Cyclical Payments Under the 2002 Farm  Act:  Production Effects Likely to be Limited" at 
203-205 (Exhibit US-35).  On the basis of these and other factors, Westcott concludes that "there are several 
mitigating factors which suggest that overall production effects of CCPs through revenue risk reduction are 
likely to be limited."  Paul A. Westcott, "Counter-Cyclical Payments Under the 2002 Farm Act:  Production Effects Likely to be Limited" at 205 (Exhibit US-35).  The other studies submitted by the United States 
examining the empirical evidence of production effects – for example, including the Lin & Dismukes study 
finding that "[t]he effect of CCPs on producers' planting decisions . . . appears to be very negligible – an 
increase in the acreage of major field cr ops of less than 1% . . . ." – conf irm that the effect s of the counter-
cyclical payments are, in fact, very limited.  Lin, William and Dismukes, Robert.  "Supply Response Under 
Risk:  Implications for Counter- cyclical Payments' Production Impacts ," Review of Agricultural Economics–
Volume 29, Number 1–Pages 64-86 , forthcoming, p. 83  (Exhibit US-85) (emphasis added). 
103 Brazil Answers to Second Set of Questions, para. 68. 
104 Brazil Answers to Second Set of Questions, para. 69. 
105 McIntosh, Christopher R., Jason F. Shogren and Erik Dohlman, "Supply Response to Counter-
Cyclical Payments and Base Acre Updating under Uncertai nty:  An Experimental Study," Forthcoming paper in 
the American  Journal  of Agricultural  Economics , November 2006, p. 5) (Exhibit Bra-565). 
106 Brazil Answers to Second Set of Questions, para. 69. 
107 See e.g.,  U.S. First Written Submission, paras. 319-328  and Annex I;  U.S. Rebuttal Submission, 
paras. 349-386 and Annex I;  U.S. Oral Statement, paras.  76-81 and Statement of Dr. Joseph W. Glauber;  U.S. 
Comments on Answers to Parts D-E of First Set of Panel Questions, paras. 30-42;  and U.S. Comments on 
Brazil's "Oral" Presentation, paras. 79-91.  WT/DS267/RW 
 Page D-547 
 
 
suggested that the McIntosh, Shogren & Dohlman is  invalid merely because it is based on controlled 
experiments, as Brazil claims.108  Rather, the United States has identified the numerous factors that 
limit the utility of the McIntosh, Shogren & D ohlman study in assessing the question at hand, 
including those expressly acknowledged by its aut hors.  Moreover, the United States has noted the 
irony in Brazil's criticisms leveled at the studies submitted by the United States ( i.e., that they are not 
unique to upland cotton production), when Brazil itsel f submits studies that do not even examine the 
behavior of actual farmers but, rather, the responses of University of Wisconsin economics students to 
some highly stylized scenarios.  To claim that this  highly abstract experimental study "analyzes more 
closely the effects of counter-cyclical payments on the production decisions of U.S. upland cotton farmers than results of empirical studies"
109 – as Brazil does – is simply not  supported by a review of 
the study and its conclusions. 
 
65. The United States has cited new empirical research on the production effects of 
counter-cyclical payments.  Could Brazil explain why the fact that these studies do not deal specifically with upland cotton should preclude the Panel from considering 
the studies as being highly probative? 
 
73. Brazil's answer to this question fundamentally  contradicts its answer to Panel question 64.  
Brazil asserts that the studies submitted by the United States are not probative "due to their failure to 
address the specific effect of upland cotton counte r-cyclical subsidies on upl and cotton production."
110  
Yet, as Brazil admits in Question 64 there are no studies that "address the specific effect of upland 
cotton counter-cyclical subsidies on upland cotton production."111 and in fact that studies upon which 
it relies itself – including the McIntosh, Shogren & Dohlman study – do not even do so.  Brazil's complaint on this basis is, thus, patently absurd.  74. Equally unavailing are the four bases that Brazil asserts for why the effects of counter-
cyclical payments made to a holder of upland cotton base acreage that produces upland cotton should 
be understood to be fundamentally different fro m those observed by Lin & Dismukes for counter-
cyclical payments made in respect of corn , wheat, and soybeans and Goodwin & Mishra for 
marketing loss assistance payments in respect of the same crops.  For example, Brazil does not 
explain what its assertions about "maximum per-ac re counter-cyclical payments" have to do with 
effects on production.  In fact, if it were true – as Brazil alleges – that the costs of production for 
upland cotton are higher than for other crops, one  would expect rational farmers to produce other 
crops while still collecting the allegedly very high maximum upland cotton counter-cyclical payment.  
Thus, Brazil's reasoning actually supports exactly  the opposite conclusion than the one it asserts. 
75. Brazil's assertions about the "frequency of paymen t" similarly lack merit.  Differences in what 
Brazil calls the "fill rate" did not preclude Brazil's preferred study – the McIntosh, Shogren & Dohlam 
study – from presenting one single assessment across all counter-cyclical payments .  This supports the 
conclusion that any alleged differences in the "frequency of payment" do not preclude the Lin & 
Dismukes and Goodwin & Mishra from being highl y probative of the likely effects of counter-
cyclical payments made in respect of upland cotton base acres.  76. Brazil's third asserted basis – its allegation th at "one would expect low supply elasticities in 
these regions for these crops"
112 – is similarly without merit.  As noted in response to Question 64, 
this appears to be premised on Brazil's own assertions  of grossly inflated supply elasticities for upland 
cotton.  
                                                     
 
108 Brazil Answers to Second Set of Questions, para. 71. 
109 Brazil Answers to Second Set of Questions, para. 73. 
110 Brazil Answers to Second Set of Questions, 75. 
111 Brazil Answers to Second Set of Questions, 75. 
112 Brazil Answers to Second Set of Questions, para. 80. WT/DS267/RW  
Page D-548  
 
77. Finally, as noted above, there is no basis for Brazil's attempts to invoke certain statements by 
the NCC carefully selected to give the impression that U.S. upland cotton farmers would simply be "bankrupt" without counter-cyclical payments.  As  Brazil admits, these statements were not even 
made with respect to counter-cyclical payments under the FSRI Act of 2002 but rather were made in 
February 2001 – before the FSRI Act of 2002 even ca me into effect – about certain emergency relief 
that had been provided under the FAIR Act of  1996 including production flexibility contract 
payments, marketing loss assistance payments, and disaster payments.  These statements offer no 
insight regarding the role of counter-cyclical paymen ts in production decisions or about U.S. farmers' 
costs and revenues today.  And they certainly do nothing to detract from the actual data regarding 
"present" costs and revenue, which flatly contradict  Brazil's claims that U.S. upland cotton farmers 
would be bankrupt without counter-cyclical payments. 
 78. In sum, Brazil has offered no valid reason why the Panel should not consider the studies 
submitted by the United States to be highly probativ e on the question of the effects of the counter-
cyclical payments on acreage and production decisi ons.  The United States submits that these studies 
continue to provide important insight into the effects of those payments and confirm the U.S. 
arguments that these effects are not the "significan t" production and price effects that Brazil has 
alleged.  
66. Can Brazil explain the differences between the figures for the amount of counter-
cyclical payments allocated to upland cotto n provided by Brazil at the meeting of 
the Panel with the parties (Opening Statement of Brazil, para. 40 and Exhibit 
Bra 625) and the figures in Table 5 of Brazil's Rebuttal Submission? 
 67. Please confirm whether or not the Panel's understanding is correct: 
"Table 6" in Brazil's First Written Submi ssion was produced using the so-called 
"Brazil's method" using USDA data. 
"Table 5" in Brazil's Rebuttal Submission was produced using the so-called "cotton-to-cotton" methodology using USDA data. The figures cited in para. 40 of Brazil's opening statement (i.e. "$868 million and 
$838 million) are produced with the "Brazil's method" as well as the 
"cotton-to-cotton" methodology, using the data provided by the United States in 
exhibit US-64. 
 68. Please comment on the following statement by the US:  
"The United States understands that Brazil intends the counter-
cyclical payment figures shown in 'Table 5' of Brazil's rebuttal 
submission to supersede the counter-cyclical payment figures shown in 'Table 6' of its first written submission."  (US response to question 4 at para. 15)    
69. How does Brazil address the argument of the United States that "the only evidence 
that Brazil has submitted purporting to exam ine the price effects of marketing loan 
and counter-cyclical payments specifically are the results of the modelling exercise 
that it has conducted for purposes of this proceeding"?  (Opening Statement of the 
United States, para. 76)   
 
79. In the cited portion of the U.S. oral presentation, the United States observed that:  
regarding the degree  of any possible effects on world market prices, the United States 
notes that the only evidence that Brazil has submitted purporting to examine the price  WT/DS267/RW 
 Page D-549 
 
 
effects of marketing loan and counter-cyclical payments specifically are the results of the modeling exercise that it has conducted for purposes of this proceeding.
113 
80. Brazil accuses the United States of "ignor[ing ] the hundreds of exhibit and the circumstantial 
evidence presented by Brazil in the original proceeding and in  this compliance proceeding,"114 and 
then expounds for 10 pages about the "abundant and diverse evidence" it has allegedly presented.115  
However, not a single piece of the allegedly "ab undant and diverse evidence" does what the United 
States noted – examines the degree of any possible effects on world market prices of the marketing 
loan and counter-cyclical payment programs.  The United States therefore understands Brazil's 
response to confirm the U.S. observation.  
81. As to Brazil's assertion that its allegedl y "abundant and diverse evidence" nonetheless 
supports a finding that "the effect" of marketing loan and counter-cyclical payments is "present" 
significant price suppression, Brazil is wrong.  The United States has addressed each of Brazil's 
arguments in its prior submissions
116, in the general U.S. comment above regarding Brazil's claims 
under Articles 5(c) and 6.3(c), and in the U.S. comments regarding Brazil's responses to 
Questions 62-65 and 70.  As shown therein, none  of the "evidence" asserted by Brazil withstands 
scrutiny.  
 
70. How does Brazil respond to the United States' rebuttal that Brazil has not even 
established a temporal correlation between payment of subsidies and significantly 
suppressed prices during the life of the FSRI, that is from marketing year 2002 
to 2005?  More specifically, please address th e United States' claim of the stability 
of US plantings, US share of world production, US share of world exports and the world price of cotton during this period. 
 
82. The United States notes that Brazil chooses not to respond to the Panel's question.  The Panel asks Brazil to "respond to the United States' rebuttal that Brazil has not even established a temporal 
correlation between payment of subsidies and significantly suppressed prices during the life of the 
FSRI, that is from marketing year 2002 to 2005 ."  Instead of responding, however, Brazil attempts to 
sidestep the issue by attributing to the United States  – inexplicably – the "assertion" that "there were 
not 'coincidences' between (a) increased U.S. production and exports  and (b) large U.S. marketing 
loan and counter-cyclical subsidies" and then proceeding to attempt to rebut that alleged 
"assertion."
117  The United States has never suggested that this is the appropriate analysis, let alone 
made the kind of "assertions" that Brazil attempts to attribute to the United States.  Nor did the original panel conclude that an increase in absolute  levels of production and ex ports would equate to a 
"temporal coincidence" between allegedly significantly suppressed world market prices
 and payments 
under the marketing loan and counter-cyclical payment program. 
 
