Document: WT/DS267/R/Add.1 Page C-1 ANNEX C ORAL STATEMENTS OF PARTIES AND THIRD PARTIES AT THE FIRST SESSION OF THE FIRST SUBSTANTIVE MEETING Contents Page Annex C-1 Executive Summary of the Opening Statement of Brazil C-2 Annex C-2 Executive Summary of the Closing Statement of Brazil C-7
Document codes: WT/DS267/R/Add.1
Complainant: Brazil
Respondent: U.S.
Third parties: Argentina, Australia, Benin, Canada, Chad, China, Taiwan, EU, India, New Zealand, Pakistan, Paraguay, Venezuela, Japan, Thailand
Dispute stage: Mutually Agreed Solution
Agreements cited: Art. 3, 5, 6  Subsidies and Countervailing Measures (SCM)Art. 3.3, 7.1, 8, 9.1, 10.1  AgricultureArt. III:4, XVI  GATT 1994

ANNEX C

ORAL STATEMENTS OF PARTIES AND THIRD PARTIES
AT THE FIRST SESSION OF THE FIRST
SUBSTANTIVE MEETING

Contents Page
Annex C-1 Executive Summary of the Opening Statement of Brazil C-2
Annex C-2 Executive Summary of the Closing Statement of Brazil C-7
Annex C-3 Executive Summary of the Openi ng Statement of the United States C-12
Annex C-4 Executive Summary of the Closing Statement of the United States C-16
Annex C-5 Third Party Oral Statement of Argentina C-20
Annex C-6 Third Party Oral Statement of Australia C-27
Annex C-7 Third Party Oral Statement of Benin C-33
Annex C-8 Third Party Oral Statement of Canada C-36
Annex C-9 Third Party Oral Statement of China C-40
Annex C-10 Third Party Oral Statem ent of the European Communities C-43
Annex C-11 Third Party Oral Statement of India C-53
Annex C-12 Third Party Oral Statement of New Zealand C-55
Annex C-13 Third Party Oral Statement of Paraguay C-58
Annex C-14 Third Party Oral Statement of Chinese Taipei C-61

ANNEX C-1

EXECUTIVE SUMMARY OF THE ORAL STATEMENT
OF BRAZIL AT THE FIRST SUBSTANTIVE MEETING
OF THE PANEL WITH THE PARTIES

I. INTRODUCTION

1. Brazil addresses first various peace clause issues, followed by Step 2 export and domestic
payments, export credit guarantees and the ETI Ac t subsidies. Finally, Brazil addresses the
“preliminary issues” raised by the United States.

II. PEACE CLAUSE ISSUES

The Peace Clause is an Affirmative Defence

2. The peace clause is in the nature of an affi rmative defence and it is, thus, the US burden to
prove that Brazil’s claims under the SCM Agreemen t are “exempt from actions”. An affirmative
defence is a provision that does not set out any positi ve obligations but enables Members to maintain
measures that are otherwise inconsistent with its WTO obligations. The peace clause does not in itself
set out any positive obligations for Members, but si mply provides a conditional shelter against certain
actionable and prohibited export subsidy claims under the SCM Agreement. The peace clause meets
the criteria set forth by the Appellate Body for an affirmative defence in US – FSC and in the Aircraft
disputes, by being an exception to a legal regime otherwise applicable. Given the extraordinary
protection it provides, it is not “bizarre”, as the United States argues, that the peace clause requires the
defending Member to prove that its domestic a nd export subsidies meet the conditions for peace
clause protection.

“such measures do not grant support to a specific commodity”

3. This phrase in AoA Article 13(b)(ii) means th at in calculating the amount of support for any
marketing year between 1995-2003, all non-”green box” support provided to a specific commodity
must be tabulated, regardless of whether the type or form of the support is “product-specific”, “non-
product specific”, de minimis , or “blue box”. This is certain ly evidenced by the decision of
negotiators not to use the phrases “product-specific” and “AMS” in Article 13(b)(ii) to qualify the
type of support to a specific commodity. Th e US attempt to read “product-specific” into
Article 13(b)(ii) is inconsistent not only with the text but also the context of the phrase “such
measures” in Article 13(b)(ii). The US interpre tation of “product-specific support” is further
incompatible with the object and purpose of the Agreement on Agriculture. It would create a new
category of non-actionable trade-distorting non-”gre en box” subsidies and sanction huge increases in
spending for “amber box” and, therefore trade-distorting, domestic support as long as it took the form
of support for multiple commodities. This is contrary to the presumption of trade and production-
distorting effects for individual products from non- ”green box” domestic support, which flows from a
domestic measure being inconsistent with the “green box” requirements of AoA Annex 2.

“that decided during the 1992 marketing year”

4. This word “decided” does not require any particular type of “decision”. As a neutral term, the
meaning of “decided” must be interpreted in a way that does justice to the ordinary meaning of other
terms in Article 13(b)(ii) that are not neutral. Most importantly, the term “decided” must be
interpreted in a manner that permits a comparison between a “ grant” of non-”green box” “support” to
a specific commodity for individual marketing year s between 1995-2003, and a “decision” regarding
such support in MY 1992. A textual interpretation reveals that the term “that” refers back to
“support” and that support is accompanied by the term “granted”.

5. The Appellate Body agreed with the panel in Brazil – Aircraft that the phrase “the level of
export subsidies granted” meant “something actually provided”, which means actual budgetary
expenditures. Thus, the neutral term “decision” (for MY 1992) can only be read harmoniously with
the term “grant support” (for MY 1995-2003) wher e the “decision” is to fund non-”green box”
support to a specific commodity for marketing year 1992.

6. In addition, even if Article 13 would refer to a level of (income) support, as the United States
alleges, the Appellate Body has held in Brazil – Aircraft that the “level” of export subsidies refers to
actual expenditures.

7. The US interpretation of a “level of suppor t” is furthermore inconsistent with its own
interpretation of Article 13(b)(ii) in its Statement of Administrative Action (SAA). In the SAA, it
stated that governments would have peace clause protection from adverse effects and serious
prejudice challenges in the WTO “ unless the AMS for the particular commodity exceeds the level
decided in the 1992 marketing year”. Brazil strongly disagrees with the notion of “AMS” as the
relevant standard for the peace clause, but this official US interpretation of the peace clause in 1995 is
nevertheless compelling evidence of the United States view of the “decision” it had taken during MY
1992. The calculation of the AMS for a particular commodity requires the calculation of the support
provided in monetary terms. AoA Annex 3 offers two options for the calculation of AMS: budgetary
outlays or the price gap formula detailed on para graphs 10 and 11. Under either option, the AMS
represents a measurement of support in monetary terms.

8. In sum, Brazil is of the firm view that th e text of Article 13(b)(ii) requires comparing MY
1992 support with MY 1995-2003 support by comparing actual expenditures. This methodology
produces an “amount” of support – not a “rate”. Thus, any decision under Article 13(b)(ii), by
definition, must relate in some way to an “amount” of expenditures. Only this methodology allows a
clear comparison between the two time periods, regardless of the type of support.

9. However, even if the Panel were to decide th at the relevant standard is a “rate of support”
standard, Brazil has provided the testimony of Prof essor Daniel Sumner indicating that – following
the US approach to measuring “support to upland cott on” – the “rate of support” to upland cotton in
MY 1999-2002 was much higher than the “rate of su pport” to upland cotton in MY 1992. Based on
the evidence and analysis presented by Professor Sumner , Brazil also asserts that even under the US
“rate of support” methodology, the United States has failed to demonstrate that its MY 1999-2002
support does not exceed its support to upland cotton decided in MY 1992.

US “statute of limitations” interpretation of the peace clause

10. There is no express or implied “statute of limitations” in the peace clause. Subsidizing
Members such as the United States are offered c onditional protection under the peace clause during a
9-year period. But the rights of Members inju red by subsidies provided in excess of 1992 marketing
year levels are preserved throughout the implementation period as well. This is the balance struck by
the peace clause.

11. The US “statute of limitations” argument in this case is very similar to one rejected by the
Appellate Body in US – Lead Bars . This argument is further inconsistent with the views of the
Indonesia – Automobiles panel, which held that measures applie d in the past must be examined to
assess present serious prejudice. The US interpreta tion would cut off a Member ’s right to challenge
such measures because it missed an imaginary deadline. This US interpretation is inconsistent with
the object and purpose of the AoA because it w ould permit Members to provide huge “non-green”
box support one year without peace clause protection, and then claim absolution as soon as the next
marketing year began.

“Support to Upland Cotton”

12. Brazil has produced extensive evidence providi ng the factual basis for the Panel to find that
CCP, DP, market loss, and PFC payments are “suppor t to” upland cotton within the meaning of the
peace clause. USDA categorizes the PFC and market loss payments as part of “total payments” to
upland cotton. US National Cotton Council official s repeatedly testified and produced documents
revealing that their producer members requested , received, and depended on all four of these
subsidies. Crop insurance is also support to cotton as evidenced by specific upland cotton crop
insurance policies and groups of policies for uplan d cotton. Moreover, USDA specifically identifies
and tabulates crop insurance subsidies for upland cotton. In addition, all five domestic support
measures fail to meet the requirements of AoA A nnex 2. Therefore, they constitute non-“green box”
support that is presumed to be production and trad e distorting. Such distortions can, however, only
occur with respect to the production of or the trade in a particular commodity. Because, PFC, market
loss assistance, direct and counter-cyclical payments as well as crop insurance subsidies are available
to producers of upland cotton, these production and tr ade-distorting subsidies affect the production of
and trade in upland cotton. The Panel should, th erefore, find that all five of these programmes
granted support to upland cotton in MY 1999-2002.

Restrictions on Plantings of Fruits and Vegetables under the PFC and DP Programmes

13. Brazil presents evidence that PFC and direct payments are not “decoupled” domestic support.
These payments are dependent on the requirement th at a farmer does not produce fruits, vegetables,
nuts or wild rice on the contract acreage. This rest rictions has the effect of channelling production on
contract acreage into production of programme crop s, including upland cotton, and is of particular
importance for upland cotton base acreage located in regions of the United States where production of
fruits and vegetables is a viable alternative to the production of upland cotton.

III. STEP 2 EXPORT AND DOMESTIC PAYMENTS

14. The US Step 2 export payments clearly cons titute subsidies continge nt upon proof of export
of US upland cotton. Step 2 export payments are export subsidies that violate AoA Articles 3.3 and 8
and that are prohibited by ASCM Articles 3.1(a) and 3.2.

15. Similarly, US Step 2 domestic payments are pr ohibited local content subsidies in violation of
ASCM Article 3.1(b). There is no explicit der ogation of ASCM Article 3.1(b) built into the
Agriculture Agreement. In fact, the opposite is true, since AoA Article 13(b)(ii) provides a
conditional exemption only for claims under ASCM Articles 5 and 6, but not for claims under ASCM
Article 3. There is also no conflict between ASCM Article 3.1(b) and AoA Article 6 or Annex 3,
paragraph 7, because there are two types of do mestic support, including domestic support to
processors of agricultural commodities – those that comply with Article 3.1(b) of the SCM Agreement
and those that do not.

IV. EXPORT CREDIT GUARANTEES

16. With respect to the consultations regarding the US export credit guarantee programmes, there
is no doubt that the United States and Brazil consulted on three occasions about the GSM 102,
GSM 103, and SCGP programmes as they relate to a ll eligible products. Thus, these measures are
properly within the Panel’s terms of reference a nd the Panel should reject the US request for a
preliminary ruling.

17. With respect to Brazil’s claims regardi ng the GSM 102, GSM 103 and SCGP export credit
guarantee programmes, the United States interpretation of AoA Article 10.2 should be rejected. AoA
Article 10.2 does not carve out export credit guarantees from the disciplines on export subsidies under
the AoA. Nowhere does the provision exempt e xport credit guarantees from the disciplines on export
subsidies, while exemption need to be made e xplicit in the text of an agreement following the
Appellate Body reports in EC – Hormones and EC – Sardines . Similarly the context of AoA
Article 10 as well as its object and purpose do not support the US view of AoA Article 10.2 as
enabling Members to grant export credit support at zer o percent interest and for unlimited terms – all
for free – until Members complete negotiations on specific disciplines for export credits.

18. Concerning the substance of Brazil’s claims against export credit guarantees, the
United States has not even addressed Brazil’s clai m that since there is no commercial market for
export credit guarantees on terms such as those provided by the CCC programmes, those programmes
confer benefits per se. Brazil furthermore demonstrates that under the US formula accounting for the
budgetary costs of contingent liabilities of CCC e xport credit guarantees, operating costs and losses
for GSM 102, GSM 103 and SCGP have outpaced premiu ms collected in every single year since the
United States started applying the formula in 1992. These figures represent actual costs and losses of
the US export credit guarantee programmes.

19. Thus, the programmes constitute export subsid ies within the meaning of ASCM Articles 1.1
and 3.1(a), item (j) of the Illustrative List, and AoA Articles 10.1, 1(e) and 8. They “at the very least”
threaten to circumvent US export subsidy commitm ents, in violation of Articles 10.1 and 8 and are
prohibited under ASCM Articles 3.1(a) and 3.2.

V. ETI ACT

20. Lastly, the United States argues that Brazil has fa iled to meet is burden of proof that ETI Act
subsidies constitute export subsidies violating the AoA and prohibited by the SCM Agreement. Brazil
has adopted and reiterated all of the successful arguments of the EC in the US – FSC (21.5) dispute.
Brazil asks the Panel to follow the panel in India – Patents (EC) and to give “significant weight” to
the rulings in the US – FSC (21.5) dispute and to avoid “inconsistent rulings”, while recognizing that
the Panel is not formally bound by that decision.

VI. PRELIMINARY ISSUES

21. Brazil has addressed the US request for a preliminary ruling on export credit guarantees
above.

22. Concerning the US request for a preliminary ruling on the MY 2002 cottonseed payments, the
record indicates that Brazil’s consultation request covered “future” measures related to existing
measures; it indicates further that Brazil and th e United States consulted about the “Cottonseed
Payment Programme”, and that the Agricultural Assi stance Act of 2003 provided funding for the
existing administrative structure of the Cottonseed Payment Programme. Therefore, following the
Appellate Body decision in Chile – Agricultural Products (Price Band) , the Agricultural Assistance
Act of 2003 is properly within the Panel’s terms of reference. In any event, the $50 million in

cottonseed payments are properly treated as “support to cotton” for the purpo ses of the peace clause
calculation of the amount of support granted in MY 2002.

23. Regarding the US arguments that PFC and market loss assistance payments are outside the
Panels terms of reference, as they constitute expired measures, Brazil asks the Panel to reject this third
US request for a preliminary ruling. Brazil has properly included PFC and market loss assistance
payments as part of its claims relating to present serious prejudice. Consultations under DSU
Article 4.2 may be held concerning measures affec ting the operation of a covered agreement. ASCM
Article 5 requires a Member to avoid causing adverse effects, which may be the effects of current or
previous, expired subsidies. As in the Indonesia – Automobiles dispute, expired measures are
eminently within the Panel's terms of reference. Denying Members the possibility to challenge
expired measures would yield the result that a Member could enact “one-time” subsidy measures that
could never be challenged and the provisions of ASCM Articles 5 a nd 6 would thereby be rendered a
nullity.

VI. CONCLUSION

24. Brazil requests the Panel to reject all three US requests for preliminary rulings and to rule that
AoA Article 13 does not exempt US domestic suppor t and export subsidies fr om actions under the
SCM Agreement.

ANNEX C-2

EXECUTIVE SUMMARY OF THE CLOSING STATEMENT
OF BRAZIL AT THE FIRST SUBSTANTIVE MEETING
OF THE PANEL WITH THE PARTIES

I. INTRODUCTION

1. Brazil addresses first the “preliminary issu es” raised by the United States, and then the
various peace clause issues. Finally, Brazil addre sses the Step 2, ETI Act and export credit guarantee
measures.

II. PRELIMINARY ISSUES

2. With respect to the consultations regarding the US export credit guarantee programmes, there
is no doubt that the United States and Brazil consulted on three occasions about the GSM 102,
GSM 103, and SCGP programmes as they relate to a ll eligible products. Thus, these measures are
properly within the Panel’s terms of reference.

3. Regarding the MY 2002 cottonseed payments, the record indicates that Brazil’s consultation
request covered “future” measures related to existing measures; it indicates further that Brazil and the
United States consulted about the “Cottonseed Payment Programme”, and that the Agricultural
Assistance Act of 2003 provided funding for the exis ting administrative structure of the Cottonseed
Payment Programme. Therefore, the Agricultural Assistance Act of 2003 is properly within the
Panel’s terms of reference. In any event, the $50 million in cottonseed payments are properly treated
as “support to cotton” for the purposes of the peace clause calculation of the amount of support
granted in MY 2002.

4. Regarding the US arguments that PFC and market loss assistance payments are outside the
Panels terms of reference, as they constitute expired measures, Brazil asks the Panel to reject this third
US request for a preliminary ruling. Brazil has properly included PFC and market loss assistance
payments as part of its claims relating to present serious prejudice. ASCM Article 5 requires a
Member to avoid causing adverse effects, which may be the effects of current or previous, expired
subsidies. Adverse present effects caused by both types of measures are eminently within the Panel's
terms of reference. As a factual matter, the Panel must decide on the question whether a particular
expired subsidy has an actual causal connection w ith currently existing adverse effects. Yet, by
granting the US request for a preliminary ruling the Panel would effectively dismiss Brazil’s claim.
Therefore, the fact that a subsidy meas ure has expired cannot be the basis for a priori excluding it
from the Panel's terms of reference.

5. Furthermore, DSU Article 4.2 and 6.2 – invoked by the United States – must be applied in the
context of the remedies provided for actionable subsidies under ASCM Articles 7.2-7.10. Under DSU
Article 19 a panel can only recommend that the Memb er bring a wrongful measure into conformity
with the covered agreement(s) at issue. Howeve r, for disputes concerning ASCM Articles 5 and 6,
ASCM Article 7.8 contemplates two different remedies: removal of the adverse effects or withdrawal
of the subsidy. While a Member cannot bring an expired measure into conformity with the covered
agreements, both of the ASCM Article 7.8 remedies are valid options even for remedying the effects
of a subsidy measure no longer in effect (as in the Australia – Leather dispute). As ASCM
Articles 7.2-7.10 are “special and additional ru les and procedures” under DSU Article 1.2 and DSU
Appendix 2, they must prevail to the extent ther e is a difference between them and DSU Articles 4

and 6. This means that contrary to disputes invol ving other covered agreements, the Panel is required
to address the adverse effects of expired subsidy measures.

6. Further, ASCM Articles 5 and 6.3 make no di stinction between subsidies that are now being
paid and subsidies that are no longer being paid but have a causal relationship to continuing adverse
effects, as evidenced by the Panel report in Indonesia – Automobiles , which found serious prejudice
arising, inter alia, from expired subsidy measures that had b een provided for one year and – like the
market loss assistance payments – been terminated.

III. PEACE CLAUSE ISSUES

“such measures do not grant support to a specific commodity”

7. This phrase in Article 13(b)(ii) means that in calculating the amount of support for any
marketing year between 1995-2003, all non-”green box” support provided to a specific commodity
must be tabulated, regardless of whether the type or form of the support is “product-specific,” “non-
product specific”, de minimis , or “blue box”. This is certain ly evidenced by the decision of
negotiators not to use the phrases “product-specific” and “AMS” in Article 13(b)(ii) to qualify the
type of support to a specific commodity. Th e US attempt to read “product-specific” into
Article 13(b)(ii) is inconsistent not only with the text but also the context of the phrase “such
measures” in Article 13(b)(ii). The US interpreta tion is further incompatible with the object and
purpose of the Agreement on Agriculture. It would create a new category of non-actionable trade-
distorting non-”green box” subsidies and sanction huge increases in spending for “amber box” and,
therefore trade-distorting, domestic support as long as it took the form of support for multiple
commodities. This is contrary to the presumption of trade and production-distorting effects for
individual products from non-”green box” domestic support, which flows from a domestic measure
being inconsistent with the “green box” requirements of Annex 2 of the Agriculture Agreement.

“that decided during the 1992 marketing year”

8. This word “decided” does not require any particular type of “decision”. As a neutral term, the
meaning of “decided” must be interpreted in a way that does justice to the ordinary meaning of other
terms in Article 13(b)(ii) that are not neutral. Most importantly, the term “decided” must be
interpreted in a manner that permits a comparison between a “ grant” of non-”green box” “support” to
a specific commodity for individual marketing year s between 1995-2003, and a “decision” regarding
such support in MY 1992. The Appellate Body agreed with the panel in Brazil – Aircraft that the
phrase “the level of export subsidies granted” meant “something actually provided”, which means
actual budgetary expenditures. Thus, the neutral term “decision” (for MY 1992) can only be read
harmoniously with the term “grant support” (for MY 1995-2003) where the “decision” is to fund non-
”green box” support to a specific commodity for marketing year 1992.

9. The US argument that the only decision it t ook during MY 1992 was a “fixed rate of support”
for MY 1992 is totally inconsistent with the US Statement of Administrative Action (SAA), in which
the United States provided its official interpre tation of the peace clause. In the SAA, the
United States stated that governments would have peace clause protection from adverse effects and
serious prejudice challenges in the WTO “unless the AMS for the particular commodity exceeds the
level decided in the 1992 marketing year.” Brazil st rongly disagrees with the notion of “AMS” as the
relevant standard for the peace clause, and draws th e attention of the Panel to the fact that the
United States now admits that “AMS” is nowhere found in the text of Article 13(b)(ii). But this
official US interpretation of the peace clause in 1995 is nevertheless compelling evidence of the
United States view of the “decision” it had taken during MY 1992. And this interpretation did not
reflect a decision regarding only a rate of support. Instead, the only two “decision” options were set
out in the AoA Annex 3, where “AMS” is calculate d. This calculation is based on either budgetary

outlays, or a calculated amount based on the difference between a fixed reference price and the
applied administered price multiplied by the amount of production eligible to receive the administered
price. Under either option, the United States’ interpretation indicates that an “amount” (not a “rate of
support”) is the measure of support under the peace clause.

10. The SAA statement is also strong evidence th at the alleged US “decision” to continue the
1990 FACT Act level of support at 72.9 cents per pound is simply post hoc rationalization. Brazil
presents evidence that prior to this dispute, the United States had not made up its mind on what would
constitute the relevant decision for peace clause purposes. A series of questions asked by Brazil in the
Committee on Agriculture and answers provided by th e United States reveals that as of 28 June 2002,
the United States had not yet made a “decision” regarding which year the United States was using
with respect to Article 13(b)(ii). These questions provided the United States with every opportunity
to announce the decision that it had allegedly taken 10 years before. Yet, it said nothing about a “rate
of support”.

11. In sum, Brazil is of the firm view that th e text of Article 13(b)(ii) requires comparing MY
1992 support with MY 1995-2003 support by comparing actual expenditures. This methodology
produces an “amount” of support – not a “rate”. Thus, any decision under Article 13(b)(ii), by
definition, must relate in some way to an “amount ” of expenditures. Only such methodology allows
a clear comparison between the two time periods, regardless of the type of support.

12. However, even if the Panel were to decide th at the relevant standard is a “rate of support”
standard, Brazil has provided the testimony of Prof essor Daniel Sumner indicating that the “rate of
support” to upland cotton in MY 1999-2002 was much higher than the “rate of support” to upland
cotton in MY 1992. Based on the evidence and anal ysis presented by Professor Sumner, Brazil also
asserts that even under the US “rate of support” methodology, the United States has failed to
demonstrate that its MY 1999-2 002 support does not exceed its s upport to upland cotton decided in
MY 1992.

US “statute of limitations” interpretation of the peace clause

13. There is no express or implied “statute of limitations” in the peace clause. Subsidizing
Members such as the United States are offered c onditional protection under the peace clause during a
9-year period. But the rights of Members inju red by subsidies provided in excess of 1992 marketing
year levels are preserved throughout the implementation period as well. This is the balance struck by
the peace clause.

14. The US “statute of limitations” argument in this case is very similar to one rejected by the
Appellate Body in US – Lead Bars . This argument is further inconsistent with the views of the
Indonesia – Automobiles panel, which held that measures applie d in the past must be examined to
assess present serious prejudice. The US interpreta tion would cut off a Member ’s right to challenge
such measures because it missed an imaginary deadline. This US interpretation is inconsistent with
the object and purpose of the AoA because it w ould permit Members to provide huge “non-green”
box support one year without peace clause protection, and then claim absolution as soon as the next
marketing year began.

“Support to Upland Cotton”

15. Brazil has produced extensive evidence providi ng the factual basis for the Panel to find that
CCP, DP, market loss, and PFC payments are “suppor t to” upland cotton within the meaning of the
peace clause. USDA categorizes the PFC and market loss payments as part of “total payments” to
upland cotton. US National Cotton Council official s repeatedly testified and produced documents
revealing that their producer members requested , received, and depended on all four of these
subsidies. Crop insurance is also support to cotton as evidenced by specific upland cotton crop
insurance policies and groups of policies for uplan d cotton. Moreover, USDA specifically identifies
and tabulates crop insurance subsidies for upland cotton. Thus, the Panel should find that all five of
these programmes granted support to upland cotton in MY 1999-2002.

IV. STEP 2 PAYMENTS

16. The US Step 2 export subsidies clearly constitute export subsidies that violate Articles 3.3 and
8 of the Agriculture Agreement and that are prohibited by Articles 3.1(a) and 3.2 of the SCM
Agreement because they are contingent upon proof of export of US upland cotton.

17. Similarly, US domestic Step 2 subsidies are pr ohibited local content subsidies in violation of
Article 3.1(b) of the SCM Agreement. There is no explicit derogation of Article 3.1(b) built into the
Agriculture Agreement. In fact, the opposite is true, since Article 13(b)(ii) provides a conditional
exemption only for claims under Articles 5 and 6 of the SCM Agreement, but not for claims under
Article 3 of the SCM Agreement. There is also no conflict between Article 3.1(b) of the SCM
Agreement and Agriculture Agreement Article 6 or Annex 3, paragraph 7, because there are two types
of domestic subsidies – those that comply with Ar ticle 3.1(b) of the SCM Agreement and those that
do not.

V. EXPORT CREDIT GUARANTEES

18. With respect to Brazil’ s claims regarding the GSM 102, GSM 103 and SCGP export
guarantee programmes, the United States interpretati on of AoA Article 10.2 should be rejected.
Under the US view of Article 10.2, it can grant e xport credit support at zero percent interest and for
unlimited terms – all for free – at least until Members complete negotiations on specific disciplines
for export credits. This interpretation is not supported by a Vienna Convention analysis.

19. The United States has not even addressed Braz il’s claim that since there is no commercial
market for export credit guarantees on terms such as those provided by the CCC programmes, those
programmes confer benefits per se. And Brazil has demonstrated that under the cost formula used by
the White House, the US Congress, US government accountants and the CCC itself, operating costs
and losses for GSM 102, GSM 103 and SCGP have outpaced premiums collected in every single year
since the United States started applying the formula in 1992. These figures represent actual costs and
losses of the US export credit guarantee programmes. The programmes therefore constitute export
subsidies within the meaning of ASCM Articles 1.1 and 3.1(a), item (j) of the Illustrative List, and
AoA Articles 10.1, 1(e) and 8. They “at the very least” threaten to circumvent US export subsidy
commitments, in violation of Articles 10.1 and 8 and are prohibited under ASCM Articles 3.1(a) and
3.2.

VI. CONCLUSION

20. Brazil requests the Panel to reject the numer ous attempts by the United States to delay the
initiation of Brazil’s serious prejudice claims. Br azilian upland cotton producers are experiencing
present serious prejudice from continued huge amounts of US subsidies to upland cotton. Applying

either methodology of calculating the support for peace clause purposes, the United States has no
basis to claim peace clause protection.