83. Rather, the original panel considered a number of factors every single one of which the 
United States examined in its first wr itten submission and its rebuttal submission.118  A s  t h e  
United States showed therein, none of the factors c onsidered by the panel in the original proceeding in 
reaching its conclusion of a "discernible temporal co incidence" between U.S. subsidies and significant 
                                                      
113 U.S. Oral Statement, para. 76. 
114 Brazil Answers to Second Set of Questions, para. 90. 
115 Brazil Answers to Second Set of Questions, para. 101. 
116 U.S. First Written Submission, paras. 203-331 and Annex I;  U.S. Rebuttal Submission, paras. 215-
404 and Annex I;  U.S. Answers to Parts A-C of First Set of Panel Questions, paras. 27-44;  U.S. Oral 
Statement, paras. 50-85 and Statement of Dr. Joseph W. Glauber;  U.S. Answers to Parts D-E of First Set of 
Panel Questions, paras. 14-42;  U.S. Comments on Brazil's "Oral" Presentation, paras. 34-91 and Annex I, and U.S. Answers to Second Set of Panel Questions, paras. 1-4, and 62-170. 
117 Brazil Answers to Second Set of Questions, para. 108. 
118 U.S. First Written Submission, paras. 277-291;  U.S. Rebuttal Submission. paras. 314-320. WT/DS267/RW  
Page D-550  
 
price suppression support such a finding with resp ect to the marketing loan and counter-cyclical 
payments now.  Brazil has never rebutted the U.S. ar guments in this regard;  and does not do so now 
even despite the direct request by the Panel to do so.  This confirms that Brazil has not – and cannot – prove any "discernible temporal coincidence" betw een significantly suppressed world market prices 
and marketing loan and counter-cyclical payments.  Indeed, as discussed below, Brazil has not even 
proven the factual predicates therefor, including significantly suppressed prices. 
 84. Rather than offering any proof of "discerni ble temporal coincidence" between significantly 
suppressed world market prices and marketing loan and counter-cyclical payments, Brazil relies on 
reasoning that is entirely untenable.  Consider, fo r example, Brazil assertion that the increase in the 
absolute level of U.S. production and exports al one over the life of the FSRI Act of 2002 should be 
understood "in isolation" to "suggest a relationshi p" between the marketing loan and counter-cyclical 
subsidies and allegedly suppressed world market prices.
119  As evidenced by the fact that U.S. share of 
world production and exports has remained relativel y stable over the course of the entire FSRI Act, 
however, it is a fact that there is precisely the same "temporal coincidence" between increased foreign 
production and exports and the U.S. marketing loan and counter-cyclical payments.  Does this – "in 
isolation" – support the same conclusion in respect of foreign production and exports?  Should the 
U.S. marketing loan and counter-cycli cal payments be understood to have caused  the increase in the 
absolute level of foreign production and exports?  Surely not.  Su rely any rational analysis would look 
more closely at how the marketing loan and coun ter-cyclical payments interact with the production 
decisions ( i.e., the decision on what to plant). 
 
85. When one looks at planted acreage, one finds that the increase of absolute levels of U.S. 
production is solely attributable to an increase in yields.  In fact, in MY 2005, U.S. producers actually 
planted fewer  acres than in either MY 2001 or MY 1999 (13.9 compared to 15.4 and 14.5 million 
acres, respectively), the years that Brazil has urged th e Panel to look at as comparison years before the 
FSRI Act came into effect.  Moreover, had the yiel ds in MY 2005 been what they were in those 
earlier years, U.S. production in MY 2005 would have been far lower.120  Thus, contrary to Brazil's 
assertions, the increased production in these years is not evidence of any causal link between the 
marketing loan and counter-cyclical payments a nd production.  It is evidence of dramatic 
improvements in yields.  
86. In an apparent effort to avoid this flaw in its argument, Brazil then argues that "but for" the 
U.S. marketing loan and counter-cyclical payments, U.S. planted acreage would have been lower over 
the life of the FSRI Act.
121  As the United States has shown – ex amining the planting decisions made 
by U.S. farmers in MY 2006, MY 2005 and, in f act, every year under the FSRI Act of 2002 – the facts 
do not support Brazil's assertion.122  Thus, Brazil's answer only confirms that, notwithstanding its 
assertions, Brazil does not – and, in fact, cannot – "reinforce the original panel's finding, at 
paragraph 7.1351 of its report, of a discernable temporal coincidence of suppressed world market 
prices and the price-contingent U.S. subsidies."123 
 87. Nor does Brazil respond fully to the second of th e Panel's questions.  As the Panel's question 
reflects, the United States identified a key flaw in Brazil theory at the very start of this proceeding.
124  
                                                      
119 Brazil Answers to Second Set of Questions, para. 109. 
120 If yields were at the levels that prevailed in MY 2001, U.S. production would have been almost 
30 percent lower in MY 2005.  If yields were at MY 1999 levels, U.S. production would have been almost 
40 percent lower.  See U.S. First Written Submission, paras. 279-282. 
121 Brazil Answers to Second Set of Questions, para. 108. 
122 See e.g.,  U.S. Comments on Brazil's "Oral"  Presentation, paras. 58-78. 
123 Brazil First Written Submission, para. 152.  The United States notes that, while Brazil asserts in its 
first written submission that it will isolate the effects of the marketing loan and counter-cyclical payment 
programs, it does not do in its assessment of "temporal coincidence." 
124 U.S. First Written Submission, paras. 243-252.  WT/DS267/RW 
 Page D-551 
 
 
Namely, if, as Brazil alleges, U.S. producers we re cut off from market signals, why does U.S. 
production response mirror foreign production respon se (see chart below)?  Why does one not find 
U.S. share of world production and exports increasi ng over the life of the FSRI Act as U.S. producers 
allegedly ignore the same market signals received by their foreign counterparts?  
US Production Response Mirrors 
Foreign Production Response
-20.00%-10.00%0.00%10.00%20.00%30.00%
2000 2001 2002 2003 2004 2005 2006f
Marketing Year1,000 480 lb bales
Foreign % Change US % Change 
 
88. Brazil has never been able to rebut this evid ence;  its only response has been to assert that the 
stable share of world production and exports is  somehow itself evidence that U.S. producers are 
insulated from market signals.  However, as the Unit ed States explained in its first written submission, 
in making this assertion, Brazil is improperly assuming its own conclusion – i.e., "stable U.S. share of 
world production and export proves that U.S. support payments cause price suppression because 
without the price suppression caused by U.S. support payments U.S. share of world production and 
exports would not be stable."125  Brazil's circular reasoning is not improved by its reassertion in 
Brazil's response to this question.  89. In its response, Brazil also argues at length about the alleged "United States [ sic] claims that 
the stability of U.S. acreage de monstrates the lack of any 'temporal coincidence' (and hence 
causation)."
126  Brazil's arguments in this regard are baffling because the United States has not 
"claimed" any such thing.  What the United States h as noted is (a) the original panel's analysis that 
"United States production of upland cotton in creased from MY 1998 to MY 2001 and, while 
production dropped in MY 2002, there was still an  overall increase in MY 2002 compared to 
MY 1998;"127 and (b) Brazil's  arguments that in its discussion of production and  "temporal 
coincidence" in the panel report, "[t]he [original]  Panel simply referred to "production" as shorthand 
for planting decisions by producers, which even  in agricultural economics literature is not 
uncommon."128  According to Brazil's argument, then, th e original panel found an "overall increase" 
in the U.S. upland cotton planted acreage in MY 1999-2002 and considered this as one factor in its 
finding of a "discernible temporal coincidence".  Th e United States has shown that there is no similar 
"overall increase" in the U.S. upland cotton plante d acreage over the life of the FSRI Act. To the 
contrary, planted acreage declined from MY 2002  levels in MY 2003 and MY 2004, picked up 
                                                      
125 U.S. First Written Submission, para. 251. 
126 Brazil Answers to Second Set of Panel Questions, paras. 112-115. 
127 Upland Cotton (Panel) , para. 7.1351. 
128 Brazil Appellee Submission, para. 686.  Brazil argued that "ultimate production" is not an 
appropriate basis for assessing production decisions  as "producers do not decide on production, but on plantings.  
Ultimate production is affected by weather and other factors affecting yields."  Brazil Appellee Submission, 
para. 706, n. 995.  As a result, Brazil asserted that the original panel's discussion of an "overall increase in 
production" was actually a discussion regarding planting, not actually production. WT/DS267/RW  
Page D-552  
 
slightly in MY 2005 and more so in MY 2006 but is  projected to fall dramatically in MY 2007 to 
levels lower than they have been in almost a decade.
129 
 90. There is similarly no merit to the other ar guments made by Brazil regarding U.S. planted 
acreage.
130  Brazil continues to make arguments on the fundamentally flawed assumption that U.S. 
planted acreage should change year-to-year based on changes in the futures price for upland cotton 
alone.  Thus, for example, Brazil even claims as "one  of the most important 'temporal coincidences' in 
the record" – the fact that U.S. planted acreage increased slightly in  MY 2005 even though futures 
prices for cotton in that year we re lower than the year before.131  But Brazil's own assertions about the 
proper analysis of planted acreage in another year – MY 2007 – demonstrate the fallacy in Brazil's 
arguments about planted acreage shifts in MY 2005.   If U.S. planted acreage must move in synch 
solely with upland cotton prices, why does Brazil argue that U.S. upland cotton acreage should be 
decline dramatically in MY 2007132 even though the expected harves t time price for upland cotton in 
this year ( i.e., the average January-March 2007 New York fu tures price for the December contract) is 
59 cents/lb, more than 6 cents/lb higher  than for MY 2005 and almost the same level as in MY 2006.  
The reason why Brazil argues that there shoul d be a decline is because the prices for corn – a 
competing crop – make that a more attractive option in MY 2007.133  The same kind of considerations 
of competing crops, weather, pests and other such factors – not some narrow assessment of changes in 
the futures price for upland cotton price alone – explain the acreage shifts also in MY 2005 (and indeed in each of the other years th at the FSRI Act has been in effect).
134 
 
91. Finally, the United States notes that althoug h the Panel asks Brazil specifically to respond to 
the U.S. arguments regarding world market pric es, Brazil does not do so.  Rather, Brazil simply 
asserts that prices over the life of the FSRI Act are below those that prevailed in MY 1980-1998.135  
As the United States explained in its first writte n submission, however, Brazil's claim in this 
proceeding is of significant price suppression , not price depression .  A decline  in prices does not 
demonstrate price suppression .136  The question is whether prices are being prevented from rising  by 
                                                      
129 See U.S. First Written Submission, para. 280 and U. S. Answers to Second Set of Panel Questions, 
paras. 1-4. 
130 As the United States explained in its rebuttal s ubmission, Brazil's attempts to compare changes in 
U.S. planted acreage , changes in foreign harvested  acreage, and changes  in the futures prices is fundamentally 
flawed both because of its apples-to-oranges comparison  and also because it seeks to explain changes in U.S. 
upland cotton acreage solely  by reference to upland cotton futures, in disregard of the basic fact that acreage 
decisions are made in consideration of prices and other factors not only for cotton but for competing crops.  U.S. 
Rebuttal Submission, paras. 305-306.  In fact, what Brazil's flawed analysis shows – when conducted on the same harvested-acreage basis for both the United States and the rest of the world – is that neither  U.S. nor 
foreign harvested acreage moves closely in line with futures prices of cotton alone.  U.S. Rebuttal Submission, 
para. 305-307.  Nonetheless, even if  the comparison were valid (and it is not), it would show that, where 
changes in U.S. and foreign area diverge, U. S. harvested acreage tends to react more conservatively than foreign 
acreage to increasing prices (as in MY 2003 and 2006).  U.S. Rebuttal Submission, paras. 305-307.  This would 
undermine – rather than support – Brazil's assertions of alleged "subsidy-fueled overproduction." 
131 See U.S. Comments on Brazil's "Oral" Presentation, para. 70. 
132 Oral Statement of Brazil, para. 73. 
133 See Brazil Oral Statement of Brazil, para. 73 (arguing  that "[i]f marketing loan and CCP subsidies 
did not exist, and if U.S. cotton farmers would have to re act to market price signals, far more than 14 percent of 
cotton acreage predicted by the NCC [for MY 2007] would switch to substitute crops.");  see also U.S. 
Comments on Brazil's "Oral" Presentation, paras. 1-4 (rebutting Brazil's argument). 
134 See U.S. Comments on Brazil's "Oral" Presentation, para. 70.  For example, the data show a perfect 
correlation between a shift away from soybean acreage in MY 20 05 due to concerns about an outbreak of Asian 
soybean rust in the Delta and Southeast regions of the United States and an increase in the competing crop – 
cotton – in the exact same areas. 
135 Brazil Answers to Second Set of Questions, para. 113. 
136 Interpreting "suppression" in accordance with its ordinary meaning of "[p]revent or inhibit (an 
action or phenomenon)," the panel in th e original proceeding defined "price su ppression" as "the situation where 
'prices' – in terms of the 'amount of money set for sale of upland cotton' or the 'value or worth' of upland cotton  WT/DS267/RW 
 Page D-553 
 
 
something (in this case, the marketing loan and c ounter-cyclical payment programs).  Brazil provides 
no empirical evidence showing such "suppression" as a result of marketing loan and counter-cyclical 
payments.  92. Rather, the fact that the A-Index has trende d downwards for more than 25 years now – well 
before the FSRI Act came into effect – and the fact that the A-Index has gone up from the levels that 
prevailed before  the FSRI Act came into effect as of MY 2002 would tend to suggest that, to the 
extent there is any price suppression , it is not "the effect" of the marketing loan and counter-cyclical 
payment programs.  
 
 Source:  USDA, Agriculture Marketing Service Reports137 
 
93. Brazil has never rebutted this evidence nor est ablished that there is a "discernible temporal 
coincidence" of U.S. marketing loan and counte r-cyclical payments and allegedly suppressed world 
market prices. 
 
71. In the original case, the Panel conclude d that the analysis covering "the six-year 
period from 1997-2002 ... lends itself to an assessment of the medium- to longer-term examination of developments in the United States upland cotton industry" 
(see para. 7.1354 of the original panel report).  Thus, total costs of production were 
the costs considered appropriate by the Pa nel.  Would total costs of production 
continue to be relevant should the complia nce Panel decide to use only marketing 
year 2005 as the reference period for analysis?   Or would variable costs of upland 
cotton farming in marketing year 2005 now be the relevant information to 
consider? 
 
94. The United States offers a number of observations  regarding Brazil's answer to this question.  
First, Brazil asserts that there have been no fundame ntal changes in the conditions of competition or 
any other relevant factors that would compel th e compliance Panel to reject the findings of the 
original panel's causation analysis relating to "total cost of production."
138  Brazil is incorrect. 
                                                                                                                                                                     
– either are prevented or inhibited from rising ( i.e. they do not increase when th ey otherwise would have) or 
they do actually increase, but the increase is less than it otherwise would have been." Upland Cotton (Panel) , 
paras. 7.1276-7.1277.  The Appellate Body agreed that  this was an appropriate interpretation of "price 
suppression."  Upland Cotton (AB) , para. 424. 
137 Compiled Statistics – Prices (Exhibit US-25). 
138 Brazil Answers to Second Set of Questions, paras. 117 and 118. The A-Index Has Been Trending Down for More Than 25 Years
0.0010.0020.0030.0040.0050.0060.0070.0080.0090.00100.00
1980
1982
1984
19861988
1990
1992
1994
1996 1998
2000 2002
2004
Marketing Yearcents/lbWT/DS267/RW  
Page D-554  
 
95. As the United States explained as early as September 2003, the 1997 ERS/USDA survey data on cost of production used by both Brazil and the Un ited States in the original panel proceeding likely 
overstated certain costs because of technological and other changes.
139   The U.S. arguments were 
borne out when ERS released new cost of produc tion data based on a 2003 survey.  As a result of 
changes in technology – widespread adoption of  biotech cottonseed, and other improvements in 
production practices, such as boll weevil eradication programs – upland cotton yi elds have exhibited a 
structural increase and per unit input costs have fallen.140  This dramatic shift in the cost and yield 
structure for upland cotton certainly represents a f undamental shift in the conditions of competition, 
contrary to Brazil's assertions.  As the United Stat es explained in earlier submissions, the data show 
clearly that upland cotton producers covered not onl y their operating (variable) costs but also a 
substantial portion of their total costs between 2002-2005.141 
 96. Second, Brazil continues to assert that tota l costs of production, including non-cash or 
economic costs, are determinative of a producer's planting decision, without offering any basis in the economic literature or even in fact to support that  assertion.  The United States has reviewed this issue 
thoroughly in its prior submissions and, rather than  repeating this here, refers to the Panel to the 
earlier discussion.
142  For the reasons explained by the United States, if the Panel were to examine 
effects on planting/production in a single year – MY 2005 – the relevant consideration is operating 
costs, not "total" costs.143 
 97. Third, while Brazil is correct in its observation that a farmer has two different cost concerns – 
one a year-to-year planting decision and another lo ng-term decisions about the economic viability of 
his farm – Brazil analysis of these decisions is flaw ed.  As the United States has explained the "total 
costs" that Brazil uses is not an appropriate consideration with respect to either decision.
144  To the 
extent a producer has planting options for vari ous crops, based on agronomic conditions, the first 
decision is an assessment of net returns per crop;  that is, what is relative market revenue minus 
operating costs (net revenue per crop).145  In addition, over time, a producer must also cover all cash 
costs, including such items as mortgage costs and equipment.  The United States agrees with Brazil 
that "without generating sufficient funds to meet th is second set of costs, there would be no facilities 
or equipment to grow upland cotton in the first place."146  However, as the United States has shown, 
U.S. farmers assess the economic viability of a farm based on the total costs and revenue for the 
farm .147  It is on the basis of those considerations – not some artificially segmented crop-by-crop 
"total cost" analysis – that the farmer makes d ecisions such as whether to declare bankruptcy.   
 98. It is a significant flaw in Brazil's analysis, therefore, that Brazil disregards off-farm income 
and income from other crops, both of which are an impor tant part of the total re venue of a farm.  It is 
similarly incorrect for Brazil to attempt to include in  its "total cost" analysis such factors as imputed 
opportunity costs that have been calculated by US DA to attribute some value to unpaid labor and 
owned land but that are not necessarily costs that must be paid off in order for farmers to avoid having 
to "close down [their] business[es]."
148 As a result of these flaws, the picture that emerges of the 
                                                      
139 U.S. Further Submission in the original panel proceeding, paras. 46-54 (September 30, 2003).  U.S. 
Further Rebuttal Submission in the original panel proceeding, para. 123-133 ( November 18, 2003). 
140 U.S. First Written Submission, December 15, 2006, para. 302. 
141 U.S. First Written Submission, December 15, 2006, para. 300. 
142 For the most recent review, s ee U.S. Comments on Brazil's "Oral" Presentation, paras. 62-65. 
143 Any such analysis would also have to look at the other factors besides expected operating costs 
affect the planting decision – MY 2005 being a good example of other confounding factors.  In that year, a 
major unanticipated factor was the emergence of soybean rust in key cotton producing states, which encouraged producers to switch from soybeans to cotton.  U.S. Comments on Brazil's "Oral" Presentation, para. 70. 
144 See U.S. Answers to Second Set of Panel Questions, paras. 96-100, 113-116, 133-154. 
145 See e.g., U.S. Comments on Brazil's "Oral"  Presentation, paras. 66-67. 
146 Brazil Answers to Second Set of Questions, para. , para. 121. 
147 See e.g.,  U.S. Answers to Second Set of Panel Questions, paras. 133-154. 
148 Upland Cotton (Panel) , para. 7.1353.  WT/DS267/RW 
 Page D-555 
 
 
financial viability of U.S. farmers is completely and thoroughly distorted.  It results in the attribution 
to marketing loan and counter-cyclical payment "effects" that they are not in fact having. 
 99. When one considers instead, the total cash costs that most farmers do in fact have to meet 
over the long term, the data show th at U.S. farmers have in fact ge nerated sufficient funds to cover 
their total cash costs over the long term.  The cost data for the period 2000-2005 show that, instead of 
the cumulative $663 deficit per acre erroneously asserted by Brazil, the cumulative returns over the 
same period were a positive return of $161 per acre.  Moreover, for MY 2000-2006, instead of the 
$837 deficit  per acre alleged by Brazil, the cumulative net returns were a positive $133 per acre.
149 
 
100. The FAPRI baseline projections from July 2006,  which Brazil used in an earlier submission, 
confirm the same facts.  Comparing gross market  revenue for upland cotton per acre to variable 
expenses per acre shows that upland cotton revenue would more than cover variable expenses and 
would cover a large share of other cash expen ses.  For the period 2004/05-2010/11, cumulative net 
returns per acre were projected to be $620.34.150 
 
101. It is important to remember that these results look only to total costs and revenue for upland 
cotton production.  When whole-fa rm costs and revenue from all sour ces is taken into consideration 
an even more robust picture of economic viability would likely emerge.  
72. Brazil has argued that the adjustment in co tton stocks should not be included in the 
simulation of a large and permanent reduc tion in subsidies to cotton. Please 
respond to the following argument: 
 
If the simulation were a comparative static analysis in which a baseline is compared to a counterfac tual outcome in some long-run 
state, modelling such adjustments would be unnecessary. But such 
adjustments should be taken into account given that the model is used to simulate the average impact on the world price of cotton (among other variables) on specific periods of time (MY 2002-05 or MY 2006-08) and not in the long run.   
102. In its response to this question, Brazil conti nues to suggest incorrectly that stock responses are 
incorporated into the demand elasticities used in Brazil's new model.  This is simply untrue. 
 103. Brazil also attempts to minimize the importa nce of stock adjustments to overall market price 
movements.  However, stock-holding activity is an  important component of any storable commodity 
market.  Market participants hold stocks for a va riety of reasons to accommodate a number of possible 
factors.  The adjustment of stocks is an importa nt determinant in overall price movement.  The United 
States has shown that by ignoring the importance of stocks in a short-run analysis, Brazil's analysis 
overstates the price impacts.
151 
 104. The United States agrees that stock adjustment s are not necessary to an analysis of long-term 
demand and price adjustments. However, in a long-te rm analysis, the elasticities that are used must 
fully reflect long-term adjustments in supply and demand.  Based on such elasticities documented by 
FAO, the United States demonstrated that – ev en using Brazil's own econometric model, which 
suffers from certain fundamental stru ctural flaws that tend to overstate  the results – any price impacts 
due to the removal of U.S. programs are only in the range of 1 to 1.5 percent, not the grossly exaggerated results that Brazil attempts to show. 
 
                                                     
 
149 U.S. Comments on Brazil's "Oral" Presentation, paras. 76-77. 
150 Brazil's First Written Submission, para. 286.  See also  Exhibit Bra-479, page 6. 
151 See e.g.,  U.S. Comments on Brazil's "Oral" Presentation, para. 86. WT/DS267/RW  
Page D-556  
 
73. How does Brazil respond to the argument made by the United States in 
paragraph 79 of its Opening Statement that: 
 
"to the extent a counterfactual assessment is undertaken, it is only to assess what the price equilibrium would be at present if 
marketing loan and counter-cyclic al payments had been lower, 
different or did not exist.  Article 6.3(c) does not ask what prices will look like in the short-run adjustment period if the marketing loan and counter-cyclical payments are suddenly eliminated... Brazil's argument that it is n ecessary to look at the short-run 
effects of total elimination of the programs cannot be accurate as a 
textual matter." 
More specifically: 
 
(a) Why did Brazil not consider it appropr iate to include simulations that 
involve reductions rather than elimin ation of the subsidy programmes?  
 
105. The United States offers two observations in respect of Brazil's answer.  First, Brazil's 
response to this question appears to make little sense.  Brazil asserts that it has not modeled reductions 
of the U.S. marketing loan and counter-cyclical payment programs because the United States has not 
made changes to reduce payments under those prog rams.  However, the United States has also not 
eliminated the marketing loan and counter-cyclical paym ents.  Under its own reasoning, Brazil would 
have no basis for purporting to model the tota l elimination of those payments either. 
 106. Second, the United States notes that Brazil reas serts its arguments about the appropriateness 
of assessing the "short-run" response of "shocking" the system with elimination of marketing loan and 
counter-cyclical payments.  As the United States has explained, Brazil confuses the question under 
Articles 5(c) and 6.3(c) of the SCM Agreement .  The question under those provisions is what the 
present effects of the challenged measures are (and whether these effects comprise "significant" price 
suppression).  The question is not what the effects are of eliminating anything.  To the extent a 
counterfactual analysis is conducte d to attempt to tease this out, the question is simply where the 
equilibrium would have been today  had the challenged measures not been in existence.  The question 
is not what will happen in the  short run  if a Member were to eliminate the challenged measures today.  
Brazil's citation of Korea – Ships  confirms this precisely:   
 
price suppression is the situation where prices have been restrained by something, and 
price depression is the situation where pri ces have been pushed down by something.  
So the question to be answered is whether the "something" is subsidization.  Looking 
at a counterfactual situation, i.e., trying to determine what prices would have been in 
the absence of the subsidy , seems to us the most logical and straightforward way to 
answer this question.
152 
107. Indeed, in other disputes, Brazil has conf irmed that in assessing trade effects using a 
counterfactual analysis, "elasticity values should be taken from long-run estimates and not short run 
estimates."153  Brazil has provided no valid reason for why the analysis is different here. 
 