ANNEX C-3

EXECUTIVE SUMMARY OF THE OPENING STATEMENT
OF THE UNITED STATES AT THE FIRST MEETING
OF THE PANEL WITH THE PARTIES

1. The United States has stayed within the di sciplines and acted consistently with its WTO
obligations negotiated and agreed in the Uruguay Ro und. We share many of Brazil’s objectives with
respect to reform of measures that affect agricultural trade, but we obviously do not endorse the
means by which Brazil is attempting to obtain ch anges to WTO-consistent US support measures for
upland cotton. Brazil seeks to impose disciplines an d achieve results through this litigation that were
not agreed in the Uruguay Round through negotiation.

2. Brazil suggests that whether a Member’s me asures are in breach of the Peace Clause should
be judged by comparing the aggregate outlays that may be attributed to a commodity to the aggregate
outlays that were made during the 1992 marketing year that, again, may be attributed to that
commodity. Brazil’s erroneous analysis stems from three interpretive missteps.

3. First, with respect to measures currently in effect, Brazil mistakenly suggests that support
under previous measures in past years is releva nt to the Peace Clause comparison. The proviso,
however, is written in the present tense and thus, with respect to measures currently in effect, calls for
a determination of the support that challenged measures currently grant. Brazil nowhere explains how
the support in any previous years is relevant to th e present-tense criterion that Peace Clause-exempted
measures “do not grant support” in excess of a certain le vel. In fact, Brazil’s analysis of the ordinary
meaning and context of the phrase “grant support” assigns no meaning to Members’ choice of verb
tense.

4. Second, Brazil misunderstands the support that is relevant to the Peace Clause comparison
because it misreads the phrase “support to a specifi c commodity”. Brazil and New Zealand have
asserted that, had Members intended for the phras e “support to a specific commodity” to mean
“product-specific support”, they would have used the latter phrase. With respect, this pushes the
general interpretive aid of reading different word choices to carry different meanings too far. It
ignores the relevant task for an interpreter, which is to read the text according to its ordinary meaning,
in context, and in light of the object and purpose of the agreement. The ordinary meaning of the
phrase “support to a specific commodity,” in the context of the Agriculture Agreement, is
“product-specific support”.

5. We note that the Agriculture Agreement sugg ests that domestic support consists, in part, of
product-specific and non-product-specific support. Br azil’s interpretation of “support to a specific
commodity,” however, would apparently also captu re “non-product-specific support”. Absent a clear
indication that such a contrary-to-logic result was intended, the interpreter should read “support to a
specific commodity” to exclude “non-product-speci fic support”. We note that the Agriculture
Agreement suggests that domestic support consists , in part, of product-specific support and
non-product-specific support. Brazil’s interpretation of “support to a specific commodity”, however,
would apparently also capture “non-product-specific support”. Absent a clear indication that such a
contrary-to-logic result was intended, the interpreter should read “support to a specific commodity” to
exclude “non-product-specific support”.

6. Third, Brazil ignores the way in which the Un ited States “decided” (that is, “determined” or
“pronounced”) the product-specific support for upland cotton during the 1992 marketing year. As

Brazil explained in its first submission, the Peace Clause text resulted from the EC’s desire to protect
from challenge measures “decided” in 1992 fo r purposes of CAP reform, rather than support
“provided” during marketing year 1992. That is precisely the approach the United States suggests:
examine the product-specific support “decided” during marketing year 1992 and compare it to the
product-specific support that measures currently in eff ect grant. Brazil fails to explain to the Panel
how US measures actually decided support during the 1992 marketing year in favour of Brazil’s
pre-baked conclusion that the “term ‘decided during the 1992 marketing year’ requires an
examination of the amount or quantity of support . . . for a specific commodity that a WTO Member
‘decided’ to provide during the 1992 marketing year”. In fact, US measures “decided” support in the
1992 marketing year by ensuring upland cotton producer income at a rate of 72.9 cents per pound.
Brazil nowhere explains how US domestic support measures could have “decided” the amount of
outlays since those outlays resulted from the diffe rence between the income support level and world
prices during Marketing Year 1992 beyond the US Government’s control.

7. Brazil has argued that the US approach would create an annual “statute of limitations” for the
applicability of the Peace Clause and that the problem with this approach is budgetary outlays are not
known until after a given marketing year is comp leted. This comment, rather, points out the
difficulties of Brazil’s approach that only budgetary outlays may be examined under the Peace Clause.
That is, Brazil effectively concedes that under its approach there would be no certainty for Members
whether measures are exempt from actions. For example, it would be difficult to know whether
budgetary outlays under the 2002 Act exceeded 1992 outlays as of Brazil’s panel request in
February 2003.

8. With respect to US direct payments, wh ich the United States believes are “green box”
measures, Brazil argues that these payments do not satisfy the “fundamental requirement that they
have no, or at most minimal, trade-distorting eff ects or effects on production” under the first sentence
of paragraph 1 of Annex 2. Howe ver, the text of Annex 2 indicat es that “domestic support measures”
shall be deemed to have met this “fundamental requirement” if the measures “conform to the . . . basic
criteria” of the second sentence, plus any applicab le policy-specific criteria, by beginning the second
sentence with “accordingly”. This interpretation is supported by relevant context in the Agreement;
as the European Communities notes in its third party s ubmission, Articles 6.1, 7.1, and 7.2 refer to the
measures “which are not subject to reduction commitments because they qualify under the criteria set
out in Annex 2”.

9. In addition to the basic criteria in paragraph 1, US direct payments must also conform to the
five “policy-specific criteria and conditions” set out in paragraph 6 of Annex 2. Brazil brings forward
two arguments that direct payments do not satisfy the criterion under paragra ph 6(b) of Annex 2 that
the amount of payments not be related to, or based on, production undertaken in any year after the
base period. First, Brazil argues that by eliminating or reducing payments if recipients harvest certain
fruits or vegetables, payments are related to production in a year after the base period. However, no
particular type of production is re quired in order to receive such pa yments – indeed, no production is
necessary at all. Brazil’s argument, moreover, proves too much. Under Brazil’s analysis, any
limitation on a producer’s choices in a year after the base period that would alter the amount of
payment would be inconsistent with paragraph 6(b). However, a requirement that a recipient of direct
payments produce nothing at all (or see the payment reduced or eliminated) would link the amount of
payment to the type or volume of production in the current year. Such a requirement would also
ensure that such payments meet the “fundamental requirement that they have no, or at most minimal,
trade-distorting effects or effects on production” be cause there would be no production at all. Thus,
under Brazil’s analysis, paragraph 6(b) would prevent a payment that would demonstrably achieve the
“fundamental requirement” of Annex 2. This result is not required by the text of paragraph 6(b) and
should be avoided.

10. Second, Brazil argues that direct payments are based on production in a year after the base
period because once one type of direct paymen t to producers under Annex 2 has been made, all

subsequent measures providing direct payments must be made with respect to the same base period.
The Annex 2 text does not support such a reading, however. Annex 2 says that “[d]omestic support
measures for which exemption from the reduction commitments is claimed” shall meet the
fundamental requirement of the first sentence through the relevant basic and policy-specific criteria of
the second sentence. For example, in the case of de coupled income support, the particular “domestic
support measure” must meet “policy-specific criteria and conditions as set out” in paragraph 6.
Paragraph 6(a), (b), (c), and (d) relate “such paym ents” to “a defined and fixed base period”. Thus,
payments with respect to a given “domestic s upport measure for which exemption from the reduction
commitments is claimed” must satisfy conditions relating to “a defined and fixed base period”. There
is no textual requirement that all domestic support measures for which exemption from the reduction
commitments is claimed utilize the same “defined and fixed base period”. Brazil also reads
paragraph 6 as though the text were “ the defined and fixed base period”. However, this is not what
the text says nor what the negotiators agreed.

11. Brazil and the rest of the Cairns Group seek to address this very issue by proposing in the
ongoing agriculture negotiations that Annex 2, paragr aph 6, be amended to change the reference from
“a defined and fixed base period” to “a defined, fixed and unchanging historical base period”. The
revised Harbinson text, in Attachment 8, incorporates this Cairns Group proposal by proposing adding
to paragraphs 5, 6, 11, and 13 of Annex 2 the te xt: “Payments shall be based on activities in a fixed
and unchanging historical base period.” Again, Brazil is seeking to gain through litigation what it has
not yet gained through negotiation.

12. The Step 2 programme has been constructe d and implemented in a manner to support the
price paid to US upland cotton producers by pur chasers of their product. Step 2 is a single
programme that provides for payments on all sales of all upland cotton produced in the United States
in a given marketing year – whether those sales ar e for export or for domestic consumption. Step 2
payments are provided to merchandisers or manufacturers who use upland cotton as they represent the
first step in the marketing chain where these payments could be made and have the greatest impact on
producer prices.

13. The authorizing statute plainly does not state that the Step 2 payment is contingent upon
export. The statute provides for Step 2 payments to a class of eligible users who constitute the entire
universe of potential purchasers of upland cotton from producers. Payment occurs upon
demonstration of the requisite use of the cotton. Unlike the facts of United States - FSC (Recourse to
Article 21.5) , the Step 2 subsidy involves a universally av ailable subsidy on sales of one agricultural
product produced entirely in the United States, not tie d to exportation or foreign commerce. Stated
most simply, US upland cotton does not have to be exported to recei ve the payment. Assuming the
conditions in the payment formula are met, all US upland cotton is sold with an entitlement to the
Step 2 subsidy, whether it leaves the United States or is consumed there.

14. For nearly 15 years before the inception of obligations under the Agreement on Agriculture,
as well as since that time, the co re features of the two main agricultural export credit guarantee
programmes of the United States (GSM-102 and GSM- 103) have remained substantially the same.
They are well-known and well-established export credit guarantee programmes, specifically discussed
by negotiators during the Uruguay Round, as well as in the OECD and in the current Doha Round.

15. Article 9.1 of the Agriculture Agreemen t identifies and lists specific export subsidy
programmes, also well-known to the negotiators, who wanted to assure that such specific practices
were embraced within the definition of an export subsidy for purposes of the Agreement on
Agriculture. Other export subsidies are capture d within the anti-circumvention provision of
Article 10.1. In contrast, export credit guarantees we re not included in either Article 9.1 or 10.1.
Instead, as part of the balance struck in th e Uruguay Round, negotiators opted to extend the
negotiations on this subject but determined to ho ld Members to a commitment that if and when
internationally agreed disciplines emerged, the Un ited States, like all other WTO Members, could

only grant export credit guarantees in conformity with such disciplines. To do otherwise would at that
time constitute a violation of the Member’s obligations under the Agreement on Agriculture.

16. Article 10.2 expresses the two commitments of th e Members in this regard: (1) to engage in
such negotiations notwithstanding the conclusion of the Uruguay Round and (2) upon development of
internationally agreed disciplines to render them WTO commitments through the portal of
Article 10.2. Article 10.2 does not state that expor t credit guarantees shall be subject to such future
negotiated disciplines in addition to the anti-circumvention provisions of Article 10.1. To the
contrary, Article 10.2 and the reference to export credit guarantees is juxtaposed to Article 10.1 to
reflect the intention of the drafters to disti nguish export credit guarantee programmes from other
programmes that otherwise would be export subsidies subject to Article 10.1.

17. For the foregoing reasons and those set out in our first written submission, the United States
believes that US non-green box measures are exempt from actions pursuant to Agriculture Agreement
Article 13(b)(ii); US direct payments are exempt from actions pursuant to Agriculture Agreement
Article 13(a)(ii); and US export credit guarantee programmes for upland cotton and Step 2 payments
are consistent with our WTO obligations.

ANNEX C-4

EXECUTIVE SUMMARY OF THE CLOSING STATEMENT
OF THE UNITED STATES AT THE FIRST MEETING
OF THE PANEL WITH THE PARTIES

1. On the US requests for preliminary rulings, th e Panel expressed some interest in the question
of what prejudice would result to the United Stat es if we were forced to defend export credit
guarantees with respect to commodities other th an upland cotton. First and foremost, the
United States would have lost the benefit of cons ultations on these measures. Consultations serve a
number of important functions, including helping th e parties to understand each others’ concerns and
aiding in efforts to resolve the dispute. The DSU affirms the importance of consultations and requires
that a Member cannot proceed to a panel unless the Member has consulted on that measure.

2. Moreover, to require the United States to address Brazil’s allegations on these measures
would impose additional burdens on the United St ates and detract from the time and resources
available to respond for those measures that are within the terms of reference. The United States has
export subsidy reduction commitments with respect to 12 commodities. Each such commodity is
therefore subject to individual Peace Clause analysis under Article 13(c). In addition, under Brazil’s
approach, the type of analysis the United States has offered for upland cotton concerning item (j) of
the Subsidies Agreement would be appropriate for all commodities subject to the coverage of the
Agriculture Agreement. This would necessitate a commodity-by-commodity analysis of the export
credit guarantee programmes, as applied, concerni ng premiums and long-term operating costs and
losses (if any).

3. But in the end, the issue of prejudice to th e United States does not figure in the question of
whether a measure is within the Panel’s terms of reference. It is that question that underlies the
United States’ preliminary ruling requests.

4. First, the United States has requested that th e Panel find that export credit guarantee measures
relating to other eligible agricultural commodities ar e not within the Panel’s terms of reference.
While Brazil’s panel request did refer to “export credit guarantees . . . to facilitate the export of US
upland cotton and other eligible agricultural commodities,” its consultation request did not. That
consultation request nowhere included the “other eligible agricultural commodities” language, nor did
Brazil include these measures in its statement of available evidence. Thus, those measures on other
eligible agricultural commodities were not part of the “measures at issue” that Brazil identified in its
consultation request as it is required to do under DSU Article 4.4. Contrary to Brazil’s statement a
few moments ago, the United States and Brazil never consulted on export credit guarantees on
commodities other than cotton – not once and certain ly not three times. Brazil said as much on the
first day of the first panel meeti ng when it acknowledged that the United States told Brazil at the first
consultation that its questions were beyond the scope of the consultations.

5. On the question whether the export credit guarantee programmes were one measure or
multiple measures: There is no reason why export guarantees for multiple products cannot be multiple
measures. Under DSU Article 4.4, it is incumben t upon Brazil to identify in its consultation request
“the measures at issue.” Here, Brazil identified the measure as the “export credit guarantees . . . to
facilitate the export of US upland cotton,” and th e United States may, and did, rely on that
consultation request (including the attached statement of evidence) for notice.

6. For example, if a Member banned imports of all animal products for a stated health reason,
and another Member filed a consultation request on the ban solely with respect to imports of beef, that
complaining Member could not then expand the scope of the dispute through its written consultation
questions or its panel request to challenge that ban with respect to other affected agricultural
commodities. This is, however, what Brazil is attempting to do here.

7. Brazil also relies on footnote 1 of its consu ltation request, which refers to an explanation
“below”. Such an explanation expanding the sc ope of the request to include “other eligible
agricultural commodities” is not found in the consultation request. DSU Article 4.4 requires Brazil to
provide “an identification of the measures at issue, ” not a cryptic reference that is not explained
further. Despite notice from the United States and despite ample opportunity to submit a new
consultation request, Brazil never did so. Theref ore, export credit guarantee measures relating to
eligible US agricultural commodities other than US upland cotton were not the subject of
consultations and pursuant to DSU Articles 4.4, 4.7, and 6.2 do not form part of the Panel’s terms of
reference.

8. With respect to production flexibility contract payments and market loss assistance payments,
we have explained that these payments were comp leted, the programmes terminated, and the statutory
instruments providing them were superseded before Brazil’s consultation request was filed. The
measures that Brazil challenges are subsidies or pa yments provided by these programmes. The laws
authorizing these payments designated that each such payment was allocated to a particular crop or
fiscal year. Thus, pursuant to the 1996 Act, the last production flexibility contract payment for fiscal
year 2002 was made no later than the end of fiscal year 2002. As Brazil states in its first submission,
“[w]ith the passage of the new FSRI Act in May 2002, PFC payments were discontinued”. The last
market loss assistance payment w as made with respect to the 2001 marketing year (1 August 2001-
31 July 2002) pursuant to legislation enacted on 13 August 2001. Because the relevant fiscal year and
the relevant marketing year, respectively, had b een completed by the time of Brazil’s consultation
and/or panel requests, these measures cannot have been consulted upon within the meaning of DSU
Article 4.2 nor have been “measures at issue” within the meaning of DSU Article 6.2. They therefore
do not fall within the Panel’s terms of reference. Brazil’s suggestion that Articles 7.2 to 7.10 of the
Subsidies Agreement should supersede the DSU provisions concerning this Panel’s terms of reference
is novel. Preliminarily, we note that Article 7.4 do es mention the Panel’s terms of reference, but only
in the context of setting a 15-day deadline for est ablishing them, as opposed to the time line under
DSU Article 7.1.

9. Finally, with respect to subsidies provi ded under the Agricultural Assistance Act of 2003 –
the cottonseed payment – these are me asures that were not even in existence at the time of Brazil’s
panel request. As the cottonseed payment had not been made (implementing regulations were not
even issued until 25 April 2003) and the legislation au thorizing the payments had not been enacted at
the time of Brazil’s panel request, this subsidy or measure was not consulted upon and could not have
been a measure at issue between the parties. Therefore, the United States requests that the Panel make
preliminary rulings that these three sets of measures are not within its terms of reference.

10. To summarize briefly where our discussions on the Peace Clause have brought us: Brazil
suggests in this dispute that the word “ actions” in th e phrase “exempt from actions” only refers to
“collective action” by the DSB. However, we note th at Brazil’s interpretation runs directly contrary
to the view it expressed in its consultation request in the dispute European Communities – Export
Subsidies on Sugar (WT/DS266/1). With respect to Article 13(c)(ii), which uses the same phrase
“exempt from actions” at issue in this dispute, Brazil wrote: “In respect of the claims based on
Article 3 of the SCM Agreement, because the e xport subsidies provided by the EC on sugar do not
conform fully to the provisions of Part V of the Agreement on Agriculture, those export subsidies are
not exempt from challenge by virtue of Article 13(c)(ii) of the Agreement on Agriculture.” That is, in
that WTO document Brazil does not read the phrase “exempt from actions” to mean “exempt from
remedies” or “exempt from collective acti on by the DSB” but rather “exempt from challenge”.

Brazil’s interpretation in that WTO consultation re quest could only result if "exempt from action" in
the Peace Clause means "not subject to" the "taking of legal steps to establish a claim” – as the
United States has been contending in this dispute. We submit that this interpretation by Brazil is
correct.

11. The Peace Clause – in Brazil’s words – “exem pt[s] from challenge” certain measures. It
follows that the Peace Clause is not an affirmative defence but rather a threshold issue for Brazil in
this dispute. As Brazil implicitly recognized in bo th its panel and consultation requests, to even reach
the point where it will, as the complaining party, be allowed to pursue its substantive claims, Brazil
must first demonstrate that the Peace Clause does not exempt US measures from action – that is “from
challenge”.

12. On US direct payments, which the United States believes are “green box” measures because
they satisfy the criteria set out in Annex 2: As a question from the Chair to Brazil suggested,
assessing the conformity of a claimed green box measure against the “fundamental requirement” of
the first sentence of paragraph 1 would be a difficu lt, if not impossible task, for a Panel. Members
foresaw the problem and therefore provided guidance on how a measure would fulfill that
fundamental requirement – that is, if the measures “conform to the . . . basic criteria” of the second
sentence plus any applicable policy-specific crite ria, they shall be deemed to have met the
fundamental requirement.

13. With respect to the criterion in paragraph 6(b) that the amount of decoupled income support
payments not be based on, or linked to, production u ndertaken in any year after the base period, this
provision need not and should not be read as Braz il suggests. The text supports a reading that a
Member may not base or link payments to production requirements. The EC endorsed this view this
morning. US direct payments require no partic ular type of production – indeed, no production is
necessary at all. As we have suggested, Brazil’s reading of paragraph 6(b) would prevent a Member
from prohibiting a recipient from producing crops – that is, would prevent a measure that bases or
links payments to a type or volume of production: none at all. If there is no production at all as a
result of the measure, such a measure necessarily can have no “trade-distorting effects or effects on
production”. Thus, Brazil’s reading of paragraph 6(b) would preclude a Member from establishing a
measure that meets the “fundamental requirement” of Annex 2. Paragraph 6( b) need not and should
not be read in opposition to that fundamental re quirement. In the context provided by the first
sentence of Annex 2, then, paragraph 6(b) should be read as establishing that a Member may not base
or link payments to requirements to produce any crop in particular – again, US direct payments
require no upland cotton production and do not require any production at all.

14. Brazil has repeatedly raised the spectre of unchecked US domestic subsidies should the Panel
agree with the US interpretation of the Peace Cl ause. Brazil’s fears are groundless. Of course the
United States may not provide subsidies without any limit. US subsidies are disciplined in several
ways, and the US has deliberately kept itself within those limits. There are two main disciplines that
apply. The first is the US final bound co mmitment level under the Current Total Aggregate
Measurement of Support. The second, as we have discussed at length, is the Peace Clause itself and
its effective limitation to a level of producer s upport of 72.9 cents per pound. The United States has
stayed within the boundaries of those limits desp ite, as outlined in Brazil’s filings, pressure to do
otherwise. We are entitled to the benefit of that compliance.

15. We can understand that Brazil might feel that these limits are not enough. New limits may be
negotiated in the ongoing agriculture negotiations, in which the United States shares many of the
same goals as Brazil. Until that happens, however , Brazil may not seek to overturn the balance of
rights and obligations negotiated and agreed by Members in the Uruguay Round. Brazil’s Peace
Clause interpretation would do violence to the text of the Agriculture Agreement and would penalize
the United States for deciding support to upland cotton producers within the limits set by the
Agreement. We therefore ask the Panel to find that Brazil has not established that US domestic

support measures breach the Peace Clause and that su ch measures are therefore exempt from Brazil’s
action at this time.

ANNEX C-5

ORAL THIRD PARTY COMMUNICATION BY
THE ARGENTINE REPUBLIC

24 July 2003

I. INTRODUCTION

1. The Argentine Republic thanks the Panel for the opportunity to present its views as a third
party to these proceedings and, in pursuant to its Submission dated 15 July 1, will comment on the
claims contained in the First Written Submission of the United States, dated 11 July.

2. In this connection, Argentina will comment more particularly on:

 (a) The US interpretation of the provisi ons of the Peace Clause, particularly in
Article 13(b)(ii);

 (b) the US interpretations regarding Anne x 2 of the Agreement on Agriculture and,
lastly;

 (c) the US interpretation whereby Article 10.2 of the Agreement on Agriculture excludes
export credit guarantees from the general e xport subsidy disciplines in the Agreement
on Agriculture and the Agreement on Subsidies and Countervailing Measures.

II. UNITED STATES CLAIMS

(a) Interpretation of the Peace Clause

3. Argentina will discuss what it regards as a mist aken US interpretation of the terms of the
Peace Clause, particularly in Article 13(b) of the Agreement on Agriculture
2, whereby it draws the
conclusion – equally mistaken – that its domes tic support measures are exempt from the measures
based on Article XVI.I of the GATT 1994 or Ar ticles 5 and 6 of the Agreement on Subsidies
(ASCM).

(i) Grant support to a specific commodity

4. First, the United States mistakenly inte rprets the phrase "grant support to a specific
commodity".

5. In paragraph 71 of its Submission, the United States says that counter-cyclical payments and
crop insurance payments do not constitute "support to a specific commodity" because they are not
linked to specific commodity but are based on historical acreage and payment yields.
3

6. The United States contends that "support to a specific commodity", in Article 13(b)(ii), means
"product-specific support". Its argument is thus based on trying to incorporate the phrase "product-

1 "Third party Submission by Argentina", paragraph 2.
2 First Written Submission of the United States of America, 11 July 2003, Section III.D.
3 Ibid., paragraph 115.

specific support" into Article 13(b)(ii) when the ph rase is not to be found in the wording of the
article.4

7. If the negotiators had meant to say that "p roduct-specific support" was exempt, they would
have introduced that phrase into the wordi ng of the article, but they did not do so.
5 Hence, AA
Article 13(b)(ii) refers to a Member's non-Green Box domestic support measures, including domestic
support measures granted only to individual specifi c products and also those relating to several
specific products.

8. In other words, "support to a specific commodity", in Article 13(b)(ii), includes any
non-Green Box domestic support measure providing id entifiable support to an individual commodity,
regardless of whether the measure can provide support to a larger number of commodities.
6

9. In its argument, the US ignores the most rele vant context of Article 13(b)(ii), namely the
chapeau, which refers not to "product-specific support" but to "domestic support measures" in
general. This means that the measures which, und er Article 13(b)(ii) are relevant in determining
whether a Member has granted support to a specific commodity in excess of that decided during the
1992 marketing year necessarily includes non-product-specific domestic support.

10. The US interpretation would mean no claim could be made against any Amber Box domestic
support measure granted to more than one commodi ty. The US argument would thus allow Members
to make enormous increases in domestic support to a relatively small number of commodities (such as
the ten crops covered by the counter-cyclical paymen ts programme), something which is inconsistent
with the object and purpose of the AA, namely, cu tting down the level of domestic support, as is
apparent from the Preamble.
7

11. Argentina considers that "support to a specific commodity", in Article 13(b)(ii), indicates that,
in calculating the domestic support granted by a Memb er, the support must relate to a particular or
precise commodity, regardless of whether the support is product-specific or specific to more than one
product.8

12. Contrary to the US suggestion, the phrase "support to a specific commodity" does not mean
"support exclusively or only" to a specific commod ity. The fact that, through the same domestic

4 According to the Appellate Body in the India-Patents Case (WT/DS50/AB/R, adopted
16 January 1998, paragraph 45):
 " The duty of a treaty interpreter is to examine the words of the treaty to determine the
intentions of the parties. This should be done in accordance with the principles of treaty interpretation set out
in Article 31 of the Vienna Convention. But these principles of interpretation neither require nor condone the
imputation into a treaty of words that are not there or the importation into a treaty of concepts that were not
intended". (Emphasis added)
5 "… had Members intended to exclude non-product specific support they would surely have said so",
"Third Party Submission of New Zealand", 14 July 2003, paragraph 2.21.
6 In this respect, Argentina agrees with New Zealand: " … New Zealand sees no basis on which to
suggest that support to a specific commodity should be excluded simply because other commodities may receive
similar support". Third-party submission of New Zealand, 15 July 2003, paragraph 2.23.
7 "... the above-mentioned long-term objective is to provide substantial progressive reductions in
agricultural support and protection sustained over an agreed period of time, resulting in correcting and
preventing restrictions and distortions in world agricultural markets" (Agreement on Agriculture, third
preambular paragraph).
8 Australia's Third Party Submission to the Panel, 15 July 2003, paragraph 23: "... the ordinary
meaning of this phrase ("To a specific commodity"), read in its context and in light of the object and purpose of
the Agreement on Agriculture, is support granted to an individual agricultural commodity covered by
AA Annex 1, such as upland cotton, whether through product specific, or non-product specific, support".

support measures, the United States grants support to different products does not cancel out the fact
that part of the support is granted to one specific product.

(ii) Support "decided durin g the 1992 marketing year"

13. After analysing the phrase " that decided during the 1992 marketing year ", the United States
reaches the conclusion that the phrase does not re late to support actually provided to a specific
product during that year
9, but to support determined during the 1992 marketing year and that it
consisted in "deciding" or "determining" a le vel of income support for cotton producers of
US$0.72 per pound.

14. With this interpretation, the United Stat es can get around the need to respond to Brazil's
contention10 - supported by Argentina 11 - that the US budgetary outlays on domestic support for the
cotton sector for the 1999, 2000, 2001 and 2002 marketing years were far in excess of the
US$1,994 million granted in 1992.