(b) If simulations of such scenarios a re performed, would the current values of 
the elasticities chosen (particularly the supply elasticities) to simulate the elimination of marketing loan and counter-cyclical programmes continue 
                                                     
 
152 Korea – Ships (Panel) , para. 7.612. 
153 U.S. – Continued Dumping and Subsidy Offset Act (22.6) , para 3.101.  WT/DS267/RW 
 Page D-557 
 
 
to be appropriate?   Please kindly provide an explanation for the chosen 
answer. 
 
108. The United States is surprised by Brazil's asserti on now that its inflated U.S. supply elasticity 
is actually appropriate even for assessing a partial re duction of payments under U.S. programs.  Brazil 
itself has argued that different elasticities are nece ssary for reduction of paym ents versus "permanent" 
removal of payments and has attempted to have th e Panel dismiss the FAPRI parameters on the basis 
that they are not applied to "p ermanent" removal of payments.154  Now – however – the Panel is to 
believe that the inflated Sumner  elasticities are nonetheless appropria te for use in every context.  
Brazil's assertions about the these elasticities simply  lack credibility.  The United States has shown 
that the modeling parameters and assumptions that Brazil uses are grossly exaggerated.155  This is true 
regardless of whether they put to an analysis of partial or full reduction of payments.  
74. Brazil's view is that the data that th e Panel must consider for its claim of present 
serious prejudice should be that covering  the latest marketing year for which 
complete information is available, MY  2005, and where credible, evidence after 
31 July 2006.  Since in MY 2005, payments under Step 2 continued to be made by the United States (payments which the original Panel found to have contributed to adverse effects) how shall the Panel ascertai n that any adverse effects observed in 
marketing year 2005 are due solely to th e two subsidy measures which are the 
subject of the present serious prejudice claim – marketing loan and 
counter-cyclical payments? 
 
109. The United States offers three observations about  Brazil's answer to this question.  First,  
Brazil's response to this question provides an interest ing contrast to its res ponse to Question 69 above.  
In that response, Brazil attempts to excuse its fa ilure to provide empirical evidence regarding the 
effects of the marketing loan and counter-cyclical  payment programs on the basis that "Brazil cannot 
unilaterally remove the U.S. subsidies to present direct evidence of what would actually happen to U.S. acreage, production, exports, and world prices w ithout those subsidies.  Only the United States 
can do so."
156  In its response to this question, howeve r, Brazil argues that where the United States has 
removed a domestic support program, the Panel should not rely primarily on the "direct evidence of 
what would actually happen to U.S. acreage, produc tion, exports, and world prices without" payments 
under that program but rather on Brazil's own "count erfactual" assertions about the effects of the 
removal of the Step 2 program (which are, in a ny event, heavily contradicted by the arguments 
presented by Brazil itself in the original panel proceeding and undermined by the empirical evidence).
157  In effect, Brazil suggests that – regardless of what the facts actually are and regardless 
of whether payments are being made under the cha llenged programs or not – the Panel must rely on 
whatever Brazil alleges about the effects of the pa yments.  There is no basis for such a suggestion. 
 
                                                      
154 Brazil's assertions about the FAPRI parameters are patently untrue.  FAPRI has used their modeling 
system to analyze the removal of domestic subsidies under trade liberalization scenarios and the reduction of 
farm subsidies under various farm bill scenarios, includi ng the "permanent" removal of payments.  Indeed, in 
attempting to argue that elimination of the Step 2 program has had no effects on exports or prices, Brazil itself submitted and repeatedly cites to a FAPRI assessment of the effects of eliminating that program.  See Brazil 
First Written Submission, para. 203 (addressing FAPRI, "Impacts of Commodity and Conservation Reserve 
Program Provisions in House and Senate Reco nciliation Bills,"  FAPRI-UMC Report #15-05, 
December 2005(Exhib it Bra-484).) 
155 See e.g.,  U.S. First Written Submission, paras. 319-328  and Annex I;  U.S. Rebuttal Submission, 
paras. 349-386 and Annex I;  U.S. Oral Statement, paras.  76-81 and Statement of Dr. Joseph W. Glauber;  U.S. 
Comments on Answers to Parts D-E of First Set of Panel Questions, paras. 30-42;  and U.S. Comments on 
Brazil's "Oral" Presentation, paras. 79-91. 
156 Brazil Answers to Second Set of Questions, para. 91. 
157 See U.S. First Written Submission, paras. 149-195;  U.S. Rebuttal Submission, paras. 175-214;  U.S. 
Oral Statement, paras. 54-59. WT/DS267/RW  
Page D-558  
 
110. Second, the facts relating to the period after the removal of the Step 2 program – which Brazil 
attempts to have the Panel ignore – show U.S. plantings declining and U.S. exports declining 
dramatically even as the cost structure of U.S. upl and cotton farms improves due to such factors as the 
use of genetically modified cottonseed.  Brazil ha s not established that, despite these facts, U.S. 
marketing loan and counter-cyclical payments ar e somehow "significantly" suppressing world market 
prices.  The decline in exports and the decline in predicted plantings are occurring even though both 
the marketing loan program and the counter-cycli cal payment program remain in place and even 
though – according to Brazil – these programs are al legedly "designed" to provide consistently high 
payments to U.S. farmers.  These facts are not cons istent with the theories that Brazil has put forward 
purporting to establish the alleged "numbing" of U.S. production response a nd alleged substantial 
levels of overproduction and export of U.S. upland cotton. 
 111. Third, Brazil asserts that the removal of the Step 2 program should be assessed as part of a 
"non-attribution" analysis and suggests that the original panel's analysis somehow supports this 
approach.  Brazil is wrong.  The original panel neve r assessed the effects of St ep 2 payments as part 
of any "non-attribution" analysis;  Step 2 payments  were, instead, part of the package of payments 
whose effects were directly  at issue in the "present" serious prejudice analysis under Articles 5(c) 
and 6.3(c) of the SCM Agreement .   
 112. Nor does it make sense that removal  of the Step 2 program would be part of a "non-
attribution" analysis.  As the Appellate Body has explained, a "non-attribution" analysis focuses on 
"ensur[ing] that the effects of other factors on pri ces are not improperly attributed to the challenged 
subsidies."
158  This requires separating out the effects of other factors suppressing world market prices 
and ensuring that they are not attributed to ma rketing loan and counter-cyclical payments.  As 
removal of the Step 2 program is not suppressing any prices, it is not logical to speak of including that factor in any "non-attribution" analysis. 
 
2. Increase in world market share - Article 6.3(d) of the SCM Agreement  
 
Questions to the United States
 
 
75. Could the United States explain further the textual basis of its argument that 
"Article 6.3(d) is not concerned with absolute market share and whether or not in 
any given year a member's market share wo uld have been lower if subsidies were 
removed"?  (Rebuttal Submission of the United States, para. 401) 
 
Questions to Brazil  
 
76. What is the view of Brazil on the argument of the United States that an inquiry 
under Article 6.3(d) of the SCM Agreement requires two distinct elements:  first, a demonstration of an increase in the world market share of a Member as compared 
to the average share it had during the p revious period of three years, and, second, a 
demonstration that this increase in world market share compa red to the average 
share the Member had during the previous period of three years is part of a 
                                                     
 
158 Upland Cotton (AB) , para. 437.  As the United States has noted in its prior submissions, Brazil has 
not made any meaningful attempt to "ensure that the effects of other factors on prices are not improperly 
attributed to the challenged subsidies."  Upland Cotton (AB) , para. 437.  Brazil's "analysis" consists of 
unsupported assertions that nothing "attenuates" the link th at it asserts between the marketing loan and counter-
cyclical payments and allegedly significantly suppressed wo rld market prices.  This is entirely insufficient to 
meet Brazil's burden, especially in light of substantial evidence submitted by the United States (and even, 
unwittingly, by Brazil itself) showing the key importance of other factors (such as China's trade in upland 
cotton) affecting world market prices.  See e.g.,  U.S. First Written Submission, paras. 308-318;  U.S. Rebuttal 
Submission, paras. 387-396.  WT/DS267/RW 
 Page D-559 
 
 
consistent trend over a period when subsidies have been granted?  (Rebuttal 
Submission of the United States, para. 399) 
 
113. The United States respectfully refers the Panel to its general comments above regarding 
Brazil's claims under Articles 5(c) and 6.3(d) of the SCM Agreement as well to the U.S. arguments on 
this issue in its prior submissions.159 
 114. In its response to this question Brazil asserts that the second element of Article 6.3(d) – "this 
increase follows a consistent trend over a period wh en subsidies have been granted" – can be met 
simply by showing an increase in U.S. world market share from MY 1998 to MY 2005.  Brazil's 
approach – if adopted – effectively write out of Ar ticle 6.3(d) both the reference to "this" increase and 
to a "consistent" trend.  115. As the United States explained in its answer to Question 75, Article 6.3(d) of the SCM Agreement is concerned with increase  in world market share.
160  An increase  is – by definition – 
"the action, process, or fact of making or becoming greater."161  Thus, what is at issue in Article 6.3(d) 
is movement ("becoming greater"), not something static.  The key question, then, is what movement is 
relevant for purposes of that provision   The text provides the answer.  The movement that is relevant 
is that in getting from point A – "the average shar e [the allegedly subsidiz ing Member] had during the 
previous period of three years," – to point B, the leve l in the year that is the subject of the claim.  If 
upward movement – i.e., "increase" or "growth" – is involved in getting from the former to the latter, 
and the upward movement is shown to  be "the effect" of a challenge d subsidy – the first element of 
Article 6.3(d) is satisfied.    116. An "increase" is also at issue in the second element of Article 6.3(d) – the requirement that 
"this increase" be shown to "follow[] a consistent  trend over a period when subsidies have been 
granted."  Again, the text makes clear which partic ular increase is at issue – it is "this increase" - 
i.e., the same  increase that was relevant for purposes of the first element.  Thus, under the second 
element, the complaining party must show that "t his increase" – the "increase in the world market 
share it had during the previous period of three y ears" – "follows a consistent trend over a period 
when subsidies have been granted."  
117. Brazil's argues that "the United States attempts  to read the separate element of a three-year 
average into the element of a 'consistent trend,'" but ignores the fact that Article 6.3(d) specifically 
refers to "this" increase, relating back to the re ference to the increase over the previous three-year 
average.  Brazil offers no reason why the drafters w ould have referred back to "this increase" if they 
had intended that a completely different increase – one defined by the complaining party – was to be 
the relevant increase for purposes of the second element of Article 6.3(d). 
 118.   Instead, Brazil confuses two entirely separate  questions.  One question – just discussed – is 
what the relevant comparison is in assessi ng whether there has been an "increase" ( i.e., whether the 
proper points of comparison are the share of world production in a particular year versus the average share over the previous three-year period, as the te xt suggests, or rather two years selected by the 
complaining party, as Brazil urges).  A second, and separate, question is whether an increase must be 
shown in every  year in order to show that "this increase follows a consistent trend over a period when 
subsidies have been granted" (e mphasis added).  These are distinct issues.  Contrary to Brazil's 
assertions, the United States has never suggested that fo r a "consistent trend" to be shown there must 
be an increase in every single year that subsidie s have been granted.  Nor is this a necessary 
implication of the U.S. interpretation of Article 6.3(d). 
                                                     
 
159 See e.g.,  U.S. First Written Submission, paras. 323-343;  U.S. Rebuttal Submission, paras. 399-404;  
U.S. Answers to Second Set of Panel Questions, paras. 171-172. 
160 U.S. Answers to Second Set of Panel Questions, paras. 171-172. 
161 The New Shorter Oxford English Dictionary  at 1350, Volume 1, (2002 Edition) (Exhibit US-148). WT/DS267/RW  
Page D-560  
 
119. While there may not be a need to show an increase in every year, where – as here – a 
complaining party can only point to one
162 isolated year in which ther e has been an increase over the 
previous three-year average (and even that slight increase is shown to be both part of the ordinary 
fluctuation of world market share and caused by f actors other than the challe nged measures) there is 
clearly no basis whatsoever for an  assertion of a "consistent trend." 
 
120. Indeed, it is Brazil's interpretation that is inc onsistent with the "consis tent trend" language in 
Article 6.3(d).  Brazil has argued that a complaining party should be able to satisfy the second element 
of Article 6.3(d) by simply selecti ng two end-points in the period that  subsidies have been granted and 
drawing an upward-slanting line between the two poi nts.  However, this would simply show an 
increase.  It would not necessarily show a "trend," a nd it would most certainly not show a "consistent" 
trend.  To the contrary, it would render the te rm "consistent" entirely meaningless because – under 
Brazil's theory – there would only ever be two end-points and one line connecting them.  This line could never be "consistent" with anything else becau se there would simply never be anything else 
with which to be "consistent."  Brazil would – in effect – simply write "consistent" out of 
Article 6.3(d) altogether.  This is not an permissible interpretation of Article 6.3(d). 
 
77. In this connection, could Brazil respond to the argument of the United States that 
Brazil has not shown that either of these elements are met with respect to the marketing loan and counter-cyclical payme nt programs"?  (Rebuttal Submission of 
the United States, paras. 399-403) 
 
121. The United States respectfully refers the Panel to its general comments above regarding 
Brazil's claims under Articles 5(c) and 6.3(d) of the SCM Agreement , to the U.S. comments regarding 
Brazil's answer to Question 76, as well to the U.S. arguments on this issue in its prior submissions.
163 
 
C. C LAIM OF BRAZIL REGARDING THREAT OF SERIOUS PREJUDICE  
 
Questions to both parties  
 
78. Could both parties comment on the statements of Canada that "(a)t issue is 
whether these programmes....threaten to cau se serious prejudice simply by virtue of 
their existence" and that "(c)ertain subsidy programs, by their very nature, give 
rise to a constant likelihood of support th at results in a permanent threat of serious 
prejudice"?  (Third Party Submission of Canada, paras. 9-10) 
 
122. The United States respectfully refers the Panel to its general comments above regarding 
Brazil's "threat of" serious prejudice claims under Articles 5(c) and 6.3(c) of the SCM Agreement as 
well to the U.S. arguments on this issue in its prior submissions.164 
 
79. Could the parties state their views on the analysis of the ordinary meaning of the 
term "threat" in paras. 15-28 of the Third Party Submission of Canada? 
 
123. The United States respectfully refers the Panel to its general comments above regarding 
Brazil's "threat of" serious prejudice claims under Articles 5(c) and 6.3(c) of the SCM Agreement as 
well to the U.S. arguments on this issue in its prior submissions.165 
                                                      
162 Or, at most two, if one considers world production plus beginning stocks. 
163 See e.g.,  U.S. First Written Submission, paras. 323-343;  U.S. Rebuttal Submission, paras. 399-404;  
U.S. Answers to Second Set of Panel Questions, paras. 171-172. 
164 See e.g.,  U.S. Rebuttal Submission, paras. 405-425;  U.S. Answers to Second Set of Panel 
Questions, paras. 173-199.  WT/DS267/RW 
 Page D-561 
 
 
Questions to the United States   
 
80. How does the United States address the argument of Japan that in view of the 
different purposes of Parts III and V of the SCM Agreement the standard for determining threat of material injury in Article 15.7 of the SCM Agreement is an 
inappropriate standard for determining the existence of a threat of serious 
prejudice under Part III of the SCM Agreem ent?  (Third Party Submission of 
Japan, paras. 8-12.)  
 81. How does the United States respond to the argument of Australia that "it is beside 
the point for the United States to argue that the programmes under consideration 
are due to expire in late 2007"?  (Third Participant Oral Statement of Australia, 
para. 13) 
 82. Could the United States comment on the projections of marketing loan and 
counter-cyclical payments in Table 26 of Brazil's First Written Submission and on 
the projections of prices and subsidy paymen ts in Table 27 of Brazil's First Written 
Submission?  Could the United States explain how the data in these Tables support its argument that producers are likely to expect low or no marketing loan payments in MY 2007?  (Rebuttal Submission of the United States, para. 418)  
 Questions to Brazil
 
 
83. How does Brazil address the argument of the United States that footnote 13 of the 
SCM Agreement "does not indicate that where a panel finds that a Member is causing present serious prejudice through the use of a subsidy, the panel 
automatically also finds that the Member is threatening to cause serious prejudice 
in the future through the use of the same subsidy"?  (Rebuttal Submission of the United States, footnote 624) 
 84. Could Brazil confirm that its claim of threat of serious prejudice is submitted on a 
contingent basis i.e., that it does not request the Panel to make a finding on this 
claim if the Panel make a finding of present serious prejudice?  How is the 
contingent character of this "threat of seri ous prejudice" claim reflected in Brazil's 
request for the establishment of a panel? 
 85. Could Brazil explain its request that the Panel "make factual findings with respect 
to its 'threat of serious prejudice' claim to allow the Appellate Body to complete the 
analysis, in case it were to disagree with the compliance panel's interpretation"?  
(First Written Submission of Brazil, para. 241) What are the precise "factual findings" which Brazil requests the Panel to make in this regard?  
 86. How does Brazil address the argument of the United States that the definition of 
"threat" of injurious effects in Article 15.7 of the SCM Agreement and Article 
4.1(b) of the Agreement on Safeguards "in terms of their close proximity in time and their high probability of occurring" reflects the ordinary meaning of the word "threat" and that, as such, Article 15.7 of  the SCM Agreement and Article 4.1(b) of 
the Agreement on Safeguards provide "useful contextual guidance" for the 
interpretation of "threat" of serious prejudice? 
 
                                                                                                                                                                    
 
165 See e.g.,  U.S. Rebuttal Submission, paras. 405-425;  U.S. Answers to Second Set of Panel 
Questions, paras. 173-199. WT/DS267/RW  
Page D-562  
 
124. The United States respectfully refers the Panel to its general comments above regarding 
Brazil's "threat of" serious prejudice claims under Articles 5(c) and 6.3(c) of the SCM Agreement as 
well to the U.S. arguments on this issue in its prior submissions.
166  In addition, the United States 
submits the following observations regardi ng Brazil's answer to this question. 
 
125. Article 3.2 of the DSU provides that "the dispute settlement system of the WTO . . . serves to 
. . . clarify the existing provisions of those agre ements in accordance with customary rules of 
interpretation of public international law."  One of these "customary rules" is that treaty terms are to 
be interpreted "in accordance with the ordinary meani ng to be given to the terms of the treaty in their 
context and in the light of its object and purpose."167  In its response to this question and Question 88, 
Brazil urges the Panel to ignore the U.S. application of this rule in interpreting the term "threat" in 
footnote 13.  Brazil provides no basis for why Artic le 3.2 of the DSU should not be applied here. 
 126. As United States has explained, the ordi nary meaning of the term "threat" includes both 
concepts of probability of occurrence and close proximity in time.
168  This is reflected in Articles 15.7 
of the SCM Agreement , Article 3.7 of the Agreement on Implem entation of Article VI of the General 
Agreement on Tariffs and Trade (" AD Agreement "), and Article 4.1(b) of the Agreement on 
Safeguards  in describing the meaning of the term "threat. "  By application of customary rules of treaty 
interpretation under Article 3.2 of the DSU, the or dinary meaning of "threat" of certain injurious 
effects as reflected in these other provisions provi des important contextual guidance in interpreting 
"threat" of serious prejudice in Article 5(c)/footnote 13 of the SCM Agreement . 
 
127. There is no merit to Brazil's arguments that the Panel should artificially strip out the concept 
of close proximity in time from the ordinary meaning of "threat" in footnote 13 and should disregard the important contextual confirmation provided in the definition of "threat" in Articles 15.7 of the 
SCM Agreement , Article 3.7 of the AD Agreement , and Article 4.1(b) of the Agreement on 
Safeguards . 
 128. Brazil alleges, for example, that "Article 4.1(b) and 2 of the Agreement on Safeguards  as well 
as Article 15.7 of the SCM Agreement deal primarily with the threat posed by a potential surge of 
imports" but that "[b]y contrast, Articles 5(c) and 6.3as well as footnote 13 of the SCM Agreement 
deal with the likelihood of adverse effects – not subsidized imports – occurring sometime in 
future."
169  Brazil suggests that this is one reason why the concept of close proximity in time should 
be artificially stripped out of the ordinary mean ing of "threat" for purposes of footnote 13.  This 
argument is flawed.  129. First, it is wrong in its characterization of Article 15.7 of the SCM Agreement .  Neither that 
provision – nor, for that matter its counterpart in Article 3.7 of the AD Agreement  – "deal primarily 
with the threat posed by a potential surge of im ports," as Brazil suggests.  To the contrary, 
Article 15.7 expressly states that it is concerned with the "threat of material injury ," not a "surge in 
imports."  A "surge in imports" is not even required for a showing of material injury.  To the contrary, 
Article 15.7 identifies as only one of five factors that administering authorities "should" consider 
("inter alia ") in making a "threat of material injury " determination whether there has been "a 
                                                     
 
166 See e.g.,  U.S. Rebuttal Submission, paras. 405-425;  U.S. Answers to Second Set of Panel 
Questions, paras. 173-199. 
167 See United States – Gasoline (AB) , p. 17 (noting that "[this] general rule of interpretation [codified 
in Article 31 of the Vienna Convention on the Law of Treatie s] has attained the status of a rule of customary or 
general international law.  As such, it forms part of the 'customary rules of interpretation of public international 
law' which the Appellate Body has been directed, by Articl e 3(2) of the DSU, to apply in seeking to clarify the 
provisions of the General Agreement and the other 'covered agreements' of the Marrakesh Agreement Establishing the World Trade Organization. . . .) 
168 See U.S. Rebuttal Submission, para. 409. 
169 Brazil Answers to Second Set of Panel Questions, para. 172.  WT/DS267/RW 
 Page D-563 
 
 
significant rate of increase of subsidized imports in to the domestic market indicating the likelihood of 
substantially increased importation."  The chausette to  Article 15.7 even makes clear that "no one of 
[the five] factors by itself can necessarily give decisi ve guidance."  In other words, Article 15.7 of the 
SCM Agreement could hardly be more clear that it does not "deal primarily with the threat posed by a 
potential surge of imports."  Brazil's arguments premised on that assertion are, thus, irrelevant. 
 
130. Second, Brazil ignores the fact that "injury" is itself classified as an "adverse effect" under Article 5 of the SCM Agreement .  Indeed, Article 5 of the SCM Agreement makes clear in footnote 11 
that "injury to the domestic industry" therein is "used here in the same sense as it is used in Part V."  
Thus, it is illogical for Brazil to assert that the focus in Article 5 on adverse effects  somehow places a 
"threat of serious prejudice" inquiry into a fundament ally different category than a "threat of material 
injury" inquiry;  one that precludes the Panel from c onsulting the ordinary meaning of "threat" in the 
latter context as important contextual guidance in  interpreting the same word in footnote 13. 
 131. An inquiry into whether subsidized imports in to the domestic market of a Member threaten to 
cause material injury is no less an inquiry into effects  than an inquiry as to whether subsidies threaten 
to cause serious prejudice to the interests of another Me mber.  The fact that one looks to the effects of 
subsidized imports while the other looks to the effect s of subsidies is not material;  the United States 
has never suggested that footnote 13 and Article 15.7 are identical provisions.  And there is certainly 
no requirement that two provisions be identical in order for one to provide contextual guidance as to 
another. 
 