15. Argentina considers that, under Article 13(b )(ii), the word "decided" means a decision to
make payments. The US argument ignores the fact th at the text first uses the term "grant support"
with reference to the support granted or provide d to a specific commodity during the period of
implementation (1995-2003). The phrase "grant suppor t", however, is necessarily tied in with the
support "decided during the 1992 marketing year"; otherwise, there would be no basis for comparison
if one case involved the support granted and the other involved only the support scheduled.

16. In this connection, Argentina contends that the word "decided", in Article 13(b)(ii), should
not be interpreted in such a way that the pe r pound guaranteed price for commodity producers
(scheduled support) is the factor to be taken into consideration in determining the amount of support
granted. If the criterion advanced by the Unite d States were accepted, it would mean that an
unlimited amount of domestic support could be granted to each product provided the total AMS is not
exceeded.

17. In other words, the comparison required in Ar ticle 13(b)(ii) necessarily entails comparing the
same type of support in each of the periods in question (period of implementation versus 1992
marketing year), in other words "comparing th e comparable". The "support granted" in each
marketing year during the period of implementation must necessarily be tied in with the budgetary
outlays in those years.

18. In this respect, the definition of "granted " formulated by the Appellate Body in the
"Brazil-Aircraft" case is relevant, namely that it is " something actually provided " and, thus, " to
determine the amount of export subs idies "granted" in a particular year, we believe that the actual
amounts provided by a government, and not just th ose authorized or appropriated in its budget for
that year, is the proper measure … Therefore, … we believe that the proper reference is to actual
expenditures by a government …".

19. Similarly, Argentina considers that, under AA Article 13(b)(ii), the definition of the term
"support granted" must refer to a government's actual expenditures a nd not to a scheduled level of
costs or a rate of support per unit of production.

20. Accordingly, Argentina takes the view that the support "decided during the 1992 marketing
year" refers to payments actually made during that marketing year.

9 First Written Submission of the United States of America, paragraph 94: "… no amount of outlays
was 'decided' … during the 1992 marketing year … ".
10 First Written Submission by Brazil, paragraphs 144-149.
11 Third Party Submission by Argentina, paragraphs 64-65.

(iii) The time dimension of Peace Clause protection

21. In contrast to the US interpretation, Arge ntina contends that the domestic support measures
granted in any of the marketing years in the peri od from 1995 to 2003 are relevant in determining
compliance with Article 13(b)(ii). In this connecti on, we consider that any injurious effects of the
subsidies are extended time-wise.

22. An interpretation like the one postulated by the United Stat es would seriously restrict the
possibility of questioning whether such subsidies ar e consistent with ASCM Articles 5 and 6, while
effects causing injury, nullification or impairment or serious prejudice can be linked to domestic
support measures granted in previous marketing years.

(b) Annex II of the Agreement on Agriculture

(i) Interpretation of paragraph 1

23. The United States claims that its direct pa yments programme is in conformity with AA
Annex II
12 and, therefore, is exempt from measures under th e protection afforded by Article 13(a). In
reaching this conclusion, however, the United States makes a mistaken interpretation of paragraph 1
of AA Annex II.

24. The United States maintains that the structur e of this provision, where the second sentence
starts with the word "Accordingly", suggests that measures that conform to the two basic criteria set
out in paragraph 1(a) and (b), plus the policy-speci fic criteria and conditions set out in the subsequent
paragraphs of Annex II are designed to meet the "f undamental requirement that they have no, or at
most minimal, trade-distorting effects or effects on production"13.

25. Argentina considers this interpretation to be erroneous, since the text of the first sentence
establishes a clear obligation that the domestic support measures to be exempted from the reduction
commitments "… shall meet the fundamental requirement that they have no … trade-distorting effect
or effects on production … ". In Argentina's opinion, the language of this first sentence establishes a
general requirement governing the application of all Green Box measures.

26. The structure of paragraph 1 of AA Annex 2 thus creates four types of obligation:

 (i) The fundamental requirement of no, or at least minimal, trade-distorting effects or
effects on production;

 (ii) the support given in a government-finan ced programme does not entail transfers from
consumers;

 (iii) the support does not have the effect of providing producers with price support; and

 (iv) the policy-specific criteria and conditions set out in paragraphs 2 to 13 of Annex 2 are
also taken into account.

27. In this connection, Argentina believes th at Green Box measures must respect the guiding
principle of avoiding trade-distorting or production effects or at most minimal effects. A measure that
meets the two basic criteria set out in paragraph 1( a) and (b), plus the policy-specific criteria and
conditions set out in the subsequent paragraphs of Annex 2 could also be at variance with the general

12 First Written Submission by the United States of America, paragraph 53.
13 Ibid., paragraph 50.

principle. The opposite interpretation would render meaningless the first sentence of paragraph 1 of
Annex 2, which the text describes as a "fundamental requirement".

28. Therefore, it is Argentina's view that, however much the United States claims that its direct
payments programme conforms to the requirement established in the second sentence of paragraph 1
of Annex 2
14, since it does not meet the fundamental requi rement established in the first sentence it
cannot be viewed as a Green Box programme.

29. In this respect, Argentina concurs with Aust ralia and New Zealand that the first sentence of
Annex 2 paragraph 1, imposes a stringent standard by requiring that the measures to be exempted
from reduction commitments must, as a primary or essential condition, not artif icially alter trade or
production.
15

30. Consequently, if a domestic support measure lead s to a higher level of production of trade in a
particular product or group of products, the me asure does not meet the standard established in
Annex 2, Article 1.

31. It should be emphasized that the US has in no sense answered the st atements by Brazil in
paragraphs 183 to 191 of its Submission concerni ng the trade-distorting and production effects of the
direct payments programme, according to studies ma de by the US Department of Agriculture's own
economists.

32. In other words, because the direct paymen ts programme does have trade-distorting and
production effects, it cannot be included among the domestic support measures exempted from
reduction commitments.

(ii) Interpretation of paragraph 6(b)

33. The United States maintains that the Produc tion Flexibility Contract Payments (PFC) and
Direct Payments programmes are not tied in with production and, therefore, are not Green Box
domestic support.

34. Argentina considers that the alleged "flexibility" of producers to plant different crops is in fact
seriously restrictive. The amount of payments made depends on the type of production. Indeed,
particular crops (fruits, vegetables, etc.) are excluded from these programmes. The effect of this is to
channel production to the remaining crops, which do benefit from the programmes. This shows that
the amount of the payments made is linked to the type of product sown, as Argentina pointed out in its
Third Party Submission
16 and, therefore, the payments are not in conformity with AA Annex 2
paragraph 6(b).

(c) Article 10.2 of the Agreement on Agriculture does not exclude export credit guarantees from
the general export subsidy disciplines of the Ag reement on Agriculture and the Agreement on
Subsidies.

14 Ibid., paragraphs 64-68.
15 Australia's Third Party Submission to the Panel, 15 July 2003, paragraph 31: " … AA Annex 2.1
imposes a stringent standard. Annex 2.1 requires that such measures must, as a primary or essential condition,
not "bias" or "unnaturally alter trade or production …" ; Third Party Submission of New Zealand,
15 July 2003, paragraph 1.08: " … In New Zealand's view it is critical that the integrity of the disciplines on
"Green Box" measures are not weakened or their legitimate purpose undermined through the inclusion of
measures that fail to meet the strict requirements of Annex 2, including the fundamental criterion that such
measures are non-trade or production distorting … ".
16 Third Party Submission by Argentina, 15 July 2003, paragraphs 54-57.

35. The United States asserts that the text of Article 10.2 of the Agreement on Agriculture
permits Members to continue export credit guara ntee programmes unaffected by export subsidy
disciplines,17 since the text reflects the fact of that , during the Uruguay Round, Members came to no
agreement on the substantive disciplines applicable. In other words, the United States contends that
the actual text of Article 10.2 of the Agreement on Agriculture indicates that the export credit
guarantee programmes are not subject in any way to the Agreement's export subsidy disciplines.18

36. In this regard, Argentina would point out that the fact that WTO Members are negotiating
disciplines in order to implement Article 10.2 does not in any way support the US reading to the effect
that Article 10.2 excludes export credit guarantees fr om the general disciplines on export subsidies.
19
A commitment "to work towards the development" of specific international disciplines on the
granting export credits, export guarantees or insuran ce programmes is not the same as excluding them
from the general disciplines on export subsidies. If th at had been the intentio n, then the negotiators
would have expressly said so.

37. Contrary to the US contention, Argentina does not find any indication of this type in the
wording of Article 10.2. The fact that the nego tiators did not include an express reference to the
effect that export credit guarantees are not included in the definition of ex port subsidies or are not
subject to the disciplines established in AA Articles 3.3, 8 or 10.1 means that such disciplines apply to
export credit support measures.

38. In other words, in conformity with the wo rding of AA Article 10.2, export credit guarantees
are not exempt from the general disciplines of the Agreement on Agriculture, and where the measures
are not in conformity with that Agreement, from the disciplines of the Agreement on Subsidies.

39. This interpretation is reinforced by the immediate context and the object and purpose of
AA Article 10.2. Paragraph 2 forms part of Article 10, which is entitled "Prevention of Circumvention
of Export Subsidy Commitments". Paragraph 1 of Article 10 estab lishes that export subsidies not
listed in paragraph 1 of Article 9 "… shall not be applied in a manner which results in …
circumvention of export subsidy commitments …" . This provision imposes disciplines on export
credit guarantees, just as it imposes disciplines on th e whole universe of export subsidies not covered
by Article 9.1.

40. In turn, the object and purpose of AA Article 10 is to prevent any form of circumvention of
export subsidy commitments.
20 Consequently, the US interpretati on of Article 10.2 is completely at
variance on the context of the provision and the object and purpose of AA Article 10, since it
contributes to circumvention of the export subsidy commitment by excluding an entire category of
export subsidies from the general disciplines.

41. Lastly, contrary to what the US maintains,
21 the fact that an export subsidy is not included in
AA Article 9.1 does not mean that it is not an export subsidy, for Article 9.1 is not an exhaustive list,

17 First Written Submission of the United States of America, paragraph 160.
18 Ibid., paragraph 164.
19 Third Party Submission of Canada, 15 July 2003, paragraph 53: " This provision ( Article 10.2) sets
out an intention on the part of Members to undertake further work regarding these measures – the simple fact of
agreeing to do so, however, does not amount to a permissi on to use those measures to confer export subsidies
without consequence and without limit. The US interpretation of Article 10.2 ignores the important context
provided by Article 10.1. It also directly contradicts the stated object and purpose of Article 10 as a whole …".
Similarly, in its Third Party S ubmission, New Zealand states: " Nor does Article 10.2 in any way suggest that it
provides an exception from the disciplines of Article 10.1… ", paragraph 3.15.
20 Article 10.3 reverses the burden of proof in cases of export subsidies under the Agreement on
Agriculture where exports are in exce ss of the reduction commitment level. Article 10.4 establishes disciplines
on international food aid.
21 First Written Submission of the United States of America, paragraphs 161-162.

as is evidenced by the wording of Article 10.1.
22 Nor does it mean that such an export subsidy is not
subject to the export subsidy disciplines of the Agreement on Agriculture.

42. Argentina agrees with the European Committees
23 that Article 10.2 makes it clear export
credit guarantees are not one of the types of export subsidy listed in Article 9.1 and, in that
connection, Article 10.1 establishes that non-listed export subsidy must not be applied in a manner
which results in circumvention of export subsidy commitments.

43. Hence, as the European Communities conte nd, wherever export credit guarantees are export
subsidies not listed in Article 9.1, those guarantees could be applied in a manner which would result
in circumvention of commitments and, therefore, would be prohibited under Article 10.1.

III. CONCLUSION

44. In accordance with the foregoing, Argentina c onsiders that the United States has mistakenly
interpreted the provisions of the Peace Clause, in par ticular in Article 13(b)(ii), has failed to bear the
burden of proving that the domestic support measures it granted to cotton during the 1999, 2000, 2001
and 2002 marketing years were not in excess of the support "decided durin g the 1992 marketing
year".

45. Second, Argentina considers that the US inte rpretations regarding Annex 2 of the Agreement
on Agriculture are mistaken and that, therefore, the Direct Payments and PFC programmes do not fall
under the protection of Article 13(a) of the Agreement on Agriculture for Green Box measures.

46. Third, Argentina considers that the United States export credit guarantee schemes (GSM 102,
103 and SGCP) constitute export subsidies subject to the general export subsidy disciplines of the
Agreement on Agriculture (Articles 3.3, 8 an d 10.1) and the Agreement on Subsidies and
Countervailing Measures (Article 3.1(a) and 3.2).

22 Third Party Submission of Canada, 15 July 2003, paragraph 32; "Article 9 of the Agriculture
Agreement lists and describes certain export subsidies that are subject to reduction commitments. All other
export subsidies fall within the scope of Article 10-1… ".
23 First Third Party Submission by the European Communities, 15 July 2003, Section V.

ANNEX C-6

ORAL STATEMENT BY AUSTRALIA

24 July 2003

Mr Chairman, Members of the Panel,

1. I appreciate this further opportunity to present Australia’s views on matters at issue in this
dispute.

2. In this statement, I will provide some ela boration of Australia’s views on the meaning of
Article 13(b)(ii) of the Agreement on Agriculture. I will also address some of the matters raised in the
First Written Submission of the United States and in the First Third Party Submission of the European
Communities.

Mr Chairman, Members of the Panel,

3. I will begin with matters relating to the meaning of Article 13(b)(ii) of the Agreement on
Agriculture.

4. As Australia noted in its Written Submission
1, the word “decided” appears twice in the
operative provisions of the Agreement on Agriculture – in subparagraphs (ii) and (iii) of Article 13(b).
Further, the immediate context for the word “decided” is exactly the same in each case: “provided
that such measures do not grant support to a specific commodity in excess of that decided during the
1992 marketing year”. Yet Article 13(b)(iii) deals w ith a completely different type of action: one
based on non-violation or impairment under GATT Article XXIII:1(b).

5. Thus, Australia believes that it will be necessar y for the Panel to consider two key threshold
questions.

6. Firstly, is the meaning of the phrase “provide d that such measures do not grant support to a
specific commodity in excess of that decided durin g the 1992 marketing year” the same in each of
Article 13(b)(ii) and (iii)?

7. Australia recalls that the phrase, as well as dr aft text for what became Article 13, first
appeared in the “Blair House Acco rd”. Also included in the Acco rd were provisions concerning the
EEC – Oilseeds dispute.
2

8. In Australia’s view, that dispute is crucially relevant to the interpretation of Article 13(b)(ii)
and (iii).

9. Australia recalls that it clearly underst ood in the resumed Uruguay Round agriculture
negotiations in 1993 that the words “decided during the 1992 marketing year” had been chosen to

1 Third Party Submission of Australia, paragraph 26.
2 European Economic Community – Payments and Subsidies Paid to Processors and Producers of
Oilseeds and Related Animal-Feed Proteins (“EEC – Oilseeds”), Report of the Panel, adopted 25 January 1990,
BISD 37S/86, and Follow-Up on the Panel Report “European Community – Payments and Subsidies Paid to
Processors and Producers of Oilseeds and Related Animal-Feed Proteins, DS28/R, BISD 39S/91.

incorporate into the text of Article 13(b)(ii) and ( iii) the sense of expectations of “conditions of price
competition” as this had been interpreted and applied in the EEC – Oilseeds dispute.

10. The panel in EEC – Oilseeds described the purpose of GATT Article XXIII:1(b) in the
following terms:

… The panel noted that these provisions, as conceived by the drafters and applied by
the contracting parties, serve mainly to protect the value of tariff concessions.
[…] The
idea underlying them is that the improved competitive opportunities that can
legitimately be expected from a tariff concession can be frustrated not only by
measures proscribed by the General Agreem ent but also by measures consistent with
that Agreement. …
3
11. That Panel went on to say:

… The Panel considered that the main value of a tariff concession is that it provides
an assurance of better market access th rough improved price competition.
Contracting parties negotiate tariff concessi ons primarily to obtain that advantage.
They must therefore be assumed to base their tariff negotiations on the expectation
that the price effect of the tariff concessions will not be systematically offset. … 4
12. In any case, having regard to the customary pr inciples of interpretation, Australia considers
that the phrase “provided that such measures do not grant support to a speci fic commodity in excess
of that decided during the 1992 marketing year” must have the same meaning in both Article 13(b)(ii)
and (iii).

13. Thus, there is a second threshold question that th e Panel needs to consider. That question is:
could conditions of price competition for the purpos es of a non-violation nullification or impairment
claim be assessed solely on the basis of budgetary outlay figures, as argued by Brazil, or on the basis
of a rate of payment, as argued by the United States? In Australia’s view, both factors put forward by
Brazil and the United States would properly form a part of that assessment, but not the whole.

Mr Chairman, Members of the Panel,

14. I would now like to comment on some matters raised in the First Written Submission of the
United States.

15. Firstly, Australia disagrees with the United St ates’ approach to interpreting the “peace clause”
and the meaning of “exempt from action based on”.
5

16. If the United States’ interpretation is corr ect and the WTO Agreement negotiators intended
the interpretation offered by the United States, sure ly the negotiators would have included provisions
clarifying how such situations should be resolved ? At the very least, surely Article 13 of the
Agreement on Agriculture would have been listed in the Special or Additional Rules and Procedures
Contained in the Covered Agre ements at Appendix 2 to the Dispute Settlement Understanding ? Yet
the negotiators did neither of these things.

17. The United States argues as well that its interpre tation is supported by the fact that the peace
clause applies “[n]otwithstanding the provisions of GATT 1994 and the Agreement on Subsidies and

3 EEC – Oilseeds, paragraph 144.
4 EEC – Oilseeds, paragraph 148.
5 First Written Submission of the United States, paragraph 33.

Countervailing Measures”.6 However, the United States ignores that, for its argument to be valid, the
peace clause would also have to apply “notwithstanding th e provisions of the Dispute Settlement
Understanding”.

18. The United States argues too that Brazil is in error by asserting that the peace clause itself
“provides no positive obligations”.
7 In Australia’s view, however, this argument confuses obligations
and conditions: the United States is equating a bind ing requirement to act in a certain way with a
prerequisite for the availability of a right or privilege. Article 13 of the Agreement on Agriculture
does not of itself establish any binding requireme nts with which WTO Members are required to
comply.

19. That confusion between rights and obligations continues when the United States argues that
“Brazil’s approach would produce bizarre results”.
8 Indeed, the United States’ arguments could be
considered to confirm the nature of Article 13 as an affirmative defence. Had Brazil alleged a breach
of the United States’ obligations under Article 6, Brazil would have had the initial burden of making a
prima facie case of inconsistency. Article 13, however, is a right or privilege available to the
United States, provided that its measures fully confor m to the relevant conditions. Thus, it is for the
United States to demonstrate that it is entitled to invoke that right or privilege.

20. Secondly, the United States argues that “suppor t to a specific commodity” is equivalent to
“product-specific support”.
9

21. The United States asserts that the definition of Aggregate Measurement of Support – or AMS
– at Article 1(a), and Article 6 concerning Domestic Support Commitments, provide relevant context.
The United States asserts that b ecause the calculation of AMS, and exemptions from Current Total
AMS, differentiate between product specific and non- product specific domestic support, “support” in
the context of Article 13(b)(ii) and (iii) means product-specific AMS.

22. Australia does not agree. AMS is defined by Article 1(a) to mean “the annual level of support
… provided for an agricultural product in favour of the producers of the basic agricultural product”.
However, Article 13(b)(ii) and (iii) refer to “support to a specific commodity”.

23. Had the negotiators intended that “support to a specific commodity” in the context of
Article 13(b)(ii) and (iii) mean product-specific AMS onl y, they would have said so in the text. They
did not. Further, the United States’ argument ignores that a Member’s reduction commitments
include both product specific and non-product specific domestic support measures unless they are
exempt from inclusion.

24. Thus, in Australia’s view, “support to a sp ecific commodity” means: all non-“green box”
support that benefits a specific commodity, whethe r that support be through product specific, or non-
product specific, programmes. Indeed, Australia believes that “support to a specific commodity” in
the context of Article 13(b)(ii) and (iii) can include forms of support additional to those captured in an
AMS calculation.

25. It follows, of course, that Australia consider s – in the context of this dispute – that the
portions of the direct payment and counter-cycli cal payment programmes that benefit upland cotton
should be included in the calculation of “support to a specific commodity” within the meaning of
Article 13(b)(ii). Moreover, Australia notes that the counter-cyclical payment programme provides a

6 First Written Submission of the United States, paragraph 39.
7 First Written Submission of the United States, Paragraph 43.
8 First Written Submission of the United States, paragraph 44.
9 First Written Submission of the United States, paragraph 78.

target price of 72.4 cents per pound for upland cotton,
10 and that entitlements to “Step 2” payments
and some other domestic support programmes are additi onal to the target price, as they were to the
1992 target price of 72.9 cents per pound.

26. Thirdly, the United States argues that direct payments under the 2002 Farm Act meet the
criteria of Annex 2 Decoupled Income Support paym ents. Australia has already addressed the issue
of planting restrictions on fruit and vegetables and wild rice in its Written Submission.

27. The United States argues that “eligibility for di rect payments is defined by clearly defined
criteria … in a defined and fixed base period” and th at “payment yields and base acres are defined in
the 2002 Act and fixed for the duration of the legislation”.
 11 The United States’ interpretation means
that a WTO Member could re-define and re-fix a base period every time it introduced new domestic
support legislation. This cannot be a correct in terpretation of the provisions of paragraph 6 of
Annex 2 to the Agreement on Agriculture.

28. Fourthly, the United States argues that “a Member may choose to provide ‘amber box’
support in any … manner so long as that Member’s Current Total AMS does not exceed … [its]
commitment level”.
12

29. Australia disagrees. The United States’ ar gument ignores that Article 13(b)(ii) does not
exempt non-“green box” domestic support measur es from actions based on Article 3 of the SCM
Agreement. It also ignores the provisions of Article 21.1 of the Agreement on Agriculture . In an
analogous situation in the EC – Bananas dispute, the Appellate Body said: “… the provisions of the
GATT 1994 … apply … except to the extent that the Agreement on Agriculture contains specific
provisions dealing specifically with the same matter”.
13 The Appellate Body went on to say in that
dispute:

… [T]he negotiators of the Agreement on Agriculture did not hesitate to specify …
limitations elsewhere in that agreement; had they intended to do so with respect to
Article XIII of the GATT 1994, they could, and presumably would, have done so.
…
14
30. The Appellate Body’s statement is equally applicable in the context of this dispute. Had the
negotiators of the Agreement on Agriculture intended that non-“green box” domestic support
measures be “exempt from actions based on” Article 3 of the SCM Agreement, they would have said
so. The negotiators did expressly exempt export subsidies from actions based on SCM Article 3 to
the extent that such export subsidies confor med fully to the provisions of Part V of the Agreement on
Agriculture. In Australia’s view, therefore, th e omission from Article 13(b)(ii) of the Agreement on
Agriculture of an express exemption from actions based on SCM Article 3 for local content subsidies
has meaning.

31. Fifthly, the United States has requested th at the Panel issue a preliminary ruling that
Production Flexibility Contract and Market Loss Assistance payments are not within the Panel’s terms
of reference because these programmes have expired. The fact that a measure has expired cannot be
sufficient to remove it from the Panel’s purview. If the Panel were to grant the United States’ request
solely on that basis, it would mean that any Me mber could authorise WTO-inconsistent domestic
support programmes through short-lived measures and avoid the consequences of such actions.

10 Section 1104, 2002 FSRI Act, Exhibit Bra-29.
11 First Written Submission of the United States, paragraph 67.
12 First Written Submission of the United States, paragraph 144.
13 European Communities – Regime for the Importation, Sale and Distribution of Bananas , Report of
the Appellate Body, WT/DS27/AB/R, paragraph 155.
14 _EC – Bananas, paragraph 157.

Mr Chairman, Members of the Panel,

32. The final matter on which I will comment toda y concerns the Third Party Submission of the
European Communities and its arguments in relation to the interpretation of the first sentence of
paragraph 1 of Annex 2 to the Agreement on Agriculture. The European Communities argues that the
first sentence “simply signals the objective of Annex 2” and does not set out an independent
obligation.
15

33. That argument ignores the plain meaning of the text and renders the first sentence of
paragraph 1 inutile, which of course a treaty interp reter may not do. If an exemption from reduction
commitments is being claimed for any domestic sup port measures, the first sentence says they “shall
meet the fundamental requirement that they have no , or at most minimal, trade-distorting effects or
effects on production”. As explaine d in Australia’s written submission,16 a fundamental requirement
is a primary or essential condition. To interpret a “fundamental requirement” other than as a separate
and independent obligation would be contrary to the plain meaning of the words and thus to the
normal rules of treaty interpretation. The use of the words “shall meet” establishes an express
obligation to comply with the specified condition that such measures not, or only minimally, bias or
unnaturally alter trade or production.17

34. The European Communities argues that the word “accordingly” at the beginning of the
second sentence of paragraph 1 links the ‘fundamental requirement’ in the first sentence with the
‘basic criteria’ in the second sentence” and thus ma kes clear that the fundamental requirement is
complied with if the basic criteria in the second sen tence and the policy-specific criteria set out in
paragraphs 2 to 13 are met.
18

35. However, the meanings for “accordingly” cited by the European Communities – “in
accordance with the logical premises” and “correspondingly” – do not compel the interpretation it has
offered. Moreover, there are other, equally valid meanings of the word “accordingly”, provided by
the same dictionary, such as “harmoniously” and “agreeably”.19

36. It is possible to interpret the whole of paragraph 1 to Annex 2 so as to give effect to all of its
provisions:

 domestic support measures for which exemption from the reduction commitments is claimed shall
not, or shall only minimally, distort trade or production; and

 to the extent that measures of the type described in paragraphs 2 to 13 of the Annex are consistent
and harmonious with that fundamental requirement and conform to the basic and policy-specific
criteria as set out in the second sentence, they are exempt from reduction commitments.

37. Thus, notwithstanding that they may meet the basic and policy-specific criteria set out in
paragraphs 1 and 6 of the Annex, a Member may not claim Decoupled Income Support payments as
“green box” where those payments do not meet the fundamental requirement that they shall not, or
shall only minimally, distort trade or production. Such could be the case, for example, where the level
of Decoupled Income Support payments are sufficient to affect directly producer decisions concerning
the allocation of economic resources to production of a particular commodity.

15 First Third Party Submission by the European Communities, paragraph 15.
16 Australia’s Third Party Submission to the Panel, paragraph 31.
17 Australia’s Third Party Submission to the Panel, paragraphs 31-32.
18 First Third Party Submission by the European Communities, paragraph 20.
19 The New Shorter Oxford English Dictionary, Volume I, Ed. Lesley Brown, Clarendon Press, Oxford,
1993, page 15.

Mr Chairman, Members of the Panel,

38. Should you have questions on any matters concerning Australia’s Written Submission and
Oral Statement, I would be pleased to take th ese on notice and arrange for written answers to be
provided.

Thank you, Mr Chairman, Members of the Panel.

ANNEX C-7

THIRD PARTY ORAL STATEMENT OF BENIN

24 July 2003

Mr. Chairman, members of the Panel,

 It is my honour to represent Benin at this Third Party session today. The other two members
of our delegation are Mr. Eloi Laourou of the Permanent Mission of Be nin, and Mr. Brendan
McGivern of White & Case, our legal adviser.

 Although Benin acceded to the WTO back in 1996, this marks our first entry into WTO
dispute settlement. We have been led to take this unprecedented step by the magnitude of the threat
posed by US cotton subsidies, and the highly damagi ng effect that such subsidies have on the exports
and economy of our country.

 In our third party submission, we sought to provi de to the Panel, at the earliest possible stage,
information on the impact of the WTO-inconsistent US subsidies on Benin. In our view, this provides
essential additional context to the issues facing the panel.

 I do not intend to repeat what was in our s ubmission, but it is worth highlighting some key
facts.