132. Brazil also alleges that the Panel should r ead the concept of close proximity in time or 
"imminence" out of the ordinary meaning of the term "threat" in footnote 13 because the multilateral 
remedy available under Article 5 is somehow a "s low" remedy while the remedy available under 
Part V of the SCM Agreement is a "quick" remedy.  Once again, the factual predicate of Brazil's 
argument is flawed.  A remedy in WTO dispute se ttlement is not necessarily any more "slow" or 
"fast" than the process of applying duties under the SCM Agreement , AD Agreement , or 
Safeguards Agreement .  Indeed, the pace of a particular WTO, CVD, AD, or safeguard proceeding 
necessarily depends on the particular circumstances of each proceeding.  133. Investigations by different Members' aut horities require differing periods of time.  And 
different Members may have different appeal mechan isms that affect the amount of time to obtain a 
remedy.  In short, any number of factors could aff ect whether or not the domestic remedy available 
under the SCM Agreement , AD Agreement , and Safeguards Agreements  is a slow or fast remedy.  The 
same is true for the multilateral remedy availa ble through WTO dispute settlement (e.g., the amount 
of time required for a remedy could depend on th e complexity of the dispute brought by the 
complaining party, whether any appeals are made , the reasonable period of time for implementation 
of any adverse findings and other such factors).  Brazil's generic assertions about the "slowness" or 
"quickness" of the different remedies is, thus, speculative at best.    134. In any event, Brazil neglects one simple fact – the drafters chose  to use the same term 
("threat") in all four contexts.  If the remedies available thereunder were so different that same word 
could not even have the same ordinary meaning in th e four contexts, the drafters could very well have 
chosen to use different words.  They could very easily have inserted, for example, Brazil's preferred 
"significant likelihood" standard in footnote 13 to diff erentiate it from "threat" in Articles 15.7 of the 
SCM Agreement
, Article 3.7 of the AD Agreement , and Article 4.1(b) of the Agreement on 
Safeguards .  But they did not do so.  They chose to use "t hreat" in all four contexts and – for clarity – 
even expressly reflected the ordinary meaning of that  term in certain of the provisions.  Brazil has no 
basis unilaterally to change the text now.  WT/DS267/RW  
Page D-564  
 
87. Could Brazil comment on the argument of the United States that the standard of 
"significant likelihood" is without support in  the text of the SCM Agreement or in 
the GATT/WTO dispute settlement reports cite d by Brazil?  (Rebuttal Submission of 
the United States, paras. 406, 410,413)  
 135. The United States respectfully refers the Panel to its general comments above regarding 
Brazil's "threat of" serious prejudice claims under Articles 5(c) and 6.3(c) of the SCM Agreement as 
well to the U.S. arguments on this issue in its prior submissions.
170 
 
88. Does Brazil agree or disagree with the proposition advanced by the United States 
that "[a] panel may consider the ordinary meaning of a term as reflected in a 
particular provision to interpret the same term in another provision (especially of 
the same agreement) without the need fo r an express cross-reference."  (Rebuttal 
Submission of the United States, para. 411, footnote 635) 
 136. The United States respectfully refers the Panel to its general comments above regarding 
Brazil's "threat of" serious prejudice claims under Articles 5(c) and 6.3(c) of the SCM Agreement , to 
the U.S. comments regarding Brazil's answer to Qu estion 86, as well to the U.S. arguments on this 
issue in its prior submissions.
171 
 
89. Brazil argues that marketing loan and counter-cyclical payments for upland cotton 
are designed "in such a manner that paymen ts would be made in consistently large 
amounts".  (First Written Submission of Brazil, para. 270)   
 
(a) Could Brazil in this regard discuss the data in Table 27 of Brazil's 
First Written Submission that show an increase in the projected farm price 
and AWP over the period MY 2006 - 2010 and a decline in projected 
marketing loan payments?   
 
(b) How does Brazil respond to the argument of the United States that "by 
MY 2008, the projection is of no marketing loan payment at all"?  (Rebuttal Submission of the United States, para. 419).  
 
137. The United States respectfully refers the Panel to its general comments above regarding 
Brazil's "threat of" serious prejudice claims under Articles 5(c) and 6.3(c) of the SCM Agreement as 
well to the U.S. arguments on this issue in its prior submissions.
172 
 
138. In addition, the United States notes that, in its  response to this question, Brazil attempts to 
explain away the evidence – submitted by Brazil itself – undermining its assertions that marketing 
loan payments are "designed 'in such a manner that  payments would be made in consistently large 
amounts.'" Table 27 submitted by Brazil in  its own first written shows the AWP increasing over the 
period MY 2006-2010 and projected marketing loan payments declining over the same period.  
Brazil's response is, however, inexplicable. 
 
139. Brazil delves into a discussion of "determi nistic" versus "stochastic" projections of 
government outlays in its response to the Panel' s question.  However, according to Brazil's own 
notations, Table 27 presents, inter alia , the AWP and payments under the marketing loan and counter-
                                                      
170 See e.g.,  U.S. Rebuttal Submission, paras. 405-425;  U.S. Answers to Second Set of Panel 
Questions, paras. 173-199. 
171 See e.g.,  U.S. Rebuttal Submission, paras. 405-425;  U.S. Answers to Second Set of Panel 
Questions, paras. 173-199. 
172 See e.g.,  U.S. Rebuttal Submission, paras. 405-425;  U.S. Answers to Second Set of Panel 
Questions, paras. 173-199.  WT/DS267/RW 
 Page D-565 
 
 
cyclical payments projected by FAPRI.  The to tal amount of government outlays shown in Table 27 
were not projected by FAPRI;  to the contrary, the government outlays were estimated  by Brazil .173  In 
any event, as USDA points out in the very document Brazil cites for the proposition that "deterministic projections, by their nature, tend to underestimate outlays":  
The Congressional Budget Office (CBO) and the Food and Agricultural Policy 
Research Institute (FAPRI) have used a stochastic approach to estimate outlays and 
cost legislative proposals for some time .  CBO adopted a stochastic approach for crop 
sector analysis in September 1995 while working on the 1995/96 budget 
reconciliation/farm bill debate.  FAPRI adopted a stochastic approach just prior to 
the 2002 farm bill debate .
174 
140. Indeed, the July 2006 FAPRI baseline from which the data in Table 27 is taken is simply an 
update of the "full" 2006 baseline published earlier.  The earlier baseline clarifies that "[i]n recent 
years, we have reported average values from the st ochastic analysis for government costs and farm 
income and traditional point estimates for all other variables."175  Thus, the simple answer that Brazil 
fails to provide is that – at the time FAPRI issu ed its July 2006 baseline update FAPRI projected that 
in MY 2007 the marketing loan payment would be less than one-half of a cent and thereafter would 
amount to nothing at all .  The very fact that the projection was made – projections that were 
considered sufficiently reliable fo r Brazil to include in its written submission and use in its modeling 
exercise – confirm that marketing loan program wa s not set up pursuant to some master "design" to 
result in large payments.   
 
141. What the marketing loan program under the FSRI Act of 2002 was designed to do, moreover, 
was expire after MY 2007.  Thus, regardless of  whether projections are "deterministic" or 
"stochastic," whether they are of $1 or $1 billion, the fact is none of them take into account the fact 
that, as currently scheduled, no marketing loan payme nts will be made under the FSRI Act of 2002 in 
MY 2008 .  That fact alone renders Brazil's claims m oot to the extent that they extend to any 
hypothetical measures in that year. 
 
D. EXPORT CREDIT GUARANTEES  
 
1. Outstanding export credit guarantees 
 Questions to the United States
 
 
90. The United States states, in para. 50 of its Opening Statement, that:  
... nothing in the SCM Agreement provides that "withdrawing" a 
"subsidy" allegedly "taking the form of a program" "includes an obligation to abstain from performing on commitments outstanding under that program as of the deadline for implementation."  That argument improperly equates "performing on commitments under the program" with the "subsidy" itself.  Such an equation was 
appropriate in Brazil – Aircraft (21.5), where Brazil continued to 
issue new WTO-inconsistent bonds even after the period of implementation on the basis that it had pre-existing contractual obligations to do so.  However, it is not accurate here, where the 
guarantees are not themselves prohibited subsidies . 
                                                      
173 See Brazil First Written Submission, Table 17, n. 454. 
174 Explanatory Notes for Stochastic Budget Outlays, (Exhibit BRA-460) 
175 FAPRI 2006 U.S. Baseline Briefing Book, p. 1 (available at 
http://www.fapri.missouri.edu/ outreach/publications/2006/FAPRI_UMC_Report_01_06.pdf). WT/DS267/RW  
Page D-566  
 
Would the United States please clarify what it meant in the underlined sentence?  
 91. In paragraph 342 of its First Written Submission, Brazil indicates that the total 
amount of guarantees under the GSM 102, GSM 103 and SCGP programs outstanding on 1 July 2005 amounted to $8.5 billion. 
 
(a) Does the United States agree with the figure provided by Brazil? 
 
(b) Please indicate what proportion of that amount concerns exports of 
unscheduled products? (please distinguish between principal and interests) 
(c) Please indicate what proportion of that amount concerns exports of 
scheduled products, and in particular rice (please distinguish, in each case, between principal and interest).   
 
Questions to Brazil
 
 
92. Is it of any relevance to the Panel's a ssessment of Brazil's claims concerning 
"outstanding" export credit guarantees that what was at issue in Brazil – Aircraft (21.5) was the issuance, after the implementation date, of new bonds, and that bonds which had been issued prior to the implementation date could be redeemed 
for a number of years thereafter (see para. 46 of the US' Opening Statement at the 
panel meeting).  
 
142. Contrary to Brazil's assertions, the situation in the present proceeding with respect to export 
credit guarantees issued prior to July 1, 2005 is not analogous to Brazil's continued provision of WTO-inconsistent bonds in Brazil – Aircraft (21.5) .  Brazil's bonds continued to be prohibited export 
subsidies both before and after the date of implemen tation.  By contrast, since July 1, 2005 (and, 
indeed, even before that time), U.S. export credit gua rantees ceased being part of any program that is 
being operated at a "net cost to the government."
176  Thus, unlike Brazil, the United States has not 
attempted to continue providing prohibited expor t subsidies past the date of implementation.  
 
93. The Panel notes that Exhibit Bra-516 in dicates outstanding amounts for GSM 5 as 
of 30 June 2006 rather than as of 30 June  2005 as indicated in footnote 523 of 
Brazil's First Written Submission.  Please explain.  
 
2. Legal Bases for Brazil's export subsidies claims 
 
Question to the United States  
 
94. The United States has noted that the original Panel's findings (that the export 
credit guarantees at issue constituted prohibited export subsidies) were based on item (j).  The United States has also asserted that it has based itself on item (j) in implementing the DSB recommendations with  respect to export credit guarantees.  
Please clarify whether the Panel should understand the United States' argument in 
this respect as an argument concerning the scope of the present proceeding. 
 
                                                     
 
176 Upland Cotton (Panel) , para. 7.804.  WT/DS267/RW 
 Page D-567 
 
 
3. "Benefit" under Articles 1.1 and 3.1(a) of the SCM Agreement  
 
Questions to both parties  
 
95. Brazil has taken the position that "diff erent parties to a transaction involving a 
GSM 102 ECG derive different benefits from the GSM 102 ECG, each of which is 
potentially subject to assessment under Artic le 1.1(b) of the SCM Agreement" and 
has indicated that it is, in this proceedin g, "primarily concerned" with the benefit 
received by the US exporter in the form of  below-market fees (para. 404, Brazil's 
Rebuttal).  The United States has challenged  Brazil's approach of focusing on fees 
to the exclusion of other elements of the total cost of the loan.   Please explain, 
referring to the provisions of the SCM Agreement and WTO jurisprudence (if any applicable), your position as to whether:   (1) export credit guarantees and other 
types of subsidies may involve more than one type of benefit and/or recipient;  (2) whether it is up to the complaining Member to decide which benefit it chooses to 
challenge. 
 
143. The United States respectfully refers the Panel to the U.S. response to this question.
177  I n  
addition, the United States offers the follo wing observation regarding Brazil's response. 
 144. Brazil's response assumes that the United States "argues that Brazil must prove that [an export 
credit] guarantee also resulted in a benefit to a fo reign bank by lowering the 'total cost of funds' 
involved in the transaction."
178  This is a mischaracterization of the U.S. position.  The United States 
has made no argument concerning the necessity to prove  a benefit to any particular participant in a 
transaction or group of participants.  Inst ead, consistent with Article 14(c) of the SCM Agreement , the 
United States has argued that the proper focus is on  the guaranteed loan transaction itself, and whether 
the there is a "difference between the amount that  the firm receiving the guarantee pays on a loan 
guaranteed by the government and the amount that the firm would pay on a comparable commercial 
loan absent the government guarantee."  145. The express focus under the text is on a comparison of two transactions  to determine whether 
a benefit exists at all, not on whether a particular entity does or does not receive a benefit.  Brazil has 
made no attempt to provide such specific informati on on individual loan costs and fees or to identify 
comparable commercial loans and their terms. 
 
96. The parties differ as to whether different types of loans can be compared as long as 
they have the same "average life."  What support (economic literature, etc.) exists 
for your position on this issue?  
 
146. Brazil's response to this question appears to be irrelevant to the question posed by the Panel.  
Brazil offers an exhibit (BRA-686) in which the co nsultant retained by Brazil for purposes of this 
dispute expounds on "why at any point in time, th e principal exposures between the two-year bullet 
loan and the three-year amortizing loan can be different."
179  However, the United States has never 
argued that a loan with principal payable over 3 y ears has the same principal exposure as a loan with 
principal payable over 2 years.  To the contrary, th e United States has simply demonstrated that the 
prosaic arithmetic concept of average life provid es a common and straightforward basis for comparing 
the costs and fees derived for loans of  differing principal repayment terms.180 
 
                                                      
177 U.S. Answers to Second Set of Panel Questions, paras. 206-211. 
178 Brazil Answers to Second Set of Questions, para. 203. 
179 Brazil Answers to Second Set of Questions, para. 225. 
180 U.S. First Written Submission, paras. 123-124;  U. S. Rebuttal Submission, para. 153;  U.S. Answers 
to Second Set of Panel Questions, paras. 212-218. WT/DS267/RW  
Page D-568  
 
147. Brazil has previously argued that such a difference necessarily  renders the two types of loans 
not comparable because "the patterns of credit risk to  which the lender is exposed are very different in 
these two cases."
181  Brazil now appears to retreat from this unequivocal argument, when it states that 
the difference in principal repayment terms "pose potentially  differing risks of default."182 
148. Brazil's consultant states "the likelihood of default in the two periods may be different."183  
Presumably, therefore, they may also not be different.   As the United States has previously observed, 
Brazil's analysis simply assumes , without a factual basis, "that the borrowing bank's credit outlook is 
sufficiently positive in the short term that there is a very low default likelihood perceived in the first 
two years . . . and a greater likelihood of default in the third year."184 
 
149. Brazil's consultant expressly acknowledges that if  the chance of default in  each of the years is 
the same then there is no difference in spread be tween the two-year bullet loan and the three-year 
amortized loan.185   However, he argues that if one assumes the risk of default is higher after the first 
year then "the amortizing loan commands a higher spread."186  And, conversely, if one assumes higher 
risk of default in the first year, "the  amortizing loan now has a lower spread."187  While this may be 
true, in the absence of any factual basis in the ex amples before the Panel for an assumption that the 
risk is greater in the out years, then Brazil's th eoretical disquisition is of no significance.  Far from 
there being any such factual basis, however, the United States has actually submitted evidence that in 
a study of medium-term U.S. government-guaranteed loans, the authors found that "as the medium-
maturity loans season the likelihood of default in creases initially, peaks in the second year after 
origination, and declines thereafter."188 
 
150. In any event, in the absen ce of any specific basis for assigning, in particular transactions, 
differing default risks in particular years, Brazil's analysis simply confirms  the basic utility of average 
life for comparing pricing of loans of different principal repayment terms.  
Questions to the United States
 
 
97. Assuming that the Panel accepts the United States' argument that "benefit" is to be 
assessed on the basis of the "total costs of funds," what do you consider Brazil must establish in order to meet its burden of proof in that respect?  Must Brazil prove that a benefit is conferred in all instances (all transactions and all 
recipients)?  In most instances? 
 98. Does the United States dispute the accu racy of Brazil's comparison of GSM 102 
fees with Exim Bank fees?  Does the Un ited States agree that ExIm Bank and GSM 
102 guarantees are (at least in certain circumstances) similar or comparable? 
 
99. Please comment on Brazil's argument that the GSM 102 fees are not sufficiently 
scaled to take into account country risk (i.e. they vary only minimally according 
with country risk) (see, inter alia, paras. 410-412 Brazil's First Written 
Submission). 
                                                     
 
181 Rebuttal Submission of Brazil, para. 429;  see also , Oral Statement of Brazil, para. 219;  Brazil's 
Comments on U.S. Answers, para. 140. 
182 Brazil Answers to Second Set of Questions, para. 225. 
183 Brazil Answers to Second Set of Questions, Exhibit Bra-686, para. 11. 
184 Oral Statement of Brazil, para. 220. 
185 Brazil Answers to Second Set of Questions, Exhibit Bra-686, para. 30. 
186 Brazil Answers to Second Set of Questions, Exhibit Bra-686, para. 31. 
187 Brazil Answers to Second Set of Questions, Exhibit Bra-686, para. 31. 
188 Glennon, Dennis and Nigro, Peter;  "Measuring the Default Risk of Small Business Loans:  A 
Survival Analysis Approach," Journal of Money, Credit, and Banking , Vol. 37, No. 5 (October 2005), pp. 945 
(Exhibit US-152).  WT/DS267/RW 
 Page D-569 
 
 
Questions to Brazil  
 
100. Assuming the Panel were to agree with the United States that the proper 
benchmark to determine "benefit" is the "tot al cost of funds" of the transactions, 
what elements of evidence has Brazil provided  the Panel in this respect (other than 
evidence from the Regulations that the programme targets situations where no 
credit would be available on the market)?   In answering, please address the United 
States' argument at para. 133 of its First Written Submissi on that "Brazil has made 
no attempt to provide such specific informa tion on individual loan costs and fees or 
to identify comparable commercial loans and their terms". 
 
151. Effectively conceding that it has not provided the requisite specific information on loan costs 
and fees or identified comparable commercial loans and their terms, Brazil protests that it is "not in the position of an investigating authority" and theref ore cannot be expected to produce "this type of 
data."
189  This does not excuse Brazil from making a prima facie  case of breach.  If it does not have 
evidence that the United States is breaching its WTO obligations – as the United States has argued is 
in fact the case – Brazil has no basis to make claims to that effect before a WTO panel.  Brazil finds 
itself in no different position than domestic industries, who must submit sufficient evidence of subsidization (including financial contribution, benefit, and specificity within the meaning of 
Articles 1 and 2 of the SCM Agreement ) and injury in order to warrant an investigation under Part V 
of the SCM Agreement . 
 
152. Brazil next implies that the commercial bank that has provided  specific transactional 
information submitted by the United States may be motiv ated to falsify such information because of a 
specific interest in maintaining the GSM 102 program.
190  These assertions are completely baseless 
and do not merit a response. 
 
153. Brazil also mischaracterizes the arguments of the United States.  Brazil asserts that "the 
United States argues, in essence, that  the interest that the lender ch arges on a loan guaranteed by the 
U.S. government could be higher than the interest  it charges on a loan guaranteed by a commercial 
enterprise."191  Consistent with Article 14(c) of the SCM Agreement , however, the arguments of the 
United States have not been restricted to comparisons of interest alone, nor to a comparison of 
two transactions in which a guarantee is necessarily i nvolved.  Rather, the United States has noted that 
private sector commercial products comparable to the GSM-102 program are available in the marketplace and commercial lenders have provide d unsecured financing to foreign banks who are 
CCC-approved obligors on terms the annualized cost of which was less than that available under the 
GSM-102 program.
192  This contradicts Brazil's sweeping assertions that GSM 102 guarantees are 
only provided where credit would not otherwise not  have been available to foreign obligors. 
154. Finally, Brazil asserts that "as a factual matter, [] Article 14(c) is not directly applicable to 
GSM 102."193  The United States has never asserted that Article 14(c) is directly applicable. Rather, 
the United States – like the Appellate Body – has noted that Article 14 provides key contextual 
guidance in assessing "benefit."  In the case of loan gu arantees, it is Article 14(c) that is relevant.   
 
                                                      
189 Brazil Answer to Question 100, para. 226.  Brazil later asserts that it has discharged its burden by 
virtue its "ExIm Bank fee comparison."  Id., para. 244.  This comparison of fees  is not an appropriate analysis.  
Moreover, the United States has demonstrated, however, the elements of the Ex-Im Bank products render them 
not comparable to the GSM-102 guarantee.  U. S. Answer to Question 98 (2 April 2007). 
190 Brazil Answers to Second Set of Questions, para. 226 and fn. 297. 
191 Brazil Answers to Second Set of Questions, para. 246. 
192 See, e.g. , U.S. First Written Submission, paras. 111-131 
193 Brazil Answers to Second Set of Questions, para. 234. WT/DS267/RW  
Page D-570  
 
155. Article 14(c) recognizes that a loan guarant ee is made for the sole purpose of supporting a 
loan transaction;  the guarantee b ecomes an integral part of that transaction and has no value beyond 
it.  The particular fee assessed for a guarantee is affected by the terms of the underlying loan 
transaction, who the parties are to the underlying loan transaction, the nature of the goods being 
purchased and sold, and any number of other factors.   In turn, the terms of the underlying loan 
transaction and the costs and fees associated with that financing may be affected by the fees assessed. 
 156. Therefore, the drafters expressly provided that "a loan guarantee by a government shall not be 
considered as conferring a benefit, unless there is  a difference between the amount that the firm 
receiving the guarantee pays on a loan guaranteed by  the government and the amount that the firm 
would pay on a comparable commercial loan abse nt the government guarantee.  In this case the 
benefit shall be the difference between these two am ounts adjusted for any differences in fees."  In 
other words, they expressly recognized that an ass essment of the total costs of the transaction is 
necessary to assess whether a "benefit" is actually conferred by the guarantee.  Brazil has provided no 
basis to depart from this logic. 
 
101. Brazil argues that "[w]here guarantees are reserved for circumstances in which 
credit would not otherwise be available, there is no "comparable commercial loan absent the government guarantee," within the meaning of Article 14(c) of the SCM Agreement."  (Brazil First Written Submission, para. 375).  The Panel understands this argument of Brazil to focus on the foreign obligor.  Brazil 
elsewhere indicates that it is principally concerned, in this proceeding, with the 
benefit to the US exporter (fees).  Are these two arguments at tension? 
 
4. Item (j) of the Illustrative List  
Questions to both parties
 
 
102. What, in your view, explains the di fferent results achieved by the two methods 
advocated, on the one side, by the United States in paragraphs 87-89 of its First Written Submission and by Brazil in Exhibit Bra-613 (other than the United States' criticism that Brazil has not taken recoveri es corresponding to pre-1992 guarantees 
into account in its "cash basis" accountin g calculations, of which the Panel is 
already aware)?  
 
157. The United States appreciates the observation by  Brazil that under the Federal credit reform 
accounting methodology, "applicati on of re-estimates effectively converts the process to a 
retrospective, cash-basis accounting methodology."
194  It is precisely because of such re-estimates that 
the profitability of the export credit guarantee programs is evident.195  As Brazil elsewhere notes in its 
answers to the Panel's questions, the required accounting methodology under the Credit Reform Act 
of 1990, "'measure[s] more accurately the costs of Federal credit programs' than does cash-basis 
accounting."196   
 
158. In addition to this observation, the United Stat es respectfully refers the Panel to its extensive 
arguments regarding the profitability of the export credit guarantee programs in its prior 
submissions.197 
 
                                                      
194 Brazil Answers to Second Set of Questions, para. 266. 
195 See, e.g. , U.S. First Written Submission, paras. 81-99. 
196 Brazil Answers to Second Set of Questions, paras. 273, 285. 
197 See e.g.,  U.S. First Written Submission, paras. 73-104 ;  U.S. Rebuttal Submission, paras. 84-100.  WT/DS267/RW 
 Page D-571 
 
 
103. To what extent is evidence pertaini ng to guarantees issued under the three 
programmes (GSM 102, GSM 103 and SCGP) under the prior fee schedule relevant to the Panel's analysis of the revised GSM 102 programme under item (j)? 
 