 The importance of the cotton sector to Benin can hardly be overstated. As noted in our
submission, it accounts for 90 per cent of our agricu ltural exports, and three-quarters of our export
earnings over the past four years. It generates 25 per cent of national revenues. In total, about a
million people in Benin – out of a total population of six million – depend on cotton or cotton-related
activities. Cotton plays a particularly important ro le in rural areas, where national poverty reaches its
highest levels.

 Mr. Chairman, Members of the Panel: the results of US cotton subsidies are readily apparent
in West Africa. The United States provides huge, and WTO-inconsistent, subsidies for cotton. This
leads to an oversupply of cotton on the world market, and a consequent decline in prices. Moreover,
when cotton from Benin enters world markets, it must compete against massively-subsidized US
cotton.

 The dollar value of these subsidies dwarfs all other economy activity in Benin. As indicated
in our submission, the subsidies paid by the United States to its 25,000 cotton farmers exceed the
entire gross national income of Benin – and indeed the other countries in the region as well.

 This demonstrates, rather dramatically, the im possibility of Benin ever competing with such
subsidies. It is inconceivable that any developi ng country – let alone a least-developed country in
West Africa – could ever match the virtually limitless resources of the United States.

 Therefore, for us, the solution to this problem lies in the WTO. We ask simply that the
United States respect its WTO obligations regarding subsidies.

 Mr. Chairman, we agree with Brazil that th e United States cannot invoke the peace clause to
bar the claims that have been advanced in this dis pute. We agree that the peace clause constitutes an

affirmative defence, and that the burden lies on the United States to demonstrate that has met all the
conditions for the successful invocation of this affirmative defence. This it has failed to do.

 In any event, whether the peace clause constitutes an affirmative defence, as we believe, or is
part of the “balance of rights and obligations of Members”, as the United States argues, the result is
the same. Brazil’s First Submission has establis hed, clearly and unambiguously, that the United
States is in breach of its WTO obligations. Th e US First Submission has provided no convincing
rebuttal of Brazil’s claims.

Mr. Chairman, Members of the Panel:

 In its submission of July 11, the United St ates argued that the phrase “support to a specific
commodity” should be understood to mean “product- specific support”. However, the term “product-
specific” does not appear in Article 13(b)(ii). If the drafters of the Agreement on Agriculture had
wanted to use this term in Article 13(b)(ii), they obviously could have done so, as they did elsewhere
in Agreement, such as in Article 6(4), or in Anne x 3. Moreover, if the US interpretation were
accepted, measures providing support to more than one commodity could not be challenged under
Article 13(b)(ii). This elevates form over substan ce, and is contrary to both the language and the
object and purpose of this provision.

 Finally, the United States asks this Panel to exclude from its terms of reference certain
measures that it argues were not the subject of consu ltations. We were not part of the consultations,
and will not delve into the facts of this disagreemen t. However, Benin woul d recall the statement of
the Appellate Body in Brazil Aircraft (DS46):

“We do not believe….that Articles 4 and 6 of the DSU, or paragraphs 1 to 4 of the
SCM Agreement, require a precise and exact identity between the specific measures
that were the subject of consultations a nd the specific measures identified in the
request for the establishment of a panel. As stated by the Panel, ‘[o]ne purpose of
consultations, as set forth in Article 4.3 of the SCM Agreement, is to ‘clarify the facts
of the situation’, and it can be expected that information obtained during the course of
consultations may enable the complainant to focus the scope of the matter with
respect to which it seeks establishment of a panel.” [emphasis added]
 Indeed, Benin notes that the United States its elf took a similar approach in the recent Japan –
Apples case. In the US replies to the Panel on October 16, 2002, USTR stated that:

“[T]here is no requirement in the DSU to consult on a particular claim in order to
include that claim in a panel request and to have such a claim form part of the panel’s
terms of reference. The purpose of cons ultations is to provi de a better understanding
of the facts and circumstances of a dispute; logically, then, a party may identify new
claims in the course of consultations.”
Although this US reply dealt with claims rather than measures, it is consistent with the ruling of the
Appellate Body in Brazil Aircraft that panels should not requir e a “precise and exact identity”
between the measures that were the subject of cons ultations and the measures identified in the panel
request.

Mr. Chairman, Members of the Panel:

 For Benin, this dispute is of critical national importance. As we stated in our Third Party
submission, we are not seeking any special and differential treatment in the present case. We are
simply asking that the United States abide by the disciplines that it agreed to at the end of the Uruguay
Round.

 Thank you for allowing Benin to present its views to the Panel. We would be pleased to reply
to any questions you may have.

ANNEX C-8

THIRD PARTY ORAL STATEMENT OF CANADA

24 July 2003

I. INTRODUCTION

1. Mr. Chairman, members of the Panel, on beha lf of my Government, I thank you for your
consideration of Canada’s views in this dispute.

2. Canada’s statement today conveys our system ic interest in the interpretation of certain
provisions of the Agriculture Agreement and th e SCM Agreement regarding certain aspects of
Brazil’s claims. The first two points we address relate to US domestic support measures and the
applicability of the Peace Clause. In this respect, we set out why:

 first, the updating of the base period for US dir ect payments renders these payments inconsistent
with paragraphs 6(a) and (b) of Annex 2 of the Agriculture Agreement; and

 second, US counter-cyclical payments to producers of upland cotton must be counted as “support
to a specific commodity” under Article 13(b)(ii) of the Agriculture Agreement.

3. The last point we address is whether there is any exemption for US export credit guarantee
programmes from US export subsidy commitments unde r the Agriculture Agreement. Here, we set
out why:

 first, item (j) of the SCM Agreement may not be interpreted a contrario to deem export credit
guarantee practices as not providing export subs idies under Article 10.1 of the Agriculture
Agreement; and

 second, Article 10.2 of the Agriculture Agreem ent does not exempt export subsidies granted
under export credit guarantee programmes from US export subsidy commitments in the
Agriculture Agreement.

II. US DOMESTIC AGRICULTURAL SUPPORT MEASURES

A. TO BE EXEMPT UNDER ANNEX 2, DIRECT PAYMENTS MUST HAVE THE SAME BASE
PERIOD AS PFC PAYMENTS

4. We turn first to US direct payments. Th e United States defends these measures by asserting,
among other things, that the 2002 FSRI Act redefines and fixes the base period for the duration of the
legislation.1 According to the United States, direct paym ents therefore fully conform to Annex 2 of
the Agriculture Agreement.

5. This, in Canada’s view, raises form over substa nce. In addition to th e views we provided in
our written third party submission, Canada observes that US direct payments also do not conform to
the base period requirement in paragraphs 6(a) and (b) of Annex 2. The structure of the PFC payment

and direct payment programmes are essentially the same 2, so are the payment parameters. 3 The
applicable base period therefore is that for PFC pa yments. However, the United States allows base
acreage determining the receipt and the am ount of direct payments to be updated. 4 The base period is
therefore not “fixed”, contrary to subparagraph (a ). The amount of the payments may also be
increased based on the volume of produ ction undertaken by a producer in a year after the applicable
base period, contrary to subparagraph (b).

6. The United States itself demonstrates the linkage between PFC payments and direct
payments; they are closely related and successor programmes.
5 Yet, the United States takes the
position that because the payments are continue d under a separate piece of legislation and new
regulations, an updating of the base period does not affect their exempt status. 6 In Canada’s view,
such formalistic arguments cannot prevail.

B. COUNTER-CYCLICAL PAYMENTS ARE “S UPPORT TO A SPECIFIC COMMODITY”

7. Mr. Chairman and members of the Panel, the fo rmalism of US arguments does not stop there.
In an effort to avoid the logical conclusion that counter-cyclical payments “grant support to a specific
commodity” within the meaning of Article 13 of th e Agriculture Agreement, the United States cites
varied meanings of the term “specific” and ina ppropriately incorporates into Article 13 concepts
relating to the calculation of the AMS. These argume nts are an attempt to detract from the plain text
of Article 13 and its straight-forward application to the facts of this case.

8. In Canada’s view, counter-cyclical paymen ts “grant support to a specific commodity” under
Article 13(b)(ii) of the Agriculture Agreement.
7 It is hard to see how a measure that grants support
that is specific to a “specifi c commodity” would not be included in the assessment under
Article 13(b). It is uncontested that the US measu re provides payments in an amount determined by
target prices that are specific to certain covered products. 8 The setting of commodity-specific target
prices necessarily leads to different levels of support for different products. The cotton-specific
support granted in this respect must be taken into account for the purposes of Article 13(b).

III. US EXPORT CREDIT GUARANTEE PROGRAMMES

9. I now turn to US export credit guarantee programmes.

10. In Canada’s written third part y submission we set out the appli cable standard for determining
whether transactions under these programmes are subsid ized within the meaning of Articles 1(e) and
10.1 of the Agriculture Agreement. Canada takes no position on the facts in this respect, but notes
that USDA’s own description of its guarantee programmes implies that a benefit is conferred. I quote:
“The programmes encourage exports to buyers in countries where credit is necessary to maintain or
increase US sales, but where financing may not be available without CCC guarantees.”
9 The Panel
should assess CCC premiums in the light of this admitted reality.

2 See Brazil First Written Submission, para. 182; Th ird Party Submission of Ne w Zealand, para. 2.26;
Third Party Submission of Australia, paras. 47-48.
3 US First Written Submission, paras. 58-63.
5 US First Written Submission, fn. 47.
7 See also Exhibit Br-27 (“Title I - Commodity Programmes”; “Counter-cyclical payments for wheat,
feed grains, upland cotton, rice, and oilseeds” (emphasis added)).
8 See US First Written Submission, para. 117.
9 USDA, “Export Credit Guarante e Programmes”, FAS Online at
http://www.fas.usda.gov/excredits/exp-cred-guar.html, (second sentence) [Exhibit CDA-3].

11. Today, Canada addresses the two exemptions alleged by the United States in support of its
assertion that the US programmes do not grant export subsidies in violation of US export subsidy
commitments under Articles 8 and 10.1 the Agricultur e Agreement. The claimed exemptions are the
following:

 First, item (j) of the SCM Agreement sancti ons any US export subsidy provided through CCC-
guaranteed credit transactions because the programm es come within the scope of item (j) yet do
not meet the standard it establishes. According to the United States, item (j) may be interpreted
a contrario to allow subsidized export credit transa ctions. It follows for the United States that its
programmes do not confer export subsidies with in the meaning of Article 3.1(a) of the
SCM Agreement and Article 1(e) of the Agriculture Agreement;

 Second, Article 10.2 of the Agriculture Agreemen t exempts outright any subsidized export credit
transactions from US export subsidy commitments.

12. The panel in Brazil – Aircraft considered the first type of alleged exemption at length in its
first implementation report. The United States wa s a third party in that case, and argued for an
a contrario interpretation of the first paragraph of item (k) of the Illustrative List.
10 The panel rejected
all arguments in this respect and concluded that the provision could not be used to establish that a
prohibited export subsidy under the SCM Agreement is otherwise permitted.

13. The panel’s reasoning in that case applies with equal force here. Briefly, the panel found that:

 First, Annex I is purely “illustrative” and does not purport to exhaustively list all export subsidy
practices
11,

 Second, a measure that falls within the scope of Annex I is deemed to be a prohibited export
subsidy such that where a Member demonstrates that the measure meets the standard in any of the
listed items, it does not also have to demonstrate that the measure comes within the scope of
Articles 1 and 3.1(a) of the SCM Agreement
12, and

 Third, footnote 5 of the SCM Agreement provid es that practices described in Annex I may be
properly considered not to constitute an export subs idy only in two situations. The first situation
is where an affirmative statement in the Agreement provides that the measure in question is not an
export subsidy; the second is where an affirm ative statement in the Agreement provides that
measures satisfying the conditions of an item in Annex I are not prohibited. 13 Footnote 5 reads
“Measures referred to in Annex I as not constituting export subsidies shall not be prohibited under
this or any other provision of this Agreement”.

14. In its second implementation report in Braz il – Aircraft, the panel applied the same
reasoning.
14 Applying this reasoning to the case at hand, footnote 5 to the SCM Agreement precludes
reliance on an a contrario interpretation of item (j) as an implied exclusion to any finding of
subsidized transactions under the US programmes.

10 Brazil – Export Financing Programme for Aircraft: Recourse by Canada to Article 21.5 of the DSU ,
Report of the Panel, WT/DS46/RW, adopted 4 August 2000, paras. 6.24-6.67 [ Brazil – Aircraft, First
Recourse].
11 Ibid., para. 6.30.
12 Ibid., para. 6.31.
13 Ibid., paras. 6.37.
14 Brazil – Export Financing Programme for Aircraft: Second Recourse by Canada to Article 21.5 of
the DSU, Report of the Panel, WT/DS46/RW2, adopted 23 August 2001 at paras. 5.274 and 5.275.

15. Regarding Article 10.2 of the Agriculture Agreem ent, Canada’s view is that the words of that
provision speak for themselves. Members have unde rtaken to work towards internationally agreed
disciplines to govern the provision of export credit gu arantees. Nothing in that provision states that
the export subsidy obligations in Article 10.1 of the Agreement do not apply to US export credit
guarantee practices. Where Members have want ed to exempt measures from export subsidy
obligations, they have been clear– such as in the second paragraph of item (k) of the SCM
Agreement.15

16. In addition, the US interpretation of this provision does not accord with its object and
purpose. Canada shares the views of other third pa rty participants in this dispute that the ongoing
work under Article 10.2 is expected to further ela borate on current disciplines regarding export credit
practices and to perhaps more clearly identify when such practices shall or shall not be deemed to
confer export subsidies within the meaning of Article 1(e) of the Agriculture Agreement.
16 T h e
obvious precedent in this respect is the second paragraph of item (k) of the SCM Agreement.

IV. CONCLUSION

17. In conclusion, Mr. Chairman and members of the Panel, the Panel should find that the
United States rendered direct payments inconsistent with Annex 2 of the Agriculture Agreement by
allowing the base period to be updated. This fi nding would be in addition to a finding that
PFC payments and direct payments do not conform to Annex 2 because the amount of the payment is
linked to the type of production after the base period. Regarding counter-cyclical payments, the Panel
should find that this support to US producers of upland cotton must be counted as “support to a
specific commodity” under Article 13(b)(ii) of the Ag reement. Finally, regarding US export credit
guarantee programmes, the Panel should confirm th at neither the Agriculture Agreement nor the
SCM Agreement contain an exemption for any US e xport credit guarantee subsidy found in this case.
Were the Panel to find that such subsidies exist – which in Canada’s view is the most likely outcome
to the Panel’s assessment of the facts – then the Pa nel must conclude that the United States grants
export subsidies in violation of its export s ubsidy commitments under Articles 8 and 10.1 the
Agriculture Agreement and that Article 13(c)(ii) therefore does not apply.

15 See also Brazil – Aircraft, First Recourse, para. 6.36.
16 See First Third Party Submission by the Euro pean Communities, para. 30 and Third Party
Submission of New Zealand, paras. 3.15-3.16.

ANNEX C-9

ORAL STATEMENT OF CHINA AT
THE THIRD PARTY SESSION

24 July 2003

1. Thank you, Mr. Chairman, and members of the Panel. China is appreciative of this
opportunity to present its views on the issues raised in this Panel proceeding. In its third party written
submission of 15 July, China explained its views in rela tion to three issues. In this statement, I will
summarize China’s major points.

2. The first issue that China would like to have th is Panel’s attention is about the burden of proof
issue under the Peace Clause.

3. China agrees with Brazil’s argument that the P eace Clause is an affirmative defence in nature.
If the United States claims that defence, the burden of proof is on the United States.

4. Contrary to what the United States see, Ch ina believes that the Peace Clause does not impose
positive obligations. Stand-alone, Annex 2 and Article 6 of the Agreement on Agriculture may have
positive obligations; but when they are cross-referre d to by the Peace Clause, they become part and
parcel of conditions that must be met before a Member can move under its safety.

5. China believes the US errs on seeing no distin ction between "obliga tion" and "condition".
The Peace Clause requirement for full conformity with Article 6 and Annex 2 does not create new
obligations because Members have to comply with Article 6 and Annex 2 whether Article 13 exists or
not. Within the Peace Clause, these requirements do not stand to impose obligations on Members, but
to set conditions precedent for a Members intending to invoke Peace Clause protection. Positive
obligations to comply with these requirements, if there is any, lie under where they are, i.e. under
Article 6 and Annex 2, but not under the Peace Clause.

6. China does not see any "absurdity" as descr ibed by the United States in its written
submission. No such "absurdity" would be instilled into the process if at the first stage, the party
alleging protection of Peace Clause for its measures is required to discharge its burden to prove that
such measures do conform to the relevant Peace Clause conditions; if it cannot so prove, the measures
would lose Peace Clause protection. A second stage will follow for the party claiming against the
measures to establish its substantive case, without the Peace Clause shield.

7. With respect, China submits that the burden of proof issue must be resolved first. China also
hopes that the above two-step approach will help th is Panel and the parties to move the procedures on
towards resolution of the case.

8. The second point that China made in its writte n submission relates to proper categorization of
US Direct Payments (shortened as “DP”) under the US Fair Security and Rural Investment Act of
2002 (shortened as “FSRI”). Allow me to shorten th at act to FSRI. Without repeating the issue of
burden of proof, preponderance of evidence suggests that such Direct Payments are not “Green Box”
in nature.

9. One of the requirements for “Green Box” Direct Payment support measures lies under
Para. 6(a) of Annex 2 to the Agreement on Agriculture . The paragraph provides to the effect that
eligibility shall be determined by “clearly-defined criteria” “in a defined and fixed base period”.

10. The word “in” requires a link between the “cr iteria” and the “defined and fixed base period”.
In other words, to qualify for “Green Box” dir ect payment measure under Para. 6(a), a criterion
adopted by a Member must be tied, in a chronologi cal sense, to a starting time frame that cannot be
moved up on the calendar.

11. As the United States has explained, 2002 FSR I DP allowed landowners to retain PFC base
acreage under the 1996 Federal Agriculture Improvement and Reform Act (shortened as “FAIR”) and
“add 1998-2001 acres of eligible oilseeds or simp ly declare base acreage for all covered
commodities” (including upland cotton). In additi on, while a landowner may elect to simply utilize
acres devoted to covered commodities during the 1998-2001 period for purpose of DP, a landowner
need not do so; base acres may remain those under FAIR of 1996, implying no cotton production need
have occurred since the 1993-1995 period for a lando wner to have “cotton base acres” Consideration
the progression from PFC to DP, one can see that cont rary to the US argument that “base acres are
defined in the 2002 [FSRI] Act and fixed for the duration of the legislation”, the requisite link
between the programme acreage as a criterion and th e starting time frame under the DP is broken.
The change of legislation from FAIR to FSRI and th e replacement of PFC with DP were utilized to
for producers to leap from their previous coverage acreage, which should have been tied to the base
period, to a new updated acreage in 2002.

12. Therefore, in China’s opinion, preponderance of evidence proves that the US direct payments
under the FSRI shall be properly categorized as non-“Green Box” measures.

13. The last issue that China considers important is about export subsidy support granted by US
“Foreign Sales Corporations” for upland cotton export sales under the “FSC Repeal and
Extraterritorial Income Act of 2000”. Its short name is ETI Act.

14. The ETI Act has previously been found to violate the Agreement on Agriculture and the
Subsidies Agreement by both the panel and the Appellate Body in US – FSC (21.5) case. On
29 January 2002, the DSB adopted the panel and A ppellate Body reports. Following US failure to
withdraw such export subsidy support, on 7 May 2003, the DSB authorized the EC to impose
countermeasures against the US.

15. China believes that the panel and the Appe llate Body’s reasoning and their conclusion in US –
FSC (21.5) should be considered and taken by this Panel.

16. The measures challenged by Brazil in the cu rrent proceeding are exactly the same challenged
by the EC in US – FSC (21.5). Reasoning and conclusion by the earlier panel and the Appellate Body
are more than relevant to the current case. Th eir reports, once adopted by DSB not only create
legitimate expectations, but also reflect the collective will of the WTO membership.

17. In that respect, allow me to quote the panel in India – Patent Protection for Pharmaceutical
and Agricultural Chemical Products, for this Panel:

[I]n the course of "normal dispute settle ment procedures" required under Article 10.4
of the DSU, we will take into account the conclusions and reasoning in the Panel and
Appellate Body reports in WT/DS50. Moreove r, in our examination, we believe that
we should give significant weight to both Article 3.2 of the DSU , which stresses the
role of the WTO dispute settlement system in providing security and predictability to
the multilateral trading system, and to the need to avoid inconsistent rulings (which

concern has been referred to by both parties). In our view, these considerations form
the basis of the requirement of the referral to the "original panel" wherever possible
under Article 10.4 of the DSU.
18. This concludes my oral presentation. Ch ina welcomes questions from the Panel regarding
these issues.

I. INTRODUCTION

1. Mr. Chairman, Distinguished Members of the Panel, the European Communities is grateful
for the opportunity to express its views in this third party session.

2. We would first like to welcome the involvement of Benin in this procedure. The European
Communities is of the view that the involvement of least developed countries in dispute settlement is
highly desirable. We hope that other least developed countries follow Benin's lead.
1

3. This is a complex case which raises many difficu lt and important interpretative issues. Those
responsible for drafting Article 13 of the Agreement on Agriculture have left you with some difficult
questions. Despite those difficulties, Article 13 in particular, and the Agreement on Agriculture more
generally, represent a finely balanced and much fought over package of rights and obligations
assumed by WTO Members. The European Communiti es is confident that this Panel will undertake a
careful examination of these very precise terms and preserve the delicate balance of rights and
obligations which has been negotiated.

4. This dispute raises a large number of issues. In our interventions, we have concentrated on
those issues of principle which we consider are of systemic concern. Today, we will largely address
issues which were not addressed in our written submissi on. At the same time, we also consider it
necessary to revisit some issues which we have al ready addressed in order to rebut some of the
arguments raised by other parties.

5. The European Communities starts by setting out its conception of the role of the peace clause
(section II). We will then address several questions of interpretation relating to the peace clause
(section III). We then turn to consider the interpretation of Annex 2 of the Agreement on Agriculture
(the Green Box) (Section IV) before considering th e status of domestic content subsidies and export
credits under the Agreement on Agriculture (Section V). We conclude with some comments on one of
the requests for preliminary rulings raised by the United States (Section VI).

II. THE ROLE OF THE PEACE CLAUSE

6. We turn first to consider the role of the Peace Clause (Article 13).

7. The European Communities views Article 13 as one element regulating the interface between
the Agreement on Agriculture and the SCM Agreement . It defines, in some cases, how subsidies
granted pursuant to the Agreement on Agriculture should be treated for the purposes of countervailing
duty investigations, and in other cases exem pts such subsidies from actions under the SCM
Agreement. The European Communities disagrees with both Brazil and the United States as to how
the term “exempt from action” should be underst ood. However, while we disagree with the
United States’ logic, we do not disagree with the practical result of the application of its logic.

8. The term “exempt from action” cannot mean, as Brazil claims, that, even if the peace clause is
applicable, the Panel must ex amine Brazil’s claims under the SCM Agreement, and that if the Panel
finds that the United States has acted inconsistently with the SCM Agreement , the DSB should
somehow “refrain” from recommending the United States to bring itself into conformity with the
SCM Agreement. The European Communities finds it diffi cult to imagine how the DSB, operating
under the negative consensus rule, could refrain from recommending the United States bring itself
into conformity should the Panel find that th e United States had acted inconsistently with the SCM
Agreement. Moreover, the United States can reasonably ar gue that it is not required to bring itself

1 This text was not in the written statement circulated at the third party session, but reflects unscripted
comments made during that session.

into conformity with the SCM Agreement by withdrawing measures which it is perfectly entitled to
maintain under the Agreement on Agriculture , pursuant to both Article 13 and Article 21. The only
answer to this question is that if the United St ates is entitled to peace clause protection, the Panel
cannot find in favour of Brazil’s SCM Agreement claims.

9. The European Communities does not agree with the United States that Article 13 prevents a
Member from requesting consultations or the estab lishment of a panel with respect to a measure
which might be entitled to Article 13 protection. It is not, as the US argues, the mere fact that the
defendant Member is unable to block a request for co nsultations, or for establishment of a panel, that
the applicability of the peace clause has come before this Panel. Th e need for the Panel to adjudicate
this issue flows from the fundamental principle underlying the WTO Agreement that every question
of interpretation of the WTO Agreements which “a ffects the operation of any covered agreement”
must be subject to the DSU. 2 However, as we have noted, if the Panel determines that the US
measures in question are protected by Article 13, it cannot find in favour of Brazil’s claims under the
SCM Agreement.

III. INTERPRETATION OF THE PEACE CLAUSE

10. The Panel has a number of challenging questi ons before it on the interpretation of various
aspects of Article 13(b). The European Communities turns now to set out its position on some of the
issues before the Panel.

A ARTICLE 13 IS NOT AN AFFIRMATIVE DEFENCE

11. The European Communities will only briefly touch upon the issue of the burden of proof for
Article 13. The European Communities has yet to hear a credible response to the argument that
putting the burden of proof on the de fendant has perverse effects. As the European Communities and
the United States have pointed out, when a complainant brings a case only under the Agreement on
Agriculture (for instance alleging breach of Article 6) it will bear the burden of proof. However, if
Article 13 is considered an affirmative defence, when a complainant brings a dispute under Articles 5
and 6 of the SCM Agreement and, for instance, Article 6 of the Agreement on Agriculture , the
complainant would be required to prove a breach of Article 6 while at the same time the defendant
would also be required to prove that it had not infri nged Article 6 of the Agreement. The burden of
proof cannot switch between parties simply on th e basis of whether the complainant cites the SCM
Agreement or not, but this would be the result of interpreting Article 13 as an affirmative defence.

12. Further confirmation that Article 13 is not an affirmative defence can be drawn from the fact
that Article 13 also regulates the application of count ervailing duties on agricultural subsidies. In this
context, a determination that the subsidy in questio n is not protected by Article 13 must be taken by
an investigating authority before it may impose c ountervailing duties. Article 13 is consequently a
pre-condition for an individual Member in taking acti on against subsidised exports. It cannot, in that
context, be considered as a defence for exporters co-operating in an investigation and may, as the
United States have pointed out, be used as th e foundation for a claim in a WTO dispute by the
exporting Member that countervailing duties have been illegally imposed. There is no reason why
that conception of Article 13 should change si mply because the issue arises in WTO dispute
settlement.

2 Article 4.2 DSU.

B. RELEVANT COMPARISON FOR THE PURPOSES OF ARTICLE 13

13. Brazil has argued that any breach of the 1992 level during the 9 year implementation period
removes the protection of Article 13. 3 The European Communities agr ees with the United States that
this is incorrect. 4 The present tense of the phrase “do not grant support” makes this clear. The
comparison for the purpose of Article 13(b) must be between the level of support decided in the 1992
marketing year and that granted by virtue of th e measures being challenged. This would typically
mean the most recent marketing year.

C. THE MEANING OF “DECIDED DURING THE 1992 MARKETING YEAR”

14. We now turn to consider the meaning of th e phrase "decided during the 1992 marketing year".
Brazil argues that the term “decided” refers to a decision to budget a specific amount of domestic
support over a number of years. 5 Brazil then goes on to suggest that because the United States did not
make a “decision” during marketing year 1992 with respect to upland cotton, the only decision which
the United States can be said to have made during marketing year 1992 was the continued funding of
its programmes for upland cotton. Brazil then calc ulates the US’ budgetary outlays in respect of
upland cotton in 1992; in other words, Brazil looks at the support actually granted.6

15. The European Communities is concerned that Brazil appears to consider that the support
“decided” in the sense of Article 13 can be equate d with the support granted as Brazil has done in its
use of US budgetary outlays. Such an interpretation ignores the meaning of the word "decided". That
the use of the word "decided" cannot be equated with the term "granted" is illustrated by the
following.