159. The United States has already addressed all of Brazil's arguments in response to this question 
in its prior submissions.  Brazil is simply incorr ect to assert that CCC "predicts" that "'cohorts' of 
GSM 102 ECGs issued in FY 2006 and FY 200 7 (and thus under the amended GSM 102 fee 
schedule) will suffer losses over the long term."
198  In this respect, the United States respectfully refers 
the Panel to the U.S. comments on Brazil's answer to Question 105 below as well as the U.S. Rebuttal 
Submission at paragraphs 108-126.  With resp ect to the "cash results" that Brazil advances199, the 
United States respectfully refers the Panel to the U.S. comments herein in response to Brazil's answers 
to Question 102 and 106.  
 
104. Must a risk-based fee necessarily take into account foreign obligor risk? Please 
discuss and provide any relevant support for your position. Can foreign obligor risk 
be treated differently than country risk in this respect, and if so, why? 
 
160. The United States respectfully refers th e Panel to its own response to Question 104200 and 
simply notes again that it establishes internal bank limits to govern exposure to  potential defaults by 
foreign obligor banks in individual transactions.201    Brazil does not dispute the fact of such limits but 
indicates that the United States has offered "no ev idence" of the way in which it establishes such 
limits.  In particular, Brazil suggests that " CCC does not account for differing ratings between 
individual non-sovereign foreign obli gors in a country, [but] rather, it applies a single rating . . . for all 
non-sovereign foreign obligors within that country."202  Brazil is incorrect. 
 161. As the United States has explained, CCC conducts an independent analysis of each  foreign 
bank to establish the risk rating for such bank and the resulting bank limit.
203  The Office of 
Management and Budget ("OMB") establishes 11 sove reign and 9 non-sovereign risk categories for 
use by government agencies and programs subj ect to the Federal Credit Reform Act of 1990.204  CCC 
uses the same risk category methodology to cl assify foreign banks it approves for the GSM-102 
program.  Generally, if a bank is itself considered to be sovereign, then it will not be rated better than 
the sovereign country rating.  Similarly, if a bank is considered non-soverei gn, then it generally will 
not be rated better than the OMB non-sovereign rating for its country.   CCC's independent analysis of 
each bank applies a standard CAMEL appro ach, evaluating capital adequacy, asset quality, 
management, earnings, and liquidity of the foreign bank.205 
 
105. What considerations must guide the Pa nel's decision to accept or refuse new 
evidence or arguments on issues that were add ressed by the original Panel?  Please 
discuss in light of the following: 
 
(a) The original Panel found that original subsidy estimates, while not 
reflecting 'actual' figures, nevertheless provide a reliable measure of the United States government's own assessment of the profitability of the 
                                                     
 
198 Brazil Answers to Second Set of Questions, para. 272. 
199 Brazil Answers to Second Set of Questions, paras. 276-278. 
200 U.S. Answers to Second Set of Panel Questions, paras. 246-248. 
201 U.S. First Written Submission, para. 78. 
202 Brazil Answers to Second Set of Questions, para. 281. 
203 U.S. First Written Submission, para. 78. 
204 U.S. First Written Submission, para. 78, fn. 120;  U.S. Rebuttal Submission, para.118;  "Informal 
consultation questions to the United States," question 19 (Exhibit BRA-517). 
205 U.S. First Written Submission, para. 78, fn. 120;  U.S. Answers to Second Set of Panel Questions, 
para. 248, fn. 266 and 279-283. WT/DS267/RW  
Page D-572  
 
export credit guarantee programmes.  Is the United States asking the Panel 
to revisit that conclusion (see paras 108 ff. of the United States' First Written Submission).   
 
(b) The United States presents evidence which, it argues, demonstrates that the 
three programmes examined by the original panel were operated at no net 
cost to the US government.  Is there an y issue as to whether the Panel can 
or should accept the United States' evidence in this respect? 
 
162. First, Brazil is incorrect to assert that "the  CCC predicts that costs and losses for the 'cohorts' 
of GSM 102 ECGs newly issued in FY 2006, FY 2007 and FY 2008 will, over the long term, exceed 
fees, penalties and recoveries."
206  As the United States has explained, initial subsidy estimates in the 
U.S. budget are not derived from the specific experience of the CCC programs, nor do they in any way constitute a prediction of loss.
207 
 
163. Furthermore, the United States does not "ask the compliance Panel to ignore the original 
panel and the Appellate Body's findings" nor aba ndon "the original panel and Appellate Body's 
adoption of a forward-looking, future-oriented assessment under a methodology 'used and relied upon 
by the United States government to  assess the estimated long-term net cost to the United States 
government of export credit guarantees,' in favor of  a purely retrospective assessment of program 
performance."208 To the contrary, the United States has expounded at length on the prospective 
viability of the program209 and – unlike Brazil – on its profitability under the credit reform 
methodology "used and relied upon by the United States government."210 
 164. One additional factual assertion in Brazil's an swer to Question 105 merits response.   Brazil 
ascribes erroneous significance to "the USDA mode l" to which it refers in paragraph 302 of its 
answers and in Exhibit Bra-588.  This is not a re ference to a model specifi c to USDA of  "expected 
loss rates or estimated default costs" particular to the CCC export credit guarantee programs, as Brazil 
asserts.  Instead, it refers only to a cash flow model required of all U.S. government agencies providing international credit, which cash flow mode l is only an initial step in the budgetary process 
and which must, in any event, use risk ratings and assumed loss rates required by the OMB for all 
such agencies, irrespective of th e particular program experience.
211  The OMB then also requires such 
agencies to use "a credit subsidy calculator . . . th at agencies use to convert agency-estimated cash 
                                                      
206 Brazil Answers to Second Set of Questions, para. 284. 
207 U.S. Rebuttal Submission, paras. 108-126. 
208 Brazil Answers to Second Set of Questions, para. 292. 
209 See, e.g. , U.S. First Written Submission, paras. 73-80;  U.S. Rebuttal Submission, paras. 101-107, 
127-128. 
210 See, e.g.,  U.S. First Written Submission, paras.81-99; U.S. Rebuttal Submission, paras. 84-100. 
211 United States Government Accountability Office Report to Congressional Committees 
(GAO-04-531) September 2004:  Export Import Bank - OMB's Method for Estimating Bank's Loss Rates 
Involves Challenges and Lacks Transparency, p. 7 (Exh ibit US-73) ("To estimate their subsidy costs, credit 
agencies estimate the future performan ce of direct and guaranteed loans.  Agency management is responsible for 
accumulating relevant, sufficient, and reliable data on whic h to base these estimates.  To estimate future loan 
performance, agencies generally have cash flow mo dels, or computer-based spreadsheets, that include 
assumptions about defaults, prepayments, recoveries, and the timing of these events and are based on the nature 
of their own credit program.  Agencies that provide credit to domestic borrowers generally develop these cash flow assumptions, which OMB reviews, ba sed on their historical experience.  For U.S. international credits, 
OMB provides the expected loss rates, which are composed of default and recovery assumptions, that agencies 
should use to estimate their subsidy costs. ")  (Emphasis added)  WT/DS267/RW 
 Page D-573 
 
 
flows into present values."212   These figures can in no way be characterized to reflect that "CCC 
anticipates losses."213 
 
106. The parties disagree as to whether Br azil should include recoveries for pre-1992 
guarantees in its cash basis accounting formula (Exhibit Bra-613).  Is the Panel 
correct in understanding that Brazil's fo rmula does not includes amounts for (1) 
claims paid after 1992 under pre-1992 guarantees;  (2) fees paid on pre-1992 guarantees?  If so, please explain the relevance or non-relevance of including recoveries under pre-1992 guarantees in light of the non-inclusion of costs and other revenues related to the same guarantees.  
 
165. The United States respectfully refers the Panel to its own response to this question
214 as well 
as to the comments of the United States below in  response to Brazil's answer to Question 114.  
 
Questions to the United States  
 
107. What can explain the discrepancy between  the "credit guarantee liability" recorded 
in the CCC's financial statements (which suggest that the program is provided at a net cost to the US government) and the evidence presented by the US in para. 87 of its First Written Submission? 
 
108. Please explain why the "liability" figure in the CCC's financial statements should 
not be considered by the panel to provide, if  not the amount of actual losses, at least 
a reliable estimate of the CCC's own perception of the cost to the government of the programmes since their inception. Is the Panel wrong in understanding that a "credit guarantee liability" in this context means that the CCC considers that the 
programmes will not cover their cost s and losses in the long term? 
 109. Please indicate to the Panel whether th ere have been occurrences of reschedulings 
prior to the occurrence of defaults and the payment of claims by the CCC. 
 110. Is it possible to calculate the "subsidy estimate net of reestimates" for GSM 102 
alone (similar to what the US has done fo r all three programmes in para. 87)?  If 
so, please provide a table recording the results of this exercise. 
 111. In paragraph 7.853, the original Panel st ated that it "disagree(d) with the United 
States that we should 'eliminate' the data  for certain, more recent, cohorts in our 
analysis."  Is the United States asking that this Panel eliminate such data for the 
most recent cohorts (the table at para. 87 of the United States' First Written Submission includes data up to 2005 only).  Why should this Panel do what the original refused to do?  What would be the result of the United States "re-estimates" exercise if the original subsid y estimate for the 2006 and 2007 cohorts 
were included?  
 
                                                     
 
212 United States Government Accountability Office Report to Congressional Committees 
(GAO-04-531) September 2004:  Export Import Bank - OMB's Method for Estimating Bank's Loss Rates Involves Challenges and Lacks Transparency, p. 10 (Exhibit US-73). 
213 Brazil Answers to Second Set of Questions, para. 302. 
214 The United States notes a typographical error in its response, however.  In paragraph 261, the 
fourth sentence should read:  "Therefore, it is inexplicab le - and entirely disingenuous - that Brazil criticizes the 
United States for including recoveries recei ved before 1992 (indeed as far back as 1980 )."  The United States 
inadvertently included "not" before "including" in its response. WT/DS267/RW  
Page D-574  
 
112. Please explain whether and how the CCC limits risks or control costs of the GSM 
102 programme as regards foreign banks' individual credit ratings. 
 113. Please explain whether and how CCC co untry risk categories correspond to ICRAS 
ratings.  
 
Question to Brazil
  
 
114. Brazil argues that "(t)hat the United States has, on one view of the data, beaten the 
odds and met its costs and losses over a series of years does not mean that ECG 
programs are structured and designed to do so" (para. 503, Brazil's Rebuttal).  Is 
Brazil arguing that evidence regarding the actual operation and "profitability" of the programme (i.e. retrospective evidence) is irrelevant to the Panel's analysis under item (j)? 
 
166. The United States notes that Brazil now app ears to be advocating exclusively for "cash 
results" in respect of an analysis under item (j).
215  This appears to be a wholesale abandonment of 
Brazil's position in the or iginal panel proceeding  regarding the credit reform accounting 
methodology, a shift that can only be explained by the fact that the methodology now confirms the robust profitability of the programs, directly underm ining Brazil's theory in the present proceeding.  
The United States recalls that Brazil had previously stated that "it does not intend for this revised 
constructed formula to replace the formula used by the U.S. government itself to track the costs of the 
CCC guarantee programs pursuant to the U.S. Federal Credit Reform Act."
216  Brazil's response to the 
compliance panel's Question 114 reflects a complete reversal of that position.    167. While Brazil's positions on the issue may shif t to accommodate the results Brazil prefers, the 
overwhelming evidence confirms the profitability of the export credit guarantee programs.  This 
evidence directly contradicts Brazil's claims that premiums charged under these programs are insufficient to cover the long-ter m costs and losses of the programs. 
                                                     
 
215 Brazil Answers to Second Set of Questions, para. 314. 
216 Brazil's Answers to Questions Posed by the Panel Following the First Substantive Meeting of the 
Panel, para. 164 (Question 77) (11 August 2003) (emphasis in original).