16. First, the use of the word “decided” itself is notable. It is, however, notable primarily for
what it is not. WTO Members did not use the word “granted” which is the word which one would
expect to be used had this phrase been intended to refer only to the domestic support actually used
during the 1992 marketing year. The use of the word “decided” stands out particularly when it is
compared to the use of the word “grant” in the very same sentence. The United States has made the
same point with respect to the deci sion not to use the word “provided”. 7 If WTO Members had
intended that the support granted in the most recen t period was to be compared to that granted in
marketing year 1992 the word “decided” would not have been used. For this reason, Brazil’s use of
US budgetary outlays for marketing year 1992 is clearly flawed.

17. Second, the word “decided”, meaning “settled, certain”, 8 also implies a one-off decision. It
would be odd to talk of an administration “d eciding” countless appli cations for support under a
particular programme. However, this is what Brazil’s use of US budgetary outlays implies.

18. Finally, the use of the word “during” conf irms that WTO Members intended that the decision
need not be of application only in marketing year 1992 but may also cover future periods. The use of
the word “during” (meaning “in the course of”
9) implies a one-off decision, and does not suggest that
the period of application of the decision must be limited to marketing year 1992. Had WTO Members
intended a limitation to the support provided or grante d in 1992 the word “for” would have been used

3 Brazil’s First Written Submission, paras.142 and 146-150.
4 US First Written Submission, para. 79 and 90.
5 Brazil’s First Written Submission, paras. 139 and 140.
6 Brazil’s First Written Submission, paras. 141-145.
7 US First Written Submission, paras.83-84.
8 The New Shorter Oxford English Dictionary, 1993.
9 The New Shorter Oxford English Dictionary, 1993.

in place of “during”. This further confirms that Brazil's use of US budgetary outlays cannot be
considered correct.

19. Consequently, Article 13(b)(ii) and (iii) ar e intended to set up as a benchmark an amount of
support adopted by some form of decision (be it political, legislative or administrative) in which
support for a specific product is decided and allocated for future years. It is clearly not intended to set
up a comparison between domestic support granted in 1992 and domestic support granted in a more
recent period. The European Communities respectfu lly requests the Panel not to follow Brazil's
equation of the term decided with the term granted.

20. For the European Communities, the question of what decision was adopted during 1992 by
the United States is a question of fact which we do not take a position on, especially as we are not
fully aware of all the elements which might be relevant.

D. THE MEANING OF THE TERM “SUPPORT TO A SPECIFIC COMMODITY”

21. The United States has argued that the term “support to a specific commodity” is synonymous
with the term “product-specific support”.
10 Brazil had, in its First Written Submission, taken all
support which was specific to cotton, and added to it a proportion of generally available support
intended to represent the amount of such support which could be attributed to cotton.11

22. The European Communities shar es the approach of the United States. Quite simply, support
which is provided to a number of crops cannot at the same time be consid ered “support to a specific
commodity”. Such support is “support to several commodities” or "support to more than one
commodity".

23. With respect, Brazil and New Zealand are wrong to suggest that the word “specific” was
added to make clear that the applicable benc hmark under Article 13 was not the overall level of
subsidies decided but rather was to be undertaken on a product-by-product basis.
12 A brief glance at
the SCM Agreement finds it replete with references to “a product” or “a subsidised product”. 13
Consequently, it could make no sense to interpret Article 13 as being based on overall support. The
word “specific” was not, therefore, inserted to differentiate the use of Article 13 in respect of specific
products to the application of Article 6 to overall agricultural support, but rather as a qualifier to the
word “support”.

24. Consequently, the Panel s hould conclude that the correct comparison is between product
specific support decided in 1992 and product specific support currently provided.

IV. THE INTERPRETATION OF ANNEX 2 OF THE AGREEMENT ON AGRICULTURE
(THE “GREEN BOX”)

A. FIRST SENTENCE OF THE FIRST PARAGRAPH OF ANNEX 2 14

25. Australia has argued in its comments today th at the European Communities is incorrect to
consider that the first sentence of the first paragraph of Annex 2 do es not impose a separate
obligation. The European Communities notes, however, that Australia does not comment and does not

10 US First Written Submission, paras. 77-78.
11 Brazil’s First Written Submission, para. 143.
12 Brazil’s First Written Submission, para. 136; New Zealand Third Party Submission Para. 2.22.
13 See, in particular, Article 6.3.
14 This section was not in the written statement circulated at the third party session, but reflects
unscripted comments made during that session.

attempt to rebut the compelling contextual arguments that the European Comm unities has made in its
written submission.
15 The European Communities pointed ou t that in several instances that the
Agreement on Agriculture refers to the "criteria" for inclus ion in the green box, specifically in
Articles 6 and 7, and most importantly , in paragraph 5 of Annex 2. Th ere is no such reference to the
"fundamental requirements". The European Communiti es recalls that a panel is obliged to follow the
accepted canons of interpretation of international law, and therefore, to view the ordinary meaning of
the words concerned in light of their context and obj ective. Consequently, it is clear that the first
sentence of paragraph 1 of Annex 2 is not, in and of itself, an independent obligation. This does not
render it inutile, as Australia charges. The first sentence sets out an objective and indicates the type of
effects which respect for the criteria in the gr een box is deemed to create. The European
Communities urges the Panel to reject Australia's unsubstantiated arguments.

B. TYPE OF PRODUCTION

26. Brazil has argued that the fact payments are reduced where fruits and vegetables, and certain
other crops are grown on contract acreage for the purposes of PFC and direct payments means that the
“amount of such payments [is] related to or based on, the type or volume of production [ ..] in any
year after the base period” (Paragraph 6(b) of Annex 2). However, Brazil also appears to recognise
that farmers claiming the benefit of direct paymen ts may plant crops other than the programme crops,
and may even not produce any crops.
16 The United States asserts that no current agricultural
production is required in order to benefit from direct payments.17

27. Assuming the US’ assertion to be correct (as seems to be acknowledged by Brazil) the Panel
is faced with a dilemma. Is the amount of f unding provided by a programme, from which a farmer
can benefit without producing anything, to be considered to be “based on or linked to a certain type of
production”, when payments under that programme can be reduced by growing certain crops? Brazil
and some third parties simply assume that where pa yments can be reduced by growing certain crops,
the programme is based on or linked to a certain type of production. Such a view does not, however,
take account of the complexity of the situation.

28. In the view of the Europ ean Communities, reducing payments under a programme, where a
farmer grows fruit or vegetables does not mean that the amount of the payment is linked to type of
production. This is because the farmer is free to pr oduce a whole range of other crops, or even not to
produce at all and receive the full payment.

29. What Brazil and other third parties fail to rea lise is that the reduction in payment for fruits and
vegetables, if the European Communities understands correctly, is in fact designed to avoid unfair
competition within the subsidising Member. Brazil and the other third parties have not challenged the
right of a subsidising Member to decide decoupled payments based on past production of, or acreage
utilised for, certain crops. Indeed, this is permitted in paragraph 6(a) of Annex 2. However, in the
case where, for instance, upland cotton productio n enjoyed support, while fruit and vegetable
production did not, decoupled payments based on past cotton production would allow subsidised
former cotton farmers to grow fruit and vegetables, and thus unfairly compete with pre-existing fruit
and vegetable producers who could not benefit from the decoupled payments because they had not
produced cotton or other supported products in the b ase period. Thus, the reduction in payments is a
necessary element in ensuring that the equilibrium established by the market for the production of
fruit and vegetables is not artificially disturbed by the introduction of decoupled support.

15 EC's First Third Party Submission, paras. 15-25 and in particular paras. 22 and 23.
16 Brazil’s First Written Submission, para. 49.

30. Furthermore, finding that Brazil and the other third parties are correct would have perverse
effects. The whole Agreement on Agriculture is geared at gradually reducing certain types of
domestic support. However, if a Member could not reduce decoupled payments when certain types of
products which had previously not enjoyed any suppor t are grown, the net effect would be that WTO
Members wishing to provide decoupled support woul d have to increase overall support, and provide
producers previously excluded with support which they had not previously enjoyed. This is clearly
not an effect which the negotiators of the Agreement on Agriculture intended.

31. In this light, this potential reduction of pa yment is very different from the prohibition set
down in paragraph 6(b) of Annex 2. Paragraph 6(b) is intended to prevent an artificial pressure to
produce certain crops in order to obtain decoupl ed payments. Reducing payments where fruit and
vegetables are produced does not act to pressure farm ers into growing a particular type of crop.
Rather, it prevents internal unfair competition. At the same time, as we unde rstand the US measure, it
does not oblige a farmer to produce any particular type of crop, in fact requires no production, and
therefore should not be considered inconsistent with paragraph 6(b).

C. A DEFINED AND FIXED BASE PERIOD

32. The European Communities would also like to comment briefly on the arguments raised by
Brazil and some of the third parties with respect to the updating of the base periods in the 2002 FRSI
Act. We take note of the US statement that th e updating of the base period was necessary in order to
bring support for oilseeds production under the direct payments scheme. 18 In order to ensure the
progressive movement of production distorting subsid ies to decoupled subsidies we consider that it
must be possible to have different reference peri ods where eligibility is b ased on previous eligibility
for production distorting subsidies. We see nothing in paragraph 6 of Annex 2 which might prevent
this. At the same time, however, the European Co mmunities is concerned that continued updating of
reference periods in respect of the same already decoupled support, creating an expectation that
production of certain crops will be rewarded with a greater entitlement to supposedly decoupled
payments, tends to undermine the decoupled nature of such payments.

V. INTERPRETATION OF THE AGREEMENT ON AGRICULTURE /RELATIONSHIP
WITH THE SCM AGREEMENT AND GATT 1994

A. ARE DOMESTIC CONTENT SUBSIDIES EXPR ESSLY PERMITTED BY THE AGREEMENT ON
AGRICULTURE ?

33. Brazil has argued that US Step 2 payments , which it alleges are conditional upon use of
domestic goods, are inconsistent with Article 3 of the SCM Agreement and Article III.4 GATT 1994.
New Zealand supports this claim. However, as with other claims, their analysis does not take fully
into account the complexities of the situation. The European Comm unities agrees with the
United States that subsidies contingent upon the use of domestic goods, which are maintained
consistently with the Agreement on Agriculture are not inconsistent with either the SCM Agreement or
GATT 1994.

34. The first question is whether subsidies contingent upon the use of domestic goods are
consistent with the Agreement on Agriculture. The answer is a clear yes. Article 3.2 of the Agreement
on Agriculture requires Members not to:

“…provide support in favour of domestic producers in excess of the commitment
levels specified in Section I of Part IV of its Schedule.” (emphasis added).

35. We have emphasised the phrase “in favour of”. This is significant because it does not require
that support be “to” domestic producers. The same te rm is used in Article 1(a) (the definition of
AMS) and in Article 1(h) (definition of Total AM S). Moreover, it is established with respect to
Article 1 of the SCM Agreement that a financial contribution and be nefit need not be bestowed on the
same person.
19 Consequently, it is simply logical that support may be provided in favour of domestic
producers through the provision of funds to process ors of the product concerned, and consequently
that access to such subsidies be limited to domestic produce, in order to ensure that it is domestic
producers who benefit from this subsidy. Ind eed, WTO Members, in their wisdom, recognised
precisely this possibility in Annex 3 to the Agreement on Agriculture where they explained how the
AMS was to be calculated. Paragraph 7 thereof explicitly contemplates that:

“measures directed at agricultural processors shall be included to the extent that such
measures benefit the producers of the basic agricultural products.”
36. Consequently, it is clear that a Member has a right to provide subsidies contingent upon use
of domestic products under the Agreement on Agriculture . On this, the US and the European
Communities agree.

37. The second question for the Panel is how does that right relate to the prohibition in Article 3
of the SCM Agreement and the national treatment obligation in Article III.4 of GATT. Here, again,
we agree with the United States.

38. Article 21.1 of the Agreement on Agriculture provides that the other goods agreements will
apply “subject to” the provisions of the Agreement on Agriculture . That is, the other Annex 1A
Agreements will be subordinated to the Agreement on Agriculture .
20 A finding that a measure was a
domestic content subsidy would mean that such a su bsidy would be prohibited under Article 3.1(b) of
the SCM Agreement and would (in all likelihood) be inconsistent with Article III.4 GATT. In such an
event, the consequences of such a finding would have to be subordinated to the right to adopt such
measures under the Agreement on Agriculture (provided reduction commit ments are respected).
Moreover, the chapeau of Article 3.1 of the SCM Agreement clearly exempts from the scope of that
Article domestic content subsidies which are maintained consistently with the Agreement on
Agriculture and Article III.8 may be relevant to any claim under Article III.4. GATT.

39. Consequently, Brazil’s claims that domestic c ontent subsidies maintained consistently with
the Agreement on Agriculture can be found to be inconsistent with the SCM Agreement and
Article III.4 GATT should be dismissed.

B. EXPORT CREDIT GUARANTEES WHICH OPERATE AS EXPORT SUBSIDIES ARE SUBJECT
TO AGREEMENT ON AGRICULTURE OBLIGATIONS ON EXPORT SUBSIDIES

40. The United States maintains, in its first written submission, that Article 10.2 of the Agreement
on Agriculture operates so as to exclude export subsidies in the form of export credits or export credit
guarantees. This is not borne out by the text of Article 10.2. Article 10.2 provides for disciplines to be
negotiated on the provision of export credits a nd export credit guarantees; it does not provide an
exemption to the export subsidy obligations of the Agreement on Agriculture.

41. The United States provides numerous examples of instances in which the WTO has foreseen
further negotiations. However, none of these exam ples support the United States argument that there
are no disciplines for export credit guarantees which operate as export subsidies.

19 See, Appellate Body Report, United States – Countervailing Measures Concerning Certain Products
from the European Communities, WT/DS212/AB/R, adopted 8 January 2003, para. 110.
20 The New Shorter Oxford English Dictionary, 1993.

42. The best example to illustrate this point is the agreement to negotiate disciplines on
harmonised rules of origin. The fact that it was agre ed to have negotiations on rules of origin simply
means that there is no requirement for a WTO Member to apply an as yet un-finalised set of
harmonised rules of origin. However, this does not imply that a WTO Member is exempted from
other WTO obligations when it comes to apply rules of origin. A WTO Member must, for instance, in
applying its rules of origin, respect the most-favoured nation principle set out in Article 1 GATT.
Similarly, while there may not be disciplines on the provision of export credits and export credit
guarantees, clearly export credits or export cred it guarantees which operate as export subsidies are
subject to the export subsidy disciplines of the Agreement on Agriculture and the SCM Agreement.

43. Other examples are equally illustrative. Th e US cites provisions in the GATS providing for
negotiations on government procurem ent, emergency safeguards and subsidies on trade in services.
However, it does not point out the fact that these s ubjects are clearly not subject to GATS disciplines,
and thus negotiations are required to develop even minimal disciplines. Government procurement in
services is the best example – GATS disciplines ar e explicitly excluded by Article XIII GATS. In
contrast, there is no clear exclusion of export cr edits or export credit guarantees which operate as
export subsidies from the Agreement on Agriculture.

44. Finally, contrary to the US suggestions, such an interpretation does not render Article 10.2
meaningless. Article 10.2 is not intended to re gulate export credits and export credit guarantees as
export subsidies but rather to provide for a gene ral set of disciplines comparable to the OECD
guidelines for export credits for industrial goods. That the Harbinson text (which of course has yet to
be agreed) contains provisions on export credit and export credit guarantees is a recognition that
disciplines must be negotiated and that clarificati on must be provided as to which export credits or
export credits guarantees are, in the case of agricu ltural products, to be cons idered export subsidies,
but is not a recognition that such support which operates as an export subsidy are not currently subject
to the obligations of the Agreement on Agriculture.

VI. MEASURES BEFORE THE PANEL (FSC REPLACEMENT SCHEME)

45. The United States has argued that Brazil has failed to make a prima facie case of the
inconsistency of the FSC Replacement scheme (the ETI) with the c overed agreements. The European
Communities must admit to being surprised that the United States considers that Brazil has to present
a prima facie case of inconsistency. According to Ar ticle 17.14 of the DSU parties to a dispute must
“unconditionally accept” adopted Appellate Body Repor ts as “a final resolution to that dispute.”
21
Given that the United States must be assumed to have unconditionally accepted the findings of the
Appellate Body in the FSC 21.5 dispute, which, by definition also included a finding that the
United States was illegally providing export subsidi es to unscheduled agricultural products such as
upland cotton, the European Communities fails to see how the United States can argue that Brazil
needs to establish a prima facie case. On the contrary, Brazil simply needs to assert a claim.

VII. CONCLUSION

46. This brings us to the end of our statemen t today. Thank you for bearing with us through a
statement which was inevitably long, given the comple xity of the issues, and the very short time we
had to prepare our written submission.

47. There are a few central points whic h we would like to leave you with:

 The peace clause is not an affirmative defence;

21 Appellate Body Report US- Shrimp (21.5 – Malaysia) para. 97.

 The term "decided" cannot be equated with "granted";

 Reducing payments where certain crops are grown for reasons of internal competition
does not amount to basing payments on a certain type of production;

 Domestic content subsidies in favour of domestic producers are permitted under the
Agreement on Agriculture , and can be maintained irrespective of other provisions;
and,

 Export credit guarantees which operate as export subsidies are subject to the
Agreement on Agriculture.

48. Thank you for your attention. We are, of cour se, happy to answer your questions, here or in
writing.

ANNEX C-11

INDIA’S ORAL STATEMENT

Mr. Chairman and Members of the Panel,

 I thank you for the opportunity to present India’s views in this third party session. India has a
few short comments to make on the issues in the dispute.

1. Brazil has challenged the US Subsidy progr amme relating to cotton. The main schemes
challenged are

(i) Step 2 export payments
(ii) US export credit guarantee programmes, and
(iii) Extra Territorial Income (ETI) Act export subsidies.

2. These schemes do not conform to the provisions of Part V of the Agreement on Agriculture
and thus have no “peace clause” protection from claims under the Subsidies Agreement. These
schemes also violate Article 3.1(a) & 3.2 of the Subsidies Agreement.

3. The scheme relating to Step 2 export paym ents constitutes an export subsidy within the
meaning of the Agreement on Agriculture. It also violates the Subsidies Agreement as

(i) It involves grants within the meaning of th e Subsidies Agreement as the US Government pays
money to its exporters
(ii) These grants involve direct transfer of economic resources for which the US Government
receives no consideration
(iii) The scheme confers a benefit within the meaning of Article 1.1(b) of the Subsidies
Agreement as they constitute “free money” for which e xporters incur no corresponding
obligations and they are made for “ less than full consideration” and
(iv) The Scheme is also export contingent within the meaning of Article 3.1(a) of the Subsidies
Agreement because exporters are only eligible fo r payments if they produce evidence that
they have exported an amount of US upland cotton.

4. The three Export Credit Guarantee Programmes (GSM 102, GSM 103 & SCGP) are export
subsidies within the meaning of the Agreement on Agriculture (AOA) as

(i) They are operated “ at premium rates which are inadequate to cover the long term operating
costs and losses of the program” as per item (j) of the illustrative list of export subsidies in
ASCM.
(ii) They involve financial contributions that confer “benefits” and are contingent upon export
performance within the meaning of Article 1.1 & 3.1(a) of the Subsidies Agreement. The US
itself treats them as subsidies in its budget.

5. The ETI Act constitutes export subsidies within the meaning of Article 10.1 of the Agreement
on Agriculture. This Act operates to circumvent th e US export subsidy commitments by providing an
export subsidy to upland cotton while the US does not have any export subsidy reduction
commitments for cotton in violation of Articles 10.1 & 8 of the AOA.

6. The Step 2 Domestic Payment Scheme grants are direct transfers of funds and constitute a
financial contribution by a Government within the meaning of Article 1.1(a)(1)(i) of the Subsidies
Agreement. They also confer a “benefit” within the meaning of Article 1.1(h) of the Subsidies
Agreement because the domestic user of US upl and cotton receives the financial contribution on
terms more favourable than those available in th e market. Moreover these payment are contingent
upon the use of domestic over imported goods.

Mr. Chairman, Members of the Panel,

7. Brazil has provided the legal arguments as to why the US has no basis to assert a “peace
clause” defence against Brazil’s claims on actionable/prohibited subsidies being given by the US.

8. According to Brazil, the “peace clause” of AOA Article 13 is in the nature of an affirmative
defence. The US has indicated that it will invoke a “peace clause” defence in the matter. This means
that the burden of proof will be on US to show th at the US domestic support and export subsidies to
upland cotton are provided in conformity with the requirements of the “peace clause”.

9. Brazil has argued that US has no “peace clause” protection under AOA Article 13(c) as the
US while invoking an affirmative defence must dem onstrate that its export subsidies confirm fully to
the provisions of Part V of the AOA. Part V of the AOA consists of Articles 8 to 11. A member
violates Part V of the AOA if it provides export subsidies for products for which it has not undertaken
any export subsidy reduction commitments.

10. Issues relating to affirmative defence and peace clause defence are mainly legal in nature and
should be subject to interpretation under the Vie nna Convention on the Law of Treaties and the WTO
jurisprudence as seen through Appellate Body findings.

11. As regards subsidies contingent upon export performance, export credit guarantees and
premiums, and use of domestic over imported inputs, Mr. Chairman, India believes that they all fall in
the category of prohibited subsidies and are actionable under the ASCM.

 Thank you for your kind attention.

ANNEX C-12

NEW ZEALAND’S ORAL STATEMENT
24 July 2003

1. Mr Chairman, Members of the Panel, New Zealand’s views on the issues of concern in this
dispute are set out in our Third Party Submission of 15 July and in the time available today it is
clearly not possible to canvass all of those views. Accordingly, and as suggested by you in your
opening remarks Mr Chairman, I will focus only on some key points.

(i) New Zealand’s systemic interest in the dispute

2. First, as outlined in our Third Party Submissi on, New Zealand has joined this dispute because
of our systemic interest in ensuring the conti nued integrity of WTO disciplines applicable to
agricultural trade. In particular we are concerne d to ensure that trade-distorting or “amber box”
measures cannot be used contrary to the “peace cl ause” in a manner that negatively affects other
Members.

3. It is equally important that where the re quirements of the “peace clause” have not been
respected Members are able to utilise their rights under the SCM Agreement and GATT 1994 to take
action in respect of domestic support measures and export subsidies.

(ii) Brazil’s demonstration that the United States cannot claim “peace clause” protection for
domestic support provided in marketing years 1999, 2000, 2001 and 2002

4. Second, Brazil has demonstrated that the le vel of domestic support for upland cotton granted
by the United States in each of the marketing years in question did in fact exceed the level decided
during the 1992 marketing year and that there is therefore no “peace clause” protection for those
support measures.

5. The United States argues that this is not the cas e, on the basis that the comparison required by
the “peace clause” should be between the ‘per pound’ rates of support set by the relevant domestic
support measures and that certain domestic support measures should be excluded from the
comparison.

6. Turning first to the United States claim that the relevant comparison should be between ‘per
pound’ rates of support, in New Zealand’s view such an interpretation would be inconsistent with the
object and purpose of Article 13(b)(ii). Instead, Artic le 13(b)(ii) requires a comparison that takes into
account the totality of payments to upland cotton producers in order to reflect the true nature of the
support that is being granted, including for example, total budgetary outlays. This is especially so
when those budgetary outlays have been increasing because of falling world market prices. And those
prices are falling due, at least in part, to the f act that United States producers are shielded from true
price signals by the guaranteed ‘per pound’ rates.

7. Furthermore, New Zealand sees no basis for excluding certain domestic support measures
from the calculation required by the “peace clause” as requested by the United States.

8. The “counter-cyclical” payments are plainly not “green box” support measures in accordance
with Annex 2 of the Agreement on Agriculture , as the amount of the payment is linked to current
prices for upland cotton, in direct contravention of Annex 2 paragraph 6(c).

9. Nor is the scope of support to be measured under Article 13(b)(ii) limited to “product-
specific” support in the sense proposed by the Un ited States. There is no basis for such an
interpretation in either the wording or the intent of Article 13(b)(ii). [Just to depart from the prepared
statement for a moment, the EC has reminded us this morning of the importance of taking context into
account when interpreting WTO Agreements. We would note that it is also important to consider the
ordinary and natural meaning of the actual words a ppearing in the Agreements. Here the words used
are “support to a specific commodity” – the text does not say “product-specific support”. If the
drafters had intended to mean “pr oduct-specific support”, they surely would have said so. After all,
the phrase “product-specific support” is used at least five times elsewhere in the Agreement on
Agriculture. Returning now to the prepared text,] even if such an interpretation as suggested by the
US, could be supported, “counter-cyclical” paym ents are in any event product-specific support
because, as Brazil has demonstrated, there is a st rong linkage between those payments and production
of upland cotton.

10. New Zealand also considers that there is no basis for excluding the Production Flexibility
Contract payments or Direct Payments from the required calculation. The ability of farmers to update
the base acreage used for calculation of Direct Paymen ts rules out inclusion of those payments in the
“green box”, which contemplates only one base pe riod that is fixed and unchanging. To permit a
Member to avoid this limitation by simply cha nging the names of its domestic support programmes
would seriously undermine the requirement that there be no link between production and the amount
of support.

(iii) Brazil’s demonstration that the United States cannot claim “peace clause” protection in
respect of export subsidies;

11. Looking now at export subsidies, New Zealand agrees with Brazil that the three types of
export subsidies applied to uplan d cotton and other commodities by the United States (the Step 2
Export Programme, the Export Credit Guarantee Pr ogramme, and the FSC Replacement Programme)
violate Articles 3.3, 8 and 10.1 of the Agreement on Agriculture.

12. New Zealand rejects the argument made by th e United States that Step 2 export payments are
not export subsidies because payments are available to domestic users as well as exporters of upland
cotton. The Appellate Body (in US-FSC Recourse to Article 21.5 ) has made it clear that the fact that
payments are also able to be made to domestic users of upland cotton does not ‘dissolve’ the export
contingency of the payments that are made to exporters.

13. New Zealand also finds no basis for the assertion by the United States that export credit
guarantee programmes are not subject in any way to the export subsidy disciplines of the Agreement
on Agriculture. In fact the inclusion of reference to such programmes in the context of Article 10
supports the opposite conclusion an d demonstrates that Members were in fact concerned at the
potential for such programmes to circumvent Members’ export subsidy reduction commitments.

14. In summary Brazil has demonstrated that th e export subsidies to upland cotton do not have
“peace clause” protection, and also that they are prohibited subsidies under Article 3.1(a) and 3.2 of
the SCM Agreement.

(iv) The request by the United States for a Preliminary Ruling

15. Finally Mr Chairman, New Zealand does not consider that the Panel should grant the
preliminary ruling requested by the United States.

16. First, New Zealand believes that measures no l onger in effect are not outside the scope of the
Panel’s consideration, particularly where the programmes in question, while renamed, in fact continue
in a slightly different form. Furthermore, the na ture of serious prejudice claims means that Panels
may need to consider data beyond a single year and consider trends over a number of years.

17. Second, New Zealand considers that export credit guarantee measures relating to eligible
United States agricultural commodities (other than upland cotton) are within the Panel’s terms of
reference. To determine otherwise would be to allow a lack of transparency in the operation of
particular measures to shield them from scrutiny by Members taking disputes.

Conclusion

18. In conclusion, Mr Chairman, New Zealand be lieves that Brazil has demonstrated that the
“peace clause” has not been respected in relation to domestic support and export subsidies provided
by the United States to upland cotton in the marketing years 1999, 2000, 2001 and 2002, and that
accordingly Brazil is entitled to bring actionable and prohibited subsidy claims against the United
States under the GATT 1994 and the SCM Agreement. New Zealand looks forward to the next phase
of the case which will examine those claims.

ANNEX C-13

ORAL SUBMISSION BY PARAGUAY

24 July 2003

Mr Chairman, members of the Panel:

1. Paraguay is grateful for the opportunity to pa rticipate in these proceedings and to present its
views on the matter at issue in this dispute.

2. Because Paraguay is a firm believer in a fair sy stem of multilateral trade, it feels that it should
explain its position on this issue as a third party becau se it is an issue of particular interest to its
economy.

3. Paraguay considers that the subsidies and sup port granted by the United States to its cotton
production are inconsistent with the Agreement on Subsidies and Countervailing Measures, the
Agreement on Agriculture and the rules and principles of the GATT 1994, and that for the purposes of
this dispute it is therefore essential to take account of WTO legislation, which was carefully drafted to
avoid causing distortions in international trade and prejudice to developing countries such as
Paraguay.

4. WTO jurisprudence and the principles of inte rpretation of internati onal law applied to the
various cases suggests that the app licable rules should be read cumulatively, taking account of all
elements applied to the case in order to support the system as an integrated whole.

5. With respect to the applicability of Article 13(b)(ii) concerning domestic support measures
that conform fully to the provisions of Article 6 of the Agreement including direct payments that
conform to the requirements to paragraph 5 thereof, as reflected in each Member's Schedule, as well
as domestic support within de minimis levels and in conformity w ith paragraph 2 of Article 6,
Paraguay considers they shall be exempt from ac tions based on paragraph 1 of Article XVI of
GATT 1994 or Articles 5 and 6 of the Subsidies Agreement, provided that such measures do not grant
support to a specific commodity in excess of that decided during the 1992 marketing year.

6. This implies that it is not limited or confined to specific products. Thus, it can be concluded
that the United States does not enjoy protection from actions relating to subsidies using 1999, 2001
and 2002 as a basis, as Brazil duly proved.

7. In interpreting the Peace Clause, account must be taken of the serious prejudice that Member
economies could suffer, and an assessment made of the overall significance of all of the agreements
relating to the case.

8. Regarding inconsistency with the Agre ement on Agriculture, the Step 2 programme
introduced by the United States to stimulate expor ts and the competitiveness of its products on the
international market is inconsistent with Articles 3.3 and 8 of the Agreement on Agriculture.

9. Article 3 of the Agreement on Agriculture refers to the incorporation of concessions and
commitments. Paragraph 3 thereof stipulates that:

3.3 "Subject to the provisions of paragr aphs 2(b) and 4 of Article 9 of this
Agreement, a Member shall not provide ex port subsidies listed in paragraph 1 of
Article 9 in respect of the agricultural pr oducts or groups of pr oducts specified in
Section II of Part IV of its Schedule in excess of the budgetary outlay and quantity
commitment levels specified therein and shall not provide such subsidies in respect of
any agricultural product not specified in that Section of its Schedule."
10. The above paragraph enables Members to provi de the subsidies listed in Article 9.1 of the
Agreement on Agriculture subject to fulfilment of the commitments assumed.

11. Similarly, Article 8 of the said Agreement regulates export competition commitments,
stipulating that:

"Each Member undertakes not to provide export subsidies otherwise than in
conformity with this Agreement and the co mmitments as specified in that Member's
Schedule."
12. For the above reasons, and because it does not c onsider the provisions of the Agreement on
Agriculture to have been complied with, Paraguay believes that the export subsidies granted by the
United States to its cotton industry are inconsistent with Articles 3.3, 8 and 9.1 of the Agreement on
Agriculture.

13. The agricultural subsidies cause "serious prejudice" to the domestic industry of other
Members under Articles 5 and 6 of the Agreement on Subsidies and Countervailing Measures.

14. The introductory paragraph of part III, Artic le 5 of the said Agreement provides that no
Member should cause, through the use of any subsidy – specific and not exempted under the
Agreement – adverse effects to the interests of other Members, more specifically, as categorically
stated in the indents that follow, (a) injury to th e domestic industry of another Member and (c) serious
prejudice to the interests of another Member.

15. Article 6 specifically refers to cases in whic h "serious prejudice" is deemed to exist in the
sense of paragraph (c) of Article 5.

16. Agricultural subsidies have effects on world tr ade, and measures such as those applied by the
United States have a significant impact on developing countries like Paraguay.

17. Paraguay has a total populati on of approximately 5,300,000, of which more than 500,000 are
linked to cotton production. If we add the related industries and activities, the figure reaches an
estimated 1,500,000, or approximately 30 per cent of the country's total population.

18. Any slump in the cotton trade causes an e xodus of rural population towards the urban areas
which do not offer any relief or solution, and th is further undermines the economic situation of a
country that depends on its agriculture.

19. As regards exports, in 1991, the foreign ex change revenue generated by sales of cotton and
byproducts thereof reached US$318,912,000, approxima tely 43 per cent of the total for the country's
exports that year. At the time, of a total of 299,259 farms, 190,000 were cultivating cotton.

20. By 2001, the figures had changed considerab ly. Export revenue had fallen to US$90,505,000,
a 72 per cent drop in the value of exports. The number of farms producing cotton decreased to about
90,000, representing a 52 per cent decrease in farms, employment and small farmer income. In other
words, the impoverishment was real.

21. Regarding international cotton fibre prices, in 1991, the price per ton of Paraguayan type fibre
was quoted on the New York Exchange at US$1,624, while in 2001, it was quoted at US$934.

22. In Paraguay, some 60 per cent of cotton is pr oduced on farms of less than 10 hectares, making
it the main or only source of income for small farmers and the main source of employment for the
rural workforce in the most disadvantaged segment of society where access to capital and technology
is more restricted and the leading socio-economic welfare indicators are lower than anywhere else.

23. In spite of its marked decline, cotton c ontinues to be an important cash crop for the
"capitalized" farms, and the main – if not only – cash crop of the farms that are on the decline.

24. The agricultural sector is fundamental to the Paraguayan economy, accounting for 90 per cent
of exports, 35 per cent of employment and 25 per cent of GDP, in addition to which it supports an
agro-industry that accounts for 11 per cent of GDP and 10 per cent of total employment.

Mr Chairman, members of the Panel:

25. The importance of cotton for Paraguay, both in social and economic terms, is such that an
increase in international cotton fibre prices as a result of the elimination of significant market
distortions such as subsidization of production w ould not only bring about a general improvement in
the standard of living of the country's inhabitants, in a very fragile sector in particular, but it would
also lead to an improvement in macroecono mic conditions, balance-of-payments, monetary
reserves, etc. that would enable Paraguay to be more reliable in meeting its international financial
commitments.

26. For the above reasons, and because it does not consider that the provisions of the Agreement
on Agriculture have been complied with, Paraguay be lieves that the export subsidies granted by the
United States to its cotton industry are inconsistent with Articles 3.3, 8 and 9.1 of the Agreement on
Agriculture.

27. Paraguay therefore considers that the meas ures adopted by the United States cause serious
prejudice to world trade, affecting Paraguay in par ticular, and that the necessary steps should be taken
to eliminate the adverse effects and seek to achieve a balance in world trade.

28. Finally, Paraguay respectfully requests the Panel to conclude that the measure applied by the
United States is inconsistent with its WTO obliga tions under various provisions of the Agreement on
Agriculture, the GATT 1994 and the Agreement on Subsidies and Countervailing Measures.

ANNEX C-14

ORAL STATEMENT BY THE SEPARATE CUSTOMS
TERRITORY OF TAIWAN, PENGHU, KINMEN AND MATSU
AS A THIRD PARTY ON THE CASE OF THE
UNITED STATES SUBSIDIES ON UPLAND COTTON

 The Separate Customs Territory of Taiwan, Pe nghu, Kinmen and Matsu is pleased to be here
as a third party in this case. We have a systemic in terest in the particular question of the burden of
proof required by Article 13 of the AOA, and would like to focus on this issue in our remarks. We
have previously submitted our views in writing accordingly.

The Burden of Proof (the “Peace Clause”)

 In the case in point, Brazil asserts in its first written submission that Article 13 is by nature
an “affirmative defence” or “exception” and “ not itself a positive obligation”, therefore the
United States carries the burden of proof on whether its subsidies are in conformity with Article 13.

 Our view, in summary, is that it is inappr opriate to label Article 13 as an “affirmative
defence” or “exception”. Indeed this would mean the Article having much less than its originally
intended effect. Article 13 in itself confers rights and imposes positive obligations on Members. It is
not there simply for the convenience of resolving the question of the burden of proof. The right that it
confers of entitlement to being “exempt from actions”, for example, would be rendered pointless if the
burden of proof were on the respondent. It is surely for Brazil, therefore, as a complainant, to prove a
breach of a positive obligation by demonstrating non -conformity, rather than for the United States to
bear the burden of proof.

 In our written submission, we suggest that in a rriving at a proper interpretation of the burden
of proof in Article 13, it might also be helpful to make some comparisons with the different types of
exceptions, exemptions and defences that exist in other Articles of WTO Agreements.

 We mention, for example, disputes arising in connection with agreements not covered by the
DSU, where the complaining party would bear the burden to prove that the issue in dispute falls
within the purview of the DSB.

 Also, where a matter is specifically excluded from the dispute settlement procedures by
certain relevant agreements – such as Article 6 of the TRIPS agreement - the provision concerned
allows the Member applying it to prevent dispute settlement procedures and the burden of proof falls
on the complaining party.

 And by way of further comparison, we refer to other cases where exceptions or exemptions
are granted under relevant agreements providing specific obligations.

 While Article 13 of the AOA is clearly in this case not dealing with a matter under a non-
covered agreement or a matter that is specifically excluded from the dispute settlement procedures as
in Article 6 of TRIPS, it is also not typical of the type of exception contained in a number of the
GATT Articles. By its singular nature, Article 13, in our view, falls between these examples,
therefore the procedures for applying its provision should be interpreted separately and differently.

 And finally, as far as the burden of proof is concerned, we submit that requiring the
respondent to prove that the subsidy measure in question is in conformity with the Agreement on
Agriculture will, to a certain extent, offset the re spondent’s right to claim for the exceptions provided
by the Article 13 provisions, which is surely contrary to the drafters’ intent.

ANNEX D

REBUTTAL SUBMISSIONS OF PARTIES

Contents Page
Annex D-1 Executive Summary of Brazil's Rebuttal Submission
(22 August 2003)
D-2
Annex D-2 Executive Summary of the United States Rebuttal Submission
(22 August 2003)
D-12
Annex D-3 Brazil's Comments on U.S. Re buttal Submission (27 August 2003) D-21
Annex D-4 Comments of the United States on New Material in Brazil's
Rebuttal Filings and Answer of th e United States to the additional
Question from the Panel (27 August 2003)
D-43

1. The United States Has No Peace Clause Protection for Non-Green Box Domestic
Support Measures to Upland Cotton for MY 1999-2002

1.1. Production Flexibility Contracts and Di rect Payments Are No n-Green Box Domestic
Support

1.1.1. The Amounts of PFC and Direct Payments Depend on the “Type” of Production

1. PFC payments and direct payments ar e non-green box support because both limit the
“amount“ of payment based on the “type” of produc tion inconsistent with the requirements of
Annex 2, paragraph 6(b) of the Agreement on Agri culture. The relevant text of paragraph 6(b)
prohibits any linkage of the “amount of payments ” to any “type of production” of an agricultural
product. The “amount” of payments under the PFC and direct payment programmes falls when base
acres are used to produce fruits , vegetables and wild rice. Thus, the undisputed evidence
demonstrates that PFC and direct payments do not meet the policy-specific criteria for “de-coupled
income support” in Annex 2, paragraph 6(b).

2. Prohibiting payments if certain types of crops are produced while at the same time permitting
payments if other types of crops are produced violates Annex 2, paragraph 6(b). Contrary to the US
argument, requiring no production, i.e., prohibiting production, does not relate the amount of
payments to the “type” of production, as no individual “type” of production would be eligible to
payments. The notion of “type of production” in paragraph 6(b) is necessarily linked to the amount of
payment to some “type” of commodity that is “produced” and not to a production requirement itself.

3. In addition, Brazil also presented evidence th at the US restrictions on fruits, vegetables and
wild rice prevent producers with PFC and direct payment base acreage from growing these alternative
crops. This restriction, therefore, channels pr oduction into particular “types of production” by
prohibiting other “types of production” and, therefore, violates Annex 2, paragraph 6(b).

1.1.2. Direct Payments Are Not Green-Box Because the Base Periods for Determining
Eligibility Have Been Updated in the 2002 FSRI Act

4. Direct payments are also not properly in the green box because the amount of payments are
based on an updated “base period” and not on a “fixed” base period as required by Annex 2,
paragraphs 6(a) and (b). Paragr aphs 6(a) and (b) require a fixed and, therefore, unchanging base
period for de-coupled domestic support measures w ith the same structure, design, and eligibility
criteria. The evidence demonstrat es that there are no significant ch anges in the payment eligibility
criteria between the PFC programme and its direct successor, the direct payment program. Indeed,
PFC payments made during 2002 were deducted from the amount of direct payments due in 2002.

5. Further, the updating perm itted under the 2002 FSRI Act for direct payments was significant
– one-third of eligible farms updated their PFC base acreage as of June 2003 in order to increase the
base acreage – and payments – under the direct payment programme. This updating creates
production-distorting effects because it creates expectations of future updates and will incite farmers
to produce more of the programme crops that qualify for support.

6. The United States interprets the word “fixed ” in Annex 2, paragraph 6(a) and (b) as being
“fixed” only for the life of a particular legal measure. A Member could change a measure every year,
update the “base period” to reflect the prior year’s acreage, increase current payments to reflect the
updated (and increased) “historical” acreage, and labe l it differently under a new law. Thus, the US
interpretation would permit payments to be complete ly “coupled” to production, just with a one-year
time lag. It would render any disciplines reflected in the use of the term “a” and “fixed” “base

period” in Annex 2, paragraph 6(a) a nullity. This is contrary not only to the ordinary meaning of the
term “fixed” but also to the object and purpose of Annex 2, paragraph 6(a) to not permit Members to
increase payments over time in a manner linked to in creases in production over time. The re-linkage
of payments to production is also inconsistent with the “fundamental requirement” in Annex 2,
paragraph 1.

1.2. PFC, Market Loss Assistance, Direct and Counter-Cyclical Payments (CCP) and Crop
Insurance Subsidies Are “Support To” Upland Cotton

7. The narrow US specificity test of “tied to pr oduction” seeks to impose a “form” of specificity
on the text of Article 13(b)(ii) that is not there. It further contradicts the only analogous criteria to
Article 13(b)(ii) for calculating annual levels of support – the AMS calculation criteria of Annex 3. In
addition, it contradicts the broad definition of “in favour of” in defining AMS in Article 1(a) of the
Agreement on Agriculture, and the “in general” language of the same provision. The “substance” the
United States seeks to avoid with this unjustified interpretation is the $12.9 billion dollars in payments
for the production of upland cotton from MY 1999-present.

8. Applying its narrow specificity criteria, the United States argues that PFC, market loss
assistance, direct and counter-cyclical payments as well as crop insurance subsidies are not “support
to” upland cotton. Brazil presents evidence that all five domestic support measures provide “support
to” the production of upland cotton between MY 1999-2002.

1.2.1. Production Flexibility Contract Payments

9. Brazil has presented considerable evidence dem onstrating that PFC payments to holders of
upland cotton base acreage in MY 1999-2001 are support to upland cotton. The 1996 FAIR Act
established a specific payment formula permitting t hose upland cotton farmers who had traditionally
farmed upland cotton to continue to receive paymen ts following the elimination of the deficiency
payment program. The 1996 FAIR Act singled out upland cotton and only six other crops for such
PFC payments. Recipients were “producers” who “shared in the risk of producing a crop”, and who
farmed one of the seven crops in the three i mmediate years prior to the 1996 FAIR Act (MY 1993-
95). Only a small minority of the producers of cr ops in the United States received PFC (and market
loss assistance) payments. Brazil has demonstrated that between MY 1999-2001, the seven types of
programme crops receiving PFC represente d on average between MY 1999-2001 only 14.19 per cent
of total US farm revenue. In addition, the tota l acreage of the seven PFC and market loss assistance
crops in MY 2001 represented only 22 per cent of total US farmland. Thus, PFC payments were not
provided to US producers in general.

10. The best available eviden ce demonstrates that upland cotton producers during MY 1999-2001
received PFC (and market loss assistance) payments. USDA reported that 97 per cent of farms
producing upland cotton representing 99 per cent of upland cotton acreage from MY 1993-95 signed
up to receive upland cotton PFC payments for MY 1996-2001. Upland cotton base acreage under the
PFC (and market loss assistance) programme was 16.2 million acres. Between MY 1999-2001, the
average acreage planted to upland cotton was 15.24 million acres. In addition, USDA reported that
95.7 per cent of the 16.2 million US upland cotton b ase acreage was planted to PFC programme crops
in MY 2001 – a higher percentage than for any of the other 6 types of PFC programme crops. Thus,
the evidence suggests that upland cotton prod ucers in MY 1999-2001 were receiving PFC (and
market loss assistance) payments.

11. Brazil has presented evidence demonstrating that PFC payments have production and trade
distorting effects that arise from the prohibition on planting fruits, vegetables, and wild rice, as well as
from the various “wealth effects” that result from th e size of the subsidy averaging more than 15 per
cent of the market value of upland cotton betw een MY 1999-2001. These effects provide further

confirming evidence that the selected, targeted PFC (and market loss assistance) payments are support
to upland cotton.

1.2.2. Market Loss Assistance Payments

12. The evidence provided by Brazil with respect to PFC payments is also relevant to market loss
assistance payments because these payments were made only to farmers with PFC contracts for the
seven PFC crops, and additionally to soybeans. Thus, historic upland cotton producers (producing
upland cotton in MY 1993-1995) received “upland cotton-specific” market loss assistance payments
in MY 1998-2001. Even with the addition of so ybeans, these 8 crops only represented on average
20.75 per cent of total US farm revenue in MY 1999-2001. PFC crop base acreage and soybean
acreage in MY 2001 represented only 29 per cent of total US farmland. Thus, as with PFC payments,
market loss assistance payments were not paid to US agricultural producers in general but rather to
only a select group of US producers.

13. The evidence presented by Brazil indicates that while producers holding PFC/market loss
assistance base acreage had the legal “freedom to fa rm” different crops, if they produced upland
cotton, they would suffer adverse financial consequences unless they produced upland cotton on
upland cotton, corn or rice base acres. The evidence highlights th e practical impossibility of growing
upland cotton without any type of PFC and market loss assistance payment in MY 2001. This
evidence confirms NCC statements and supports a conclusion that any upland cotton produced in MY
1999-2001 – as a matter of economic reality and viabilit y – needed and received PFC and market loss
assistance payments to meet the high cost of production.

14. Further evidence that market loss assistance payments are support to upland cotton stems
from the fact that the United States notified these subsidies as trade and production distorting amber
box support. The evidence demonstrates that the ta rgeted market loss assistance payments triggered
by market price declines have ev en more trade and production-distorting effects than PFC payments.
Further, as with PFC payments, production and trad e distortions occurred because of the prohibition
or restriction on receiving such payments based on growing fruits, vegetables, or wild rice. The
production and trade-distorting effects on upland cott on are further confirmed by the fact that market
loss assistance payments represented on average 17. 87 per cent of the market value of upland cotton
between MY 1999-2001. Thus, even though upland cotton producers were not required to produce
upland cotton to receive market lo ss assistance payments, the record demonstrates that they continued
to produce upland cotton between MY 1999-2001, and they continued to benefit from the 17.87 per
cent subsidies represented by these payments.

1.2.3. Direct Payments

15. Direct payments are targeted support to “producers” farming, inter alia, on upland cotton base
acreage. The eligible upland cotton producers w ho grew upland cotton in MY 1998-2001 (or in MY
1993-95) – together with eligible producers of only nine other crops – are a select group, who grew
crops representing only 23.49 per cent of total fa rm cash receipts and 30 per cent of total US farm
acreage. Thus, direct payments are not available to the great majority of US producers of agricultural
commodities, i.e., they are not provided to US agricultural producers in general.

16. The United States argues that direct payments and CCP payments are not “support to upland
cotton” because there is no legal requirement under the 2002 FSRI Act for holders of upland cotton
base acreage to grow upland cotton. However, Braz il has demonstrated that the theoretical legal
planting flexibility in the 2002 FSRI Act is not reflected in the economic reality of growing high-cost
crops like upland cotton. Farmers who did plant the 14.2 million acres of upland cotton for MY 2002
could only have covered their costs by receiving upland cotton, rice or peanut direct payments and
counter-cyclical payments. This evidence strongly confirms what the NCC officials have stated

repeatedly, that their members need, rely on, and receive direct payment and counter-cyclical payment
support. And this evidence refut es the United States argument that the legal flexibility to grow other
crops – or not produce at all – is the single relevant fact justifying a finding that direct payments and
CCP payments did not support upland cotton in MY 2002.

17. Further evidence that direct payments are s upport to upland cotton is derived from the effects
on upland cotton production caused by the updating of the base acreage between the PFC and the
direct payment programmes. Brazil has presented ev idence indicating that this updating creates a re-
linkage between production and the direct (and c ounter-cyclical) payments. Production effects are
also caused by channeling the payments into crops other than fruits, vegetables, and wild rice. Further,
the size of the subsidy (over 15 per cent of the curre nt upland cotton market value) also contributes to
wealth creation that has production effects. These production effects demonstrate that the direct
payments (and CCP payments) are not de-linked from production – as argued by the United States –
and support a conclusion that they are support to upland cotton.

1.2.5. Counter-Cyclical Payments

18. The United States argues that because producers receiving CCP payments are not required to
produce upland cotton to receive payments, these paymen ts cannot, as a matter of law, be considered
support to upland cotton within the meaning of Artic le 13(b)(ii). Nevertheless, the evidence provided
by Brazil demonstrates that CCP funds in MY 2002 paid to “historic” (i.e., 1998-2001 or 1993-1995)
upland cotton producers are paid to a tiny fraction of total US producers of agricultural commodities
and not to US producers of agricultural products “i n general”. Further, the evidence supports the
conclusion that the recipients of these payments in MY 2002 needed these payments to continue
producing upland cotton. They constitute “support to upland cotton”.

19. Moreover, CCP payments create additiona l production effects due to the “base-update”
permitted under the 2002 FSRI Act for both base yields and base acreage compared to market loss
assistance payments. Further, the fruits, vegetables, and wild rice prohibitions or restrictions channel
production into upland cotton. This evidence collect ively supports a conclusion that CCP payments
are “support to upland cotton”.

1.2.6. Crop Insurance Payments

20. Brazil has demonstrated that upland cotton fa rmer benefit from specialized and specific crop
insurance policies provided under the 2000 Agricultura l Risk protection Act. Premium subsidies are
directly tied to the amount of acreage planted by an upland cotton farmer. Also the participation rate,
the share of policies at higher buy-up levels and the crop insurance loss ratio are higher for upland
cotton than for other crops. This is confirmed by USDA’s own economists, who have found that crop
insurance subsidies cause much higher production an d export effects for upland cotton than for other
crops. In sum, crop insurance subsidies tied dir ectly to the production of upland cotton are “support
to a specific commodity” for the purposes of Article 13(b)(ii).

1.3. The US Support to Upland Cotton in MY 1999-2002 Exceeded the Support Decided in
MY 1992

21. The United States has raised a number of post hoc arguments related to a supposed “rate of
support” decision it alleges to have made during MY 1992. In the SAA, the United States stated that
Members would have peace clause protection from adverse effects and serious prejudice challenges in
the WTO “ unless the AMS for the particular commodity exceeds the level decided in the 1992
marketing year”. The phrase “AMS for the particular commodity” is an explicit recognition by the
United States of the test in Annex 3, paragraph 6 wh ich states: “For each basic agricultural product, a
specific AMS shall be established expressed in total monetary terms. ” The US “rate of support”

methodology is not an expression in “total monetary terms,” nor does it permit such a calculation.
There are only two types of methodologies that would allow an expression in monetary terms of a
decision (or decisions) taken by the United States in MY 1992 regarding its level of support to upland
cotton: “using budgetary outlays” or the “gap be tween the fixed reference price and the applied
administered price multiplied by the quantity of production eligible to receive the administered price”.

22. Brazil disagrees with the United States’ assertion that it did not “decide” on budgetary
outlays. The alleged US decision to provide a ra te of support must necessarily be accompanied by a
decision to authorize whatever budgetary outlays would be necessary to meet the rate of support. The
United States took specific administrative decisions which meant that the United States decided on the
payment rates that resulted from the “rate of support” and, therefore, on the amount of budgetary
outlays it would use from its unlimited spending authority. For the United States to argue, post hoc,
that these decisions did not also include expenditures is inconsistent with its SAA interpretation of the
peace clause that the 1992 decision must be expressed in “total monetary terms.”

23. Brazil has demonstrated that expenditures for MY 1992 are lower than they are for any of the
marketing years from 1999-2002. Therefore, under this methodology, the United States has no peace
clause exemption for MY 1999-2002. While Braz il does not believe that calculating the upland
cotton AMS based on the AMS methodology in Anne x 3 is the appropriate methodology – based on
the absence of the terms “AMS”, “product-specific” and “non-product-specific” in Article 13(b)(ii) –
Brazil has provided evidence that by using this methodology the United States support to the basic
agricultural commodity “upland cotton” exceeded the support decided during the 1992 marketing year
in all marketing years from 1999-2002.

24. In the event the Panel decides not to use a “t otal monetary value” methodology, then there are
two “rate of support” methodologies: (1) budge tary outlays per pound of support, and (2) the
expected guaranteed income rate of support set out in Professor Sumner’s analysis. Brazil has
provided extensive analysis of each of these two methodologies. However, Brazil does not endorse
either methodology.

25. Brazil has demonstrated that the preferab le methodology would be to rely on budgetary
outlays per pound of upland cotton production. Professor Sumner’s approach should be used only as
an alternative to the simplistic US “72.9 methodol ogy” because it is much mo re accurate than the
United States approach accounting for eligibility cr iteria, effective programme limitations and costs
that the US ignores. In any event, Brazil has de monstrated that also under both rate of support
methodologies the US support in MY 1999-2002 exceeds the support decided during MY 1992

26. Any methodology that does not account for eligib ility and effective participation criteria is
inconsistent with Article 13(b)(ii). It is also inc onsistent with the context of Article 13(b)(ii) which
includes Annex 3, paragraphs 8 and 10 requiring calculation of the monetary value of support by
factoring in “production eligible to receive the administered price .” And it is also inconsistent with
object and purpose of the Agreement on Agriculture, which is – after all – “correcting and preventing
restrictions and distortions in world agricultural markets.”

1.4. Challenges to Actionable Subsidies und er Article 5 and 6 of the SCM Agreement
and Article XVI of GATT 1994 Are Not Limited to the Marketing Year in which a
WTO Panel Is Established

27. The United States argues that the Panel may only count current US non-green box support in
determining whether the United States enjoys peace clause exemption under Article 13(b). Applying
a strict “statute of limitations” approach, the United States argues that Brazil (1) cannot challenge any
US trade and production-distorting agricultural support for MY 2001 (or MY 2000, or MY 1999)
because it did not ensure that the Panel was established during MY 2001 (or MY 2000, or MY 1999),
and (2) it cannot challenge all of the trade and production-distorting support for all of MY 2002
because it did not ensure that the Panel was estab lished by 31 July 2003 – the last day of the 2002
marketing year. The United States goes so far as to argue that the Panel may only compare MY 1992
support decided with partial MY 2002 data through 18 March 2003 – the date the Panel was
established. According to the US theory, the only date the Panel could have been established to
ensure comparison with full MY 2002 data would have been 31 July 2003 – the last day of MY 2002.

28. Brazil has demonstrated that the United States has constructed an irrational interpretation of
Article 13(b)(ii). It is bizarre to interpret Article 13(b)(ii) in a way that requires Members to carefully
“time” a request for establishment of a panel to maximize the amount of support to be counted for the
“current” marketing year. Nothing in the “present tense” of Article 13(b)(ii) compels this result. The
Panel must interpret Article 13(b)(ii) according to its ordinary meaning and with regard to its context.
The relevant context is Articles 1(h)(ii) a nd 6.3 of the Agreement on Agriculture. The Korea – Beef
dispute exemplifies that a Member can challenge viol ations of “Current Total AMS” at any time after
a marketing year ends. The ability of challenging Current Total AMS violations in later years by
analogy suggests that non-conformity with the p eace clause requirements in much the same way leads
to lifting the peace clause exemption also for marketing years other than the current marketing year.
Thus, the proper interpretation of Article 13(b)( ii) permits actionable subsidy challenges under the
SCM Agreement and GATT Article XVI:1 for any ma rketing year for which peace clause exemption
does not exist – under either its chapeau (Current Total AMS) or the proviso of Article 13(b)(ii).

2. The GSM 102, GSM 103 and SCGP Export Credit Guarantee Programmes Constitute
Export Subsidies in Violation of Articles 10.1 and 8 of the Agreement on Agriculture,
and Item (j) and Articles 3.1(a) and 3.2 of the SCM Agreement

29. Brazil has demonstrated that the GSM 102, GSM 103 and SCGP export credit guarantee
programmes administered by the CCC constitute export subsidies within the meaning of Articles 10.1,
1(e) and 8 of the Agreement on Agriculture, Article 3.1(a) of the SCM Agreement, and item (j) of the
Illustrative List of Export Subsidies attached as Annex I to the SCM Agreement. Brazil also
demonstrated that those export subsidies circumvent , or threaten to circumvent, the United States’
export subsidy reduction commitments, in viola tion of Articles 10.1 and 8 of the Agreement on
Agriculture. Additionally, because they violate the Agreement on Agriculture, these programmes are
not exempt from actions by Article 13(c)(ii) of the Agreement on Agriculture, and constitute
prohibited export subsidies within the meaning of item (j) and Articles 3.1(a) and 3.2 of the SCM
Agreement.

30. Article 10.2 does not, as the United States asser ts, carve out export credit guarantees from the
general export subsidy disciplines of the Agreemen t on Agriculture, including the anti-circumvention
provisions of Article 10.1. The Appellate Body concluded that exemptions and carve-outs from
general obligations must be provide d for explicitly in the text of an agreement. Article 10.2 includes
no such explicit carve-out or exemption. Rather , Article 10.2 announces Members’ intent to work
toward negotiations on specific disciplines for export credits. In the meantime, the general disciplines
on export subsidies included in the Agreement on Agriculture apply to export credits.

2.1. CCC Export Credit Guarantees Constitute Export Subsidies under Articles 1 and 3.1(a)
of the SCM Agreement

31. Brazil notes that CCC export credit guarantees are “financial contributions” within the
meaning of Article 1.1(a)(1)(i) of the SCM Ag reement. Since CCC export credit guarantees are
unique financing vehicles for agricultural commodity transactions that are not available on the
commercial market, let alone on term s consistent with the market, they confer “benefits” within the
meaning of Article 1.1(b) of the SCM Agreement. Brazil presents the affidavit of Marcelo Pinheiro
Franco from the Brazilian Export Credit Insurance Agency who confirms that no

comparable market-based export credit gua rantees or financing instruments for
international transactions involving agricu ltural commodities [exist] that provide
these same terms [as the GSM and SCGP programmes].
32. Further, the United States compares agricu ltural export credit guarantees to export credit
insurance for agricultural commodities, which it asserts is available on the private commercial market.
However, it acknowledges that insurance coverage is structured altogether differently from guarantee
coverage. Thus, even if the United States had proven its assertion with evidence, it acknowledges that
the market for private insurance cannot serve as a benchmark against whic h to determine whether
CCC guarantees confer “benefits”.

33. Finally, CCC guarantees are contingent in la w on export performance and therefore constitute
prohibited export subsidies under Article 3.1(a) of the SCM Agreement.

34. Lastly, Brazil recalls that since the Unite d States surpassed its quantity commitment levels,
Article 10.3 of the Agreement on Agriculture allocates the burden to the United States to prove that its
excess exports did not benefit from export subsidies, including export credit guarantees.

2.2. The CCC Export Credit Guarantee Pr ogrammes Constitute Export Subsidies under
Item (j) of the Illustrative List of Export Subsidies

35. Brazil has demonstrated that the GSM 102, GSM 103 and SCGP programmes also constitute
export subsidies because they charge premium rat es that are inadequate to cover the long-term
operating costs and losses of the programmes, within th e meaning of item (j) of the Illustrative List.
Item (j) does not require the Panel to endorse any particular methodology or formula for determining
whether the CCC programmes cover their long-term operating costs and losses, or to decide by
precisely how much those costs and losses exceed pr emiums collected. Rather, Brazil has provided
the Panel with numerous alternatives, each of wh ich demonstrates that long-term operating costs and
losses for the GSM 102, GSM 103 and SCGP progra mmes outpace premiums collected, including
data under the FCRA, Brazil’ c onstructed formula, data from CCC’s 2002 financial statements
reporting large uncollectible amounts on post-1991 and pre-1992 guarantees, among others.

36. The United States criticizes the FCRA cost formula as inappropriate because it allegedly
relies on “estimated” rather than “actual” data about th e costs of the programmes. It is not true that
the FCRA cost formula reflects only “an estimate of the long-term costs to the Government”. A
significant portion of the inputs into the FCRA cost formula reflect actual historical experience with
borrowers, and actual contract terms such as interest rates, maturity, fees and grace periods.

37. Moreover, the results of the FCRA cost fo rmula are modified throughout the lifetime of a
cohort, pursuant to the “reestimation” process. The results of the reestimate process demonstrate that
CCC has “los[t] money” during the period 1992-2002. When these total lifetime reestimates for all

cohorts of guarantees disbursed sin ce 1992 are netted against the total original subsidy estimates
adopted each budget year during the period 1992-2002, the resulting loss is nearly $1.75 billion.

38. The implication of the United States’ positio n concerning “estimated data” is that it is
impossible to judge whether premiums for the GSM 102, GSM 103 and SCGP programmes have
covered operating costs and losses until all guarantee c ohorts for a period constituting the “long term”
are closed, so that purely “actual” rather than pa rtial “estimate” data are available. Because all
cohorts disbursed since the inception of federa l credit reform remain open, the United States
effectively argues that it is impossible for this Panel to judge whether the CCC guarantee programmes
satisfy the elements of item (j). Brazil notes how ever that the US Congress and the President have
endorsed the use of the FCRA cost formula as th e principal way to “measure more accurately the
costs of Federal credit programmes”, even in the budget year column of the US budget , let alone
several years out, when cohorts have been subject to successive rounds of reestimates.

39. In closing, Brazil reminds the Panel that the US criticism regarding the use of “estimated”
data does not address the many other bases apart from the FCRA formula on which Brazil has
demonstrated that the long-term operating co sts and losses of the GSM 102, GSM 103 and SCGP
programmes exceed premiums paid.

2.3. The CCC Export Credit Guarantee Pr ogrammes Threaten to Circumvent US Export
Subsidy Reduction Commitments

40. At paragraphs 295-305 of its First Submission, Brazil demonstrated that with respect to both
unscheduled and scheduled commodities, th e GSM 102, GSM 103 and SCGP export subsidy
programmes result in, or threaten to lead to, ci rcumvention of the United States’ export subsidy
commitments, in violation of Article 10.1 of the Agreement on Agriculture. For the same reason, the
United States violates Article 8, which requires a Me mber not to provide export subsidies otherwise
than in conformity with the Agreement on Agricu lture and with its scheduled commitments. The
threat of circumvention for scheduled commodities is further enhanced by the fact that CCC is exempt
from the requirement in the FCRA that a programme receive new Congressional budget authority
before it undertakes new loan guarantee commitme nts. Mandatory programmes like the CCC export
credit guarantee programmes must be available to all eligible borrowers, without regard to
appropriations limits. In an important sense, this resembles the United States’ FSC regime, which the
Appellate Body found is available without limit. The Appellate Body considered that the unlimited
nature of the regime posed a significant threat, under Article 10.1, that the United States would
surpass its agricultural export subsidy reduction commitments.

2.4. The GSM 102, GSM 103 and SCGP Export Credit Guarantee Programmes Constitute
Export Subsidies in Violation of Item (j) and Articles 3.1(a) and 3.2 of the SCM
Agreement

41. Since the CCC export credit guarantee programmes violate Articles 10.1 and 8 of the
Agreement on Agriculture, the United States is not entitled to the “peace clause” exemption.
Therefore, GSM 102, GSM 103 and SCGP programme s constitute prohibited export subsidies, in
violation of item (j) of the Illustrative List of Export Subsidies, and of Articles 3.1(a) of the SCM
Agreement.

3. The Step 2 Export and Domestic Subsidies Are Prohibited Subsidies in Violation of
Articles 3.1(a) and 3.1(b) of the SCM Agreement

42. The United States asserts that all US upland cott on is eligible to receive Step 2 payments and
that this removes the export and local content c ontingency. Brazil refutes the US assertion both as a

matter of law as well as fact. The Step 2 export provisions are not, as the United States now argues,
simply domestic support payments made to US producers of upland cotton. Brazil again emphasizes
that the US – FSC and Canada – Aircraft Appellate Body decisions are relevant jurisprudence and
apply to the facts of the two situations set out in the regulations to S ection 1207(a) of the 2002 FSRI
Act. Thus, even if all US production since 1990 or even during MY 1999-2002 received Step 2
payments – which the United States has failed to do cument with any data – it would not remove the
export and local content contingencies mandated by those regulations that violate SCM Agreement
Articles 3.1(a) and (b).

43. US domestic Step 2 subsidies are prohib ited local content subsidies in violation of
Article 3.1(b) of the SCM Agreement. There is no explicit derogation of Article 3.1(b) built into the
Agreement on Agriculture. The United States ar gues that there is an inherent conflict between
Annex 3, paragraph 7 and Article 6.3 of the Agreement on Agriculture with Article 3.1(b) of the SCM
Agreement because in the view of the United Stat es, there can be no payments to processors of
agricultural products included within AMS that do not violate Article 3.1(b) of the SCM Agreement.
Brazil demonstrates that this is not true and that there are subsidies to agricultural processors that do
not violate Article 3.1(b) and presents various examples to that respect.

44. Finally, Brazil notes the EC argument that applying Article 3.1(b) of the SCM Agreement
“would lead to stricter disciplines being applied to domestic subsidies than are applicable for
industrial goods”. Local content subsidies – whether for agricultural and industrial products – are
prohibited by Article 3.1(b). As “prohibited” subsidies, they are subject to the ultimate discipline –
they cannot legally exist. The two packages of disciplines for agricultural and industrial products
have both been negotiated during the Uruguay Round. The resulting rules have to be interpreted
according to the customary rules of tr eaty interpretation as contained in the Vienna Convention. This
interpretation results in agricultural local content s ubsidies being prohibited. Whether that results in
there being more or less strict disciplines than woul d be applicable to indus trial subsidies is not a
relevant consideration for the interpretation of the disciplines.

4. The ETI Act Subsidies Violate Articles 10.1 and 8 of the Agreement on Agriculture and
Are Prohibited by Articles 3.1(a) and 3.2 of the SCM Agreement

45. Brazil has made a prima facie case with respect to its claims against the ETI Act. Brazil
challenges exactly the same measure based on the same claims asserted by the EC that the panel and
the Appellate Body in US – FSC (21.5) held to violate the Agreement on Agriculture and the SCM
Agreement. The sole difference is that Brazil lim its its claims to ETI Act subsidies benefiting the
export of upland cotton only.

ANNEX D-2

EXECUTIVE SUMMARY OF THE REBUTTAL SUBMISSION
OF THE UNITED STATES

Introduction and Overview

1. The comparison under the Peace Clause proviso in Article 13(b)(ii) must be made with
respect to the support as “decided” by those measures. In the case of the challenged US measures, the
support was decided in terms of a rate, not an am ount of budgetary outlay. The rate of support
decided during marketing year 1992 was 72.9 cents per pound of upland cotton; the rate of support
granted for the 1999-2001 crops was only 51.92 cents per pound; and the rate of support that
measures grant for the 2002 crop is only 52 cents per pound. Thus, in no marketing year from 1999
through 2002 have US measures breached the Peace Clause.1

2. Brazil has claimed that additional “decisions” by the United States during the 1992 marketing
year to impose a 10 per cent acreage reduction pr ogramme and 15 per cent “normal flex acres”
reduced the level of support below 72.9 cents per pound. However, the 72.9 cents per pound rate of
support most accurately expresses the revenue en sured by the United States to upland cotton
producers. Even on the unrealistic assumption that these programme elements reduced the level of
support by 10 and 15 per cent, respectively (that is , the maximum theoretical effect these programme
elements could have had), the 1992 rate of support would still be 67.625 cents per pound, well above
the levels for marketing years 1999-2001 and 2002.

3. Although such a comparison would not conform to the text, the result of the Peace Clause
comparison is no different if one compares the support via an Aggregate Measurement of Support
calculation. Using the price gap methodology (as provided under Annex 3 of the Agriculture
Agreement) for US price-based deficiency paymen ts and marketing loan payments, the upland cotton
Aggregate Measurement of Support (in US $, millions) for these years is MY1992: 1,079; MY1999:
717; MY2000: 484; MY2001: 264; MY2002: 205. Again, in no marketing year from 1999 through
2002 have US measures breached the Peace Clause.

4. Finally, the analysis presented by Brazil’s e xpert at the first panel meeting actually supports
the United States, not Brazil. Removing the non-product-specific support that Brazil erroneously tries
to pass off as support to upland cotton, Brazil’s own expert calculates the total support per unit

1 Brazil has asserted that the United States’ appro ach does not provide any way of taking Step 2
payments into account. Becau se the availability of Step 2 payments is contingent on certain price conditions
existing during the marketing year, the level of support decided must relate to the payment parameters. These
have remained the same for Step 2, with the exception of the suspension, through 2006, of the 1.25 cent price
difference threshold and payment availability at slightly higher market prices. However, because Step 2 merely
provides an alternative avenue of providing support (through processors rather than directly to producers), these
minor adjustments do not alter the revenue ensured for producers by the marketing loan rate of 52 cents per
pound. In addition, these minor adju stments cannot overcome the greater than 20 cents per pound difference in
product-specific support between marketing years 1992 and 1999-2002. Similarly, and without prejudice to
whether these measures are within the Panel’s terms of reference, we note that cottonseed payments in 1999,
2000, and 2002 ranged in value between 0.6 to 2.3 cents per pound (factoring expenditures over production);
thus, they too do not materially affect the comparison between marketing year 1992 and any other year.

(cents/lb.) as MY1992: 60.05; MY1999: 53.79; MY2000: 55.09; MY2001: 52.82; MY2002: 56.32.
Again, in no marketing year from 1999 through 2002 have US measures breached the Peace Clause.

5. Thus, whether gauged via the rate of suppor t decided by US measures (whether or not
adjusted for the acreage reduction programme and normal flex acres), or via the AMS for upland
cotton (calculated through a price gap methodology), or via the calculations of Brazil’s expert (limited
to product-specific support), the result is exactly the same: in no marketing year from 1999 through
2002 have US measures breached the Peace Clause.

US Green Box Measures are "Exempt from Actions" Pursuant to Article 13(a)(ii)

6. A measure shall be deemed to meet the “f undamental requirement” of the first sentence of
Annex 2 if it meets the basic criteria of the se cond sentence plus any applicable policy-specific
criteria. As suggested by the u se of the word “fundamental” (“from which others are derived”) and
the structure of Annex 2 (that is, beginning the second sentence with th e word “accordingly”),
compliance with the requirement (“something called for or demanded”) of the first sentence will be
demonstrated by conforming to the basic criteri a of the second sentence plus the applicable
policy-specific criteria of paragraphs 6 through 13.

7. Direct Payments: Eligibility for direct payments under the 2002 Act is based on criteria in a
“defined and fixed base period ” (paragraph 6(a)) in the ordinary meaning of those terms: a base
period that is “definite” (set out in the 2002 Act) and “stationary or unchanging in a relative position”
(does not change in relative position for the six-year duration of the 2002 Act).

8. Paragraph 6(a) establishes that eligibilit y for payments under a decoupled income support
measure shall be determined by clearly-defined criteria in “ a defined and fixed base period,” not “the
base period” (as in paragraph 9 of Annex 3, which is defined in that same paragraph as “the years
1986 to 1988”). Brazil’s reading of “a defined and fixed base period” would read into that text the
term “unchanging”, language Br azil has proposed in the ongoing WTO negotiations but is not
currently found in the Agreement.

9. Annex 2, by its terms, sets out the fundame ntal requirement and basic and (if applicable)
policy-specific criteria to which green box “ domestic support measures ” must conform. Other
provisions in the Agreement similarly establish that the criteria set out in Annex 2 apply to “domestic
support measures”. Thus, with respect to a given decoupled income support measure, eligibility for
payments must be determined by criteria in a “defined and fixed base period”.

10. Brazil argues that a new decoupled income support measure must be based on the same base
period as a previous measure if the new measure “is essentially the same” or “[i]f the structure,
design, and eligibility criteria have not significantl y changed.” There is no provision in Annex 2 or
the Agreement on Agriculture that supports Brazil’s approach. It is thus irrelevant whether two
decoupled income support measures are “essentially the same”.

11. Brazil would read paragraph 6(b) as requiri ng a Member to make support available for any
type of production; a Member could not pr eclude a recipient from producing certain crops.
2 While
direct payments are reduced if certain crops are produced, a recipient need not produce any “type of”

2 Brazil’s reading would also seemingly require a Me mber to make payments even if the recipient’s
production was illegal – for example, the production of narcotic crops such as opium poppy or the production of
unapproved biotech varieties or environmentally damaging production (for example, planting on converted rain
forest or wetlands) – because, under Br azil’s approach, by reducing or elim inating payments for any of these
production activities, a decoupled income support measure could be understood to base or relate the amount of
payment to the “type” of production undertaken.

crop in particular in order to receive the full paymen t for which a farm is eligible; the recipient need
merely refrain from producing the forbidden fruit or vegetable. Thus, it is not any “type . . . of
production . . . undertaken by the producer” that r esults in the full direct payment but rather
production not undertaken by the producer – that is, ceasing certain production.

12. Production Flexibility Contract Payments: Production flexibility contract payments (now
expired) were made with respect to farm acreage that was devoted to agricultural production in the
past, including acreage previously devoted to up land cotton production. The payments, however,
were made regardless of whether upland cotton wa s produced on those acres or whether anything was
produced at all. As with direct payments, becau se production flexibility contract payments were
decoupled from production, they met the five policy-specific criteria set out in paragraph 6 for
decoupled income support measures.

13. Brazil has failed to make a prima facie case that US green box measures do not satisfy the
fundamental requirement of Annex 2.
3 In fact, Brazil’s “evidence” consists simply of selectively
quoting and emphasizing conceptual and theoretical statements from the economic literature. None of
the papers Brazil cites concludes that these payment s in particular, or decoupled income support
measures in general, have more than “minimal[] trade-distorting effects or effects on production.”

14. The Agreement on Agriculture does not define a numerical threshold on what degree of
effects will be considered “minimal[] trade-distor ting effects or effects on production”. However,
given that no study has found that these payments have e ffects on production of more than one per
cent, it would appear that direct payments have an d production flexibility contract payments had no
more than “minimal[] trade-distorting effects or effects on production”. Thus, not only has Brazil
failed to present a prima facie case, but the United States has affirmatively shown that these payments
satisfy the fundamental requirement of the first sentence of Annex 2.

US Non-Green Box Domestic Support Measures are not in Breach of Article 13(b)(ii)

15. : Peace Clause Proviso – Support was "Decided" During Marketing Year 1992 Using a
Rate, Not a Budgetary Outlay : The Peace Clause proviso requires a comparison to the
product-specific support “decided” during the 1992 marketing year. A Member cannot “decide”
world market prices or actual production or any ot her element outside a government’s control. Yet
Brazil would read the Peace Clause as though Me mbers were omnipotent and could “decide” every
factor influencing support.

16. Brazil lists nine different “decisions taken by the United States in relation to MY 1992 upland
cotton support programmes”. At least three of these “decisions” relate to the rate of support and not a
single decision relating to budgetary outlays or market prices. Thus, Brazil’s own answer confirms
that the proper analysis of the support “decided” by US measures is to look to the terms of the US
measures, which set a rate of support.

17. The use of the term “grant” in the Peace Clau se proviso with respect to challenged measures
does not compel an examination of budgetary outlays. The ordinary meaning of “grant” is to “bestow
as a favour” or “give or confer (a possession, a right , etc.) formally”. Thus, the use of the term
“grant” would permit an evaluation of the rate of support that challenged measures “give or confer . . .
formally”. Members did not choose to use the wo rd “granted” in place of “decided,” and a valid

3 If, as Brazil has argued, the first sentence is “fundamental” and has independent force, then
presumably if a measure meets that “fundamental requir ement”, it will be deemed to be green box, irrespective
of whether it meets the subordinate basic and policy-specif ic criteria. Thus, on Braz il’s reading, if a measure
does not conform to the criteria in Annex 2, it still could meet the “fundamental requirement”, and the
complaining party would bear the burden of proof to demonstrate a measure’s inconsistency with that provision.

interpretation must make sense of that choice rather than reading it out of the Agreement. In addition,
had Members intended the Peace Clause comparison to be made solely on the basis of budgetary
outlays, they could have used that term, which is a defined term in Article 1(c) and used frequently in
the Agreement.

18. Peace Clause Proviso – "Support to a Sp ecific Commodity" Means Product-Specific
Support: The phrase “support to a specific commodity” means “product-specific support”. That the
Peace Clause does not use the phrase “product-specific support” is neither surprising nor telling. The
basic definition of product-specific support is give n in Article 1(a), as “support . . . provided for an
agricultural product in favour of the producers of th e basic agricultural product.” Article 1(h) also
refers to the concept but does not use the exact phrase “product-s pecific support”; in fact, the
language this provision uses ("support for basic agri cultural products") is strikingly similar to the
Peace Clause proviso ("support to a specific commodity"). Neither Article 1(a) nor 1(h) even uses the
term “specific” whereas the Peace Clause contains all three elements of that phrase (product,
specific, and support).

19. Brazil Simply Ignores the Definition of Product-Specific Support in the Agreement on
Agriculture: Brazil argues that certain challenged US measures are not “non-product-specific” and
therefore must be “support to a specific commodity.” Brazil focuses on the definition of
“non-product-specific” support in Article 1(a) but simply fails to interpret that definition in light of
the definition of product-specific support that i mmediately precedes it. The universe of domestic
support measures under Article 1(a) consists of product-specific support and non-product-specific
support; these two parts must be read together and in harmony.

20. The definition of product-speci fic support consists of two elem ents: First, the support must
be provided “for an agricultural product ,” that is, the subsidy is given “in favour of” a product and
not in respect of criteria not related to the product or in respect of multiple products. Second, such
support is “in favour of the producers of the basic agricultural product ”, which suggests that subsidy
benefits those who produce the product – that is , production is necessary for the support to be
received. Both of these elements must be present for support to be product-specific since, should
either be missing, the definition would not be satisfied.

21. The second category of support in Article 1( a) is defined as “non-product-specific support
provided in favour of agricultural producers in genera l.” The ordinary meaning of “in general” is “in
general terms, generally”. Non-product-specific support cannot be interpreted as support provided
“for an agricultural product in favour of the producers of the basic agricultural product” because to do
so would reduce the first half of the Article 1( a) definition to redundancy or inutility. Thus,
non-product-specific support is support in favour of agricultural producers “generally” – that is, a
residual category of support covering those measures that do not fall within the more detailed criteria
set out in the definition of product-specific support.

22. Counter-Cyclical Payments are Non-Product-Specific Support: Counter-cyclical
payments are non-product-specific support. The payment formula for counter-cyclical payments
demonstrates that these payments are not “provided for an agricultural product” because a recipient
need not currently produce upland cotton (or any other crop) to receive payment. In addition, it is not
“the producers of the basic agricultural product” – that is, current upland cotton growers – that are
entitled to receive the counter-cyclical payments but rather persons (farmers and landowners) on farm
acres with past histories of producing covered commodities, in cluding upland cotton, during the base
period. Thus, counter-cyclical payments satisfy ne ither element of the definition of product-specific
support and do not form part of the Peace Clause comparison.

23. Despite Brazil’s atte mpts to mischaracterize the two as similar, counter-cyclical payments and
deficiency payments differ in crucial respects. To receive a deficiency payment, a producer was

required to plant upland cotton for harvest and would be paid on the acres planted to upland cotton
for harvest up to the maximum payment acreage. Thus, deficiency payments were support for an
agricultural product (upland cotton) in favour of the producers of the product. By contrast, to receive
the counter-cyclical payment a pers on with “upland cotton base acres” need not plant for harvest or
produce upland cotton (nor any other crop nor any crop at a ll). Thus, counter-cyclical payments do
not provide support for “an agricultural product” in favour of “ the producers” of the basic agricultural
product and do not form part of the Peace Clause comparison under the proviso in Article 13(b)(ii).

24. Crop Insurance Payments Provide Non-Product-Specific Support : Crop insurance is not
support “provided for an agricultural product”. For marketing year 2002, crop insurance payments
are available to approximately 100 agricultural commodities, representing approximately 80 per cent
of US area planted and greater than 85 per cent of the value of all US crops. Support which is
provided to a number of crops is not “support to a specific commodity”; it is ‘ support to several
commodities’ or ‘support to more than one commodity ’ and does not form part of the Peace Clause
comparison. The United States notifies crop insurance as non-product-specific “amber box” domestic
support subject to US reduction commitments. No WTO Member has notified crop insurance
programmes as product-specific ; in fact, Hungary, Canada, the EC , and Japan have notified crop
insurance programmes as non-product-specific support. The United States is not aware of any other
Member’s crop insurance programme that has as broad product coverage as the US programme.

25. Market Loss Assistance Payments are Non-Product-Specific Support: As indicated in the
US 1999 WTO domestic support notification (G/AG/N/ USA/43), the expired market loss assistance
payments were non-product-specific support. As with production flexibility contract payments,
market loss assistance payments were made to pers ons with farm acres that previously had been
devoted to production of certain crops, including upland cotton, during an historical base period. A
recipient was not required to produce upland cotton or any other crop in order to receive payment, and
no production was required at all. Thus, these pa yments are not product-specific support and would
not form part of the Peace Clause proviso comparison.

26. Direct Payments: Were the Panel to conclude that di rect payments do not conform fully to
the provisions of Annex 2, direct payments would be non-product-specific support. As with
counter-cyclical payments, direct payments are based on quantities of acreage that historically
produced cotton, and there is no requirement to pr oduce upland cotton (or any other crop) to receive
these payments. Thus, direct payments would not be product-specific support.

27. Production Flexibility Contract Payments: Were the Panel to consider that these payments
are within its terms of reference, the United St ates has explained that they would be green box
support. Were the Panel to conclude further th at production flexibility contract payments do not
conform fully to the provisions of Annex 2, these payments would also be non-product-specific
support for the reasons given with respect to direct payments. As such, they would not form part of
the Peace Clause proviso comparison.

28. Cottonseed Payments: The Agricultural Assistance Act of 2003 and the cottonseed payment
made pursuant to it is not within the Panel’s terms of reference because the legislation authorizing the
payments had not even been enacted at the time of Brazil’s panel request, much less its consultation
request. The “legal instruments” pursuant to which prior cottonseed payments were made, moreover,
do not appear in Brazil’s consultation or panel re quests. Thus, it would appear that cottonseed
payments for the 1999 and 2000 crops of cottonseed al so do not form part of the Panel’s terms of
reference.

29. Peace Clause Comparison – The Produc t-Specific AMS for Upland Cotton Also
Demonstrates That Challenged US Meas ures Do Not Breach the Peace Clause : The
United States believes the Peace Clause compels co mparing the rate of support decided by US

measures, whether or not adjusted for the acreage reduction programme and normal flex acres, with
the current rate of support. Were the Panel to determine to use an Aggregate Measurement of Support
calculation, however, the price gap methodology is the only appropriate one for Peace Clause
purposes.

30. The price gap methodology eliminates the effect of prevailing market prices on the
calculation of support. Instead, paragraphs 10 a nd 11 of Annex 3 designate that the support be
calculated by multiplying the quantity of eligible production by the gap between the applied
administered price (for example, the marketing loan rate) and the fixed reference price (that is, the
actual price for determining payment rates for the years 1986 to 1988). Thus, by holding the
reference price “fixed”, support measured using a price gap calculation shows the effect of changes in
the level of support (applied administered price) deci ded by a Member, rather than changes in outlays
that result from movements in market prices that a Member does not control. In fact, the
United States has calculated an AMS for upland cotton using the price gap methodology for both
deficiency payments and marketing loan payments (marketing loan gains, certificate exchange gains,
and loan deficiency payments) and using budgetary outlays for all other payments. The result is
exactly the same as a rate of support comparison: in no marketing year from 1999 through 2002 is the
support US measures grant in excess of the 1992 marketing year level.

US Export Credit Guarantee Programme

31. The Negotiating History of Article 10.2 Reveals that the Negotiators Explicitly Deferred
the Application of All Export Subsidy Disciplines on Export Credit Guarantees : The
GATT/WTO negotiating history regarding export cr edits and export credit guarantees in agriculture
supports the US interpretation of Article 10.2. On 24 June 1991, Chairman Dunkel circulated a Note
on Options in the Agriculture Negotiations reques ting decisions by the principals on “whether
subsidized export credits and related practices . . . would be subject to reduction commitments”.
Subsequently, on 2 August 1991, he circulated a proposed “Illustrative List of Export Subsidy
Practices.” Item (h) is explicitly “Export Credits provided by governments or their agencies on less
than fully commercial terms.” Similarly, item (i) is “Subsidized export credit guarantees or insurance
programmes.”

32. On 20 December 1991, the “Draft Final Act Embodying the Results of the Uruguay Round of
Multilateral Trade Negotiations” was issued. Article 10.2 of the Draft Final Act states: “Participants
undertake not to provide export credits, export credit guarantees or insurance programmes otherwise
than in conformity with internationally agreed disciplines” (emphasis added). This draft text would
clearly prohibit the use of export credit guarantees except in conformity with agreed disciplines. Such
internationally agreed disciplines would include t hose contemplated by the SCM Agreement. This
would be precisely the language necessary to support Brazil’s reading.

33. Ironically, Brazil’s interpretation would require export credit guarantees in agriculture to be
subject to greater disciplines than any other practice addr essed in the Agreement on Agriculture.
Under Brazil’s view, not only would export credit guarantees constitute e xport subsidies and be
subject to all of the export subsidy disciplines, but Members would also be specifically obligated to
work toward and then apply additional disciplines.

34. Brazil’s approach would result in gross injustice : As part of the ne gotiations, the parties
had to prepare and submit schedules of quantities and budget outlays during a base period to derive
the export subsidy reduction commit ments ultimately reflected in th e respective schedules of the
Members. Had Members’ export credit guarant ees been considered export subsidies for these
purposes from the outset, then the export credit gua rantee activity during the base period would also
have to have been added to the base figures from which each Member’s export subsidy reduction
commitments were calculated. For example, th e United States has no export subsidy reduction

commitment with respect to corn, yet during the 1986-1990 base period an average of over 5.5 million
tons of corn were exported each year under the GSM-102 and GSM-103 programmes. The
United States would have reduction commitments fo r many more products than currently and would
have had significantly increased commitments for the 13 products that are scheduled. However,
Brazil would have the Panel impose the discipl ines now but deny Members the corresponding
changes in reduction commitments. Brazil’s appro ach would be grossly inequitable and the Panel
should reject it.

35. The Application of Government-Wide Acco unting Rules Indicates that the Export
Credit Guarantee Programmes are Covering Long-Term Operating Costs and Losses: T h e
application of the Federal Cred it Reform Act of 1990 (“FCRA”) over time to the export credit
guarantee programmes as a whole currently indicates that the net result of all activity associated with
export credit guarantees issued in fiscal years 1994 and 1 995 is a total net receipt to the United States
of $29 million. The experience of 1994 and 1995 is viewed as representative, and the United States
expects that the net results for other years will be similar to the experien ce for 1994 and 1995.
Re-estimates thus far have resulted in a net reduction in the estimated costs of these programmes of
over $1.9 billion since the inception of credit reform budgeting in fiscal year 1992. Based on those
results, the Brazilian claim that "operating cost s and losses for GSM 102, GSM 103, and SCGP have
outpaced premiums collected in every single year si nce the United States started applying the formula
in 1992" is not supportable.

36. The United States has gathered cumulative r eestimates on a cohort basis: For example, for
cohort 1992 (not yet closed) the current data reflects an estimate of a profit to the United States of
approximately $124 million; for 1993 (not yet cl osed), the corresponding current figure is a profit of
approximately $56 million; and, as indicat ed, cohorts 1994 and 1995 together project a profit of
$29 million. With the exception of 2002, for which only very recent data is necessarily available, the
Panel will note that the trend for all cohorts is uniformly favourable as compared to the original
subsidy estimate.

37. Brazil asserts that “historically, the major ity of GSM support that is rescheduled is ‘in
arrears’” and that this increases costs. Brazil largely relies, however, on a 1990 government report
that is dated and precedes FCRA itself. No resche duling applicable to export credit guarantees issued
in fiscal year 1992 or later is in arrears.

38. Brazil’s Suggestion to Use Estimated Data to Determine Long-Term Costs and Losses
Supports the View that the Export Credit Guarantees Do Not Provide Export Subsidies : The
United States notes Brazil’s statement that “a certain degree of estimated data would be perfectly
acceptable in an analysis of the costs and lo sses of guarantee programmes under item(j)” for two
reasons. First, the re-estimate process for fiscal y ears 1994, 1995, and virtually every other year since
fiscal year 1992 indicates a very strong net positive trend with respect to the programmes and that
therefore current premium rates do cover long-term op erating costs and losses. Second, it is relevant
with respect to Brazil’s reliance on the significan t losses that the United States admittedly incurred
with respect to Poland and Iraq. Presumably, to at tempt to recover such losses in any practical time
frame would require such a prohibitive fee increase th at few, if any, exporters would take advantage
of the program. Consequently, the United States would be whipsawed by a prohibition on the export
credit guarantee as currently constituted because of the large losses incurred between 10 and 20 years
ago, and the inability to create a conforming pr ogramme because the fee st ructure necessary to
compensate for such historical losses would forecl ose use of the programme. Item (j) cannot be
reasonably interpreted to require an examination of all activity since the beginning of a programme,
no matter how old it may be. The data provided with respect to fiscal years 1994 and 1995 and for the
programmes as a whole indicates that current premium rates are presently adequate to cover long-term
operating costs and losses as currently projected. The United States is also in a net positive position
with respect to cotton transactions in the ten years commencing with fiscal year 1993.

39. The Export Credit Guarantee Programmes Are Not Applied in a Manner which Results
in or which Threatens to Lead to, Circumvention of Export Subsidy Commitments : Brazil has
challenged the export credit guarantee programmes, GSM 102, GSM 103, and SCGP, as such. Brazil
has failed, however, to demonstrate that these pr ogrammes as such mandate a violation of US WTO
obligations. It is well established under GATT and WT O jurisprudence that legislation of a Member
violates that Member’s WTO obligations only if the legislation mandates action that is inconsistent
with those obligations or precludes action th at is consistent with those obligations. If the legislation
provides discretion to administrative authorities to act in a WTO-consistent manner, the legislation, as
such, does not violate a Member’s WTO obligations . This distinction has continued under the WTO
system.

40. The Commodity Credit Corporation (“CCC”) h as complete statutory and regulatory discretion
at any time not to issue guarantees with respect to any individual application for an export credit
guarantee or to suspend the issuance of export credit guarantees under any particular allocation. This
is in marked contrast to the situation in US- FSC , in which the Appellate Body found a threat of
circumvention because the FSC legislation created a legal entitlement to the payment. There is no
statutory legal entitlement to an export credit guarantee. Furthermore, even if an application and fee
are received, the applicant is not necessarily en titled to receive the guarantee. Issuance is
discretionary.

41. Finally, Brazil has alleged that the United States has exceeded its quantitative export subsidy
reduction commitments during the period July 2001-J une 2002. Even if the export credit guarantee
programmes were deemed export subsidies, the Un ited States would be in compliance with the
quantitative reduction commitments for that period w ith respect to wheat, coarse grains, butter and
butter oil, skim milk powder, cheese, other milk products, bovine meat, live dairy cattle, and eggs.
This may also be true with respect to vegetable o il. In fiscal year 2002, it would also be true for
poultry meat. The United States did not use the GSM-102 or GSM-103 programmes during
2001-2002 with respect to butter and butter oil, sk im milk powder, cheese, other milk products, or
eggs.

42. Financial Arrangements Analogous to the CCC Export Credit Guarantee Programmes
are Available in the Marketplace : In light of Article 10.2, it is neither appropriate nor necessary to
analyze the export credit guarantees wi th respect to Article 1.1(b) of the SCM Agreement. However,
we note that financing is available in the marketpl ace that is analogous to export credit guarantees. A
prominent example in the commercial market would be “forfaiting.” It would appear, then, that a
competitive marketplace exists for trade fina ncing even in emerging markets where more
conventional financing is not available. The United States is not privy to the precise terms at any time
available in forfaiting transactions because those te rms can vary by country, commodity, bank risk,
size of transaction and numerous other factors. In addition, like most private financial activity, that
information is ordinarily held confidentially by the parties.

The Step 2 Programme is not Contingent on Export Performance

43. Brazil apparently does not contest that all u ses of upland cotton are eligible for the Step 2
subsidy. Instead, Brazil suggests, erroneously, that not the entire universe of users of upland cotton is
eligible for the subsidy. First, the requirement that a recipient must be “regularly engaged” in the use
of cotton is simply an anti-fraud provision to preclude an attempt to receive a payment with respect to
cotton on which a payment has already been made. Brazil also correctly notes that “the eligible
domestic user criteria exclude all firms that are dom estic cotton brokers or simple resellers”. These
parties are not using the cotton and are therefore ineligible. Brazil suggests a third category of
persons who are users but are not eligible to receive the payment: “firms that have not entered into
CCC contracts” as either manufacturers or exporters. It is true that CCC cannot pay parties that

choose to remain unknown to it, but this requir es an assumption of economic irrationality and does
not diminish the point that all who use cotton have it entirely within their power to receive the
subsidy.

ANNEX D-3

BRAZIL’S COMMENTS ON US REBUTTAL SUBMISSION

27August 2003

1. Pursuant to the Panel’s ruling of 23 Augus t 2003, Brazil presents the following comments on
the paragraphs listed below relati ng to the Rebuttal Submission of the United States of America. In
addition, Brazil offers comments on Question 67 a posed to the United States by the Panel’s
Communication of 25 August 2003.

Paragraph 43

2. In paragraph 43 of its Rebuttal Submission, the United States argues that “Brazil’s reading
would seemingly require a Member to make payments even if the recipient’s production was illegal,
for example the production of narcotic crops su ch as opium poppy or the production of unapproved
biotech varieties or environmentally damaging prod uction.” The United States claims this would
have “potentially far reaching results.” This new argument has no merit.

3. The two examples provided by the United Stat es involving the growing of illegal plants/crops
are, by definition, situations in which a national (or state/regional) domestic criminal (or civil) law
would prohibit or regulate the growing of such pl ants/crops. The criminal (or civil) law would
operate separately from any de-coupled direct paym ent to prohibit or regulate all forms of such
production. There would be no reason in that situat ion to have a further statute limiting the payment
if such illegal plants (or illegal production methods) – the activity would already be illegal. That is
exactly the case with the 1996 FAIR Act and the 2002 FSRI Act regarding PFC and direct payments
respectively. Neither limits the amount of payments for the growing of plants that would be illegal
under US law. There is no need to because US fe deral and/or State law already prohibits such
activity.

4. In addition, the US example in paragr aph 43 about a restriction on “environmentally
damaging production” is not relevant because such a restriction does not relate to the “type” of
production ( i.e., the type of crop) but rather the “manner” of production.
4 Therefore, Annex 2,
paragraph 6(b), which focuses on the “type” of production related to the “amount” of payment, it does
not address the manner in which production is conducte d. The context of Annex 2, paragraph 6(b)
includes Annex 2, paragraph 12 (“Payments unde r environmental progra mmes”) which permits
Members to impose specific conditions on the growing of crops in order to receive environmentally
related direct payments.

5. Thus, the “potentially far-reaching results”
 5 from Brazil’s text-based approach to the ordinary
meaning of “the amount of such payments” related to or based on the “type of production ” do not and

4 See First Submission of Brazil, para. 157 in which Brazil makes the distinction between
Paragraph 6(b) in which the word “type” relating to the type of crop produced contrasted with Paragraph 6(d)
which is concerned with the type of production process. The United States has never contested this distinction.
5 The United States reference to “potentially far-reach ing results” appears also to include its additional
new argument in paragraph 43 relating to the EC’s possible CAP reform imposing, inter alia, fruits and
vegetable restrictions. That potential “reform” is obviously not at issue in this case. The EC will have to make
a decision how to notify any such m easure when it is required to do so under Article 18 of the Agreement on
Agriculture. It goes without saying that an improperly categorized green box measure of one Member cannot be
justified by relying on a possible future improperly categorized green box measure of another Member.

will not exist. Brazil further notes that in the ex traordinary situation in which one Member could
theoretically seek to challenge a de-coupled direct payment limiting payments for growing plants such
as opium poppy as an actionable subsidy, the Member restricting the “type” of production of such
plants could, for instance, assert defences under Article XX(b) or (d) of GATT 1994.
6

Paragraphs 96-98

6. The United States raises the new argument th at “no other WTO Member has notified crop
insurance programmes as product-specific.”
7 At the outset, Brazil notes that it is the US crop
insurance programmes and the detailed record of th e product-specific nature of the US crop insurance
programmes that is at issue in this dispute – not those of other WTO Members.

7. None of the WTO notifications of the EC, Cana da, or Japan cited by the United States reflect
the existence of the type of special product-specifi c policies or special treatment for certain crops
within a broader insurance programme. In particular, there is no indication that these Members
provide any specific crop insurance provisions for a specific crop, such as the insurance programmes
provided by the United States for upland cotton.
8 For example, while Canada appears to have a
similar programme for “crops” as the United States, there is no indication that Canada provides
special polices or groups of policies within its br oader programme for individual crops. Thus, in
contrast to the evidence of other Member’s insurance policies, the nature, type, value, and
participation rate of the crop insurance policies provided by the United States differs widely among
commodities. As Brazil has explained, it is simply not a “one size fits all” programme. The EC
agrees. It has argued before the Committee on Agri culture that the US crop insurance programme is
product-specific support.9

8. The United States further argues that it “i s not aware of any crop insurance programme
maintained by any other Member” that covers as many commodities as the United States.
10 However,
the Article 13(b)(ii) test is whether a specific commodity receives support from a domestic measure
identified in the chapeau and whether there is some sort of a link between the support measure and
the specific commodity. Evidence of such a link in the case of crop insurance exists, as with the US
crop insurance programme, when particular commod ities are provided special policies, coverage, or
additional subsidies compared to other commod ities covered by the crop insurance programme.
There is no such evidence reflected in the notifi cations of Mexico whose notification states that
“insurance premium subsidy [is] available for all producers.”
11 Japan’s “Agricultural Insurance
Scheme” also includes subsidies for policies cove ring all crops (except vegetables), all livestock
(except poultry) and sericulture.12 By contrast, the US insurance programmes challenged by Brazil do
not provide subsidies for any insurance for liv estock or many other commodities. Indeed, the
commodities not covered by the US 2000 ARP Act and releva nt regulations represent more than half
of the value of US farm cash receipts.13

6 These same exceptions would be available in the unlikely event a Member ch allenged a direct de-
coupled payment for any of the three scenarios posed by the United States in paragraph 43.
7 Rebuttal Submission of the United States, para. 96-98.
8 See Rebuttal Submission of Brazil, paras 54 (special irrigation-related policies for upland cotton),
para. 55 (upland cotton producers have much larger pool of insurance subsidies than other types of crops),
para. 56 (specific upland cotton income protection policies and catastrophic risk protection), para 57 (much
greater use of insurance subsidies than other crops), para. 58 (reinsurance payments for upland cotton).
9 Exhibit Bra-144 (G/AG/R/31, para. 31).
10 Rebuttal Submission of the United States, para. 98.
11 G/AG/N/MEX/7, p. 4.
12 Rebuttal Submission of the United States, para. 98.
13 Rebuttal Submission of Brazil, para. 59 (Excl uded agricultural commodities from US insurance
programme represent 52 per cent of the value of all US farm cash receipts).

9. Finally, as the United States recognizes, more than half of the notifications (which include
part of Japan’s) cited by the United States refer to insurance programmes as green box support.
14
Members so notifying are not obliged to make a de termination under Article 6 of the Agreement on
Agriculture whether such support is product-specifi c or not because it is exempt from any reduction
commitments. The United States has not pr ovided evidence suggesting these green box
categorizations are incorrect. For these reasons, these notifications are also irrelevant.

Paragraphs 114-117

10. The United States argues for the first time in paragraphs 114-117 of its Rebuttal Submission
that using the “price-gap” methodology is the a ppropriate way to calculate the portion of upland
cotton AMS that stems from marketing loan gains, certificate exchange gains, and loan deficiency
payments (collectively known as “marketing loan paym ents”). The effect of applying the price gap
methodology would be to transform the $2.5 billion in budgetary expenditures for marketing loan
payments in MY 2001 into a “negative” amount for purposes of total current AMS. 15 T h e
United States bases its new argument on an alleged statement by Brazil and “agrees” that “Brazil is
correct when it states that a non-exempt direct pa yment dependent on a price gap may be calculated
using a price gap methodology, rather than budgetary outlays. . ..”16

11. The United States refers to Brazil’s 11 August Answer to Question 67, paragraph 130, as the
basis for its assertion. Brazil’s statement cited by the United States reads as follows:

Brazil notes that the United States has notified the deficiency payments using the
price gap methodology provided for in A nnex 3. [footnote citing Exhibit Bra-150
(G/AG//N/USA/10)] Brazil considers it a ppropriate to follow the US decision and
will therefore, calculate the amount of support to upland cotton provided by the
deficiency payment programme by using the “price gap” approach detailed in Annex
3 paragraph 10 and 11.
Contrary to the US interpretation of this statement, Brazil’s point was that any calculation of AMS for
deficiency payments (and for the other programmes th at require such calculation) must be consistent
with the actual choice of methodology originally made by the United States for calculating its
domestic support reduction commitments as well as its yearly current AMS notifications. Indeed, the
United States’ entire argument in paragraphs 114- 117 of its Rebuttal Submission is based on the
alleged obligation for Br azil “to be consistent.”
17 As demonstrated below, it is Brazil’s AMS
calculation, not that of the United States, that is “consistent.”

12. Members are required to notify annually thei r current total AMS to provide other Members
the opportunity to review the consistency w ith their domestic support reduction commitments
pursuant to Article 6.3 of the Agreement on Agriculture.
18 The total AMS reduction commitments
were negotiated during the Uruguay Round based on a calculation of “total AMS” provided in
marketing years 1986-1988. The initial AMS calcu lation used for the purposes of the reduction
commitments was performed pursuant to Annex 3 of the Agreement on Agriculture with Members
choosing either budgetary expenditu res or a “price-gap” methodology expressed in total monetary
terms. Like Article 13(b)(ii), the comparison between current total AMS and the AMS ceiling, i.e.,

14 Rebuttal Submission of the United States, para. 97.
15 The United States even claims credit for being conservative by not netting the negative support by
the marketing loan benefits against the positive support provided by the other domestic support programmes,
Rebuttal Submission of the United States, para. 116 and note 148.
16 Rebuttal Submission of the United States, para. 114.
17 Rebuttal Submission of the United States, para 114 (last sentence).
18 See Article 18.2 of the Agreement on Agriculture and various US notifications cited herein.

the reduction commitment, must allow for an “a pples to apples” annual comparison in accounting for
the same measures. It follows that once a Member uses a budgetary approach for one measure to
establish the AMS ceiling, it cannot use a price gap approach for that same measure in calculating
total current AMS. Instead, a Member is required to report current total AMS consistently with the
choice it made for that particular type of support in its original total AMS calculation.

13. This interpretation of Annex 3 and Article 6. 3 of the Agreement on Agriculture is consistent
with its context and object and purpose. Opting for a methodology that would permit Members to
change their original methodology ( i.e., from budgetary to price-gap) could sanction what the
United States proposes – the covering up of billions of dollars of marketing loan payments (originally
calculated on a budgetary basis) and turns them in to “negative support” by using a “price-gap”
formula. This would be inconsistent with the entire reason for the reduction commitments of Article 6
of the Agreement on Agriculture.

14. Brazil’s calculation of AMS for, inter alia , marketing loan payments followed the actual
decision of the United States during the Uruguay Round
19 as reflected in its notifications. 20 During
the Uruguay Round, the United States calculated the upland cotton portion of what would eventually
become its domestic support reductio n commitment by using the following methodologies: it used
the price gap formula for upland cotton deficiency payments21 and used budgetary outlays for all other
domestic support measures. 22 In its MY 1995 notification to the Committee on Agriculture the
United States similarly notified deficiency payments using the price-gap formula and using budgetary
outlays for all other domestic support measures subject to reduction commitments23 consistent with its
AMS calculation during the Uruguay Round. After the termination of the deficiency payment
programme in 1996, all later domestic support (current total AMS) notifications of the United States
for upland cotton only use budgetary outlays. Thus, Brazil’s approach to calculating upland cotton
AMS for MY 1992 and 1999-2002 is entirely consistent with the US approach as evidenced in its
domestic support notifications
24 and with the US obligations under the Agreement on Agriculture.

15. The United States accounted for the marketing lo an payments in the sa me manner as in its
notifications when it answered Question 67 in its 11 August submission.
25 This is, furthermore, the
methodology the Panel indicated the United States s hould use – referring to the US notification of
MY 1999 domestic support in G/AG/N/USA/43, in which the United States – in line with its
obligation – used budgetary outlays.26

16. In sum, like many other US arguments in th is phase of the dispute, this US argument is
designed to cover-up expenditures and support to upland cotton that increased significantly since the
US Uruguay Round commitments came into effect. Therefore, the Panel should reject it.

19 Exhibit Bra-191 (G/AG/AGST/USA, p. 20)
20 Exhibit Bra-150 (G/AG/N/USA/10, p. 18)
21 Exhibit Bra-191 (G/AG/AGST/USA, p. 20 and supporting tables on p. 21-22).
22 Exhibit Bra-191 (G/AG/AGST/USA, p. 20).
23 Exhibit Bra-150 (G/AG/N/USA/10, p. 18).
24 The United States entire argument in paragraphs 114-117 is premised on the alleged need for Brazil
“to be consistent” as stated in the last sentence in paragraph 114. As noted, it is Brazil who has been consistent
in using actual US notifications and the US calculation method during the Uruguay Round, not the United States
who now seeks to ignore them.
25 US 11 August Answer to Question 67, para. 128-134.
26 Exhibit Bra-47 (G/AG/N/USA/43, p. 20).

Paragraphs 124-127 and Exhibit US-24

17. The United States presents an additional critique of Professor Sumner’s analysis in Exhibit
US-24 prepared by Dr. Joseph W. Glauber, the Deputy Chief Economists of USDA, as well as in
paragraphs 124-127 of its Rebuttal Submission.

Marketing Loan Benefits

18. Dr. Glauber notes that the analysis of Professo r Sumner did not include in the upland cotton
acres eligible for marketing loans 447,164 acres of upland cotton planted on Flex acres from other
programme crops.
27 Dr. Glauber is correct that any such acreage would be eligible for receiving
marketing loan payments and therefore should be included in the calculation. 28 Dr. Glauber refers to
“Acreage Reduction compliance reports” as his source of this number. Dr. Glauber does not provide
a citation for these compliance reports and the United States has not made them available to Brazil.
Therefore, Brazil cannot confirm the actual number of acres. Brazil also notes that the number listed
is planted acres not harvested acres.
29

19. Dr. Glauber further rests his finding that 100 per cent of US upland cotton production in
MY 1992 benefited from marketing loan payments on his statement that upland cotton farmers
“often” report land that had been planted and abandone d as land left idle and therefore never planted.
No citation, authority or refere nce is provided for this assertion. The assumption in this assertion is
that farmers report one thing to the US Federal Government, yet actually do something else. Thus,
Dr. Glauber’s presumption appears to be that farmers engage in what would appear to be widespread
misrepresentation. Brazil does not know if such assumed large-scale misrepresentations were legal
under the 1992 US programme, but it certainly contradicts “programme” expectations.

20. Professor Sumner concluded that 1.99 m illion acres used to produce upland cotton in
MY 1992 were not eligible for the marketing loan pa yments because they did not participate in the
deficiency programme. Dr. Glauber confirms Professor Sumner’s general approach on non-
participating acreage in footnot e 1 on page 2 where he acknowledges that “some base building
occurred during the early 1990’s.” What this mean s is that a substantial amount of upland cotton
must have been planted outside the programme to accommodate expansion of upland cotton base by
200,000 acres in 1993, as identified by Dr. Gl auber. This acknowledgement supports
Professor Sumner’s analysis that a significant amount of upland cotton must have been grown outside
the deficiency programme. The basis for this analysis is as follows:

21. Under the rules existing in MY 1992, in order to “build” base a farm was required to plant all
of its upland cotton outside the programme.
30 The expansion of upland cotton base is equal to one-

27 Exhibit US-24, p. 1.
28 Neither Brazil nor Professor Sumner were awar e of any flex acres from other programme crops
planted to upland cotton or of data concerning any such plantings.
29 Dr. Glauber raises in the first sentence of paragraph 2 what he called “statistical problems in
comparing planted acres to programme acres.” He points out that “planted acres” information was collected and
reported by NASS, while “programme acres” are reported by the Farm Serv ice Agency. (In 1992 this part of
USDA was known as the Agricultural St abilization and Conservation Service.) Dr. Glauber goes on to explain
that a significant amount of cotton acreage is planted and abandoned each year. But the relevance of this
information in critiquing Professor Sumner’s analysis remains unclear. Brazil notes that contrary to
Dr. Glauber’s assumption, Professor Sumner’s calculations do not rely on data published by NASS, but instead
on published information in the Farm Service Agency’s “Fact Sheet: Upland Cotton” (Exhibit Bra-4). This
Farm Service Agency source provides data on planted acre s, the abandonment rate as well as harvested acres of
upland cotton for MY 1992.
30 Exhibit US-3 (7 CFR 1413.7(c)). (“[T]he crop ac reage base shall be equal to the average of the
acreage planted and considered planted to such crop for harv est on the farm in each of the 3 crop years

third of the amount of additional cotton acres planted in each of the previous three years. An acre of
base is added if an additional acre of co tton is planted for three consecutive years.
31 In order to plant
more than the current base, a farm was required to leave the programme altogether so that current
base acres would also be planted outside the programme. For example, assume a farm had 1000 acres
of upland cotton base and wanted to add – over the two-year period 1991-1992 – 200 acres of base by
1993. That farm would withdraw from the programme for those two years and plant 1300 acres of
cotton (300 acres more than the previous base) in 1991 and 1992. The 1993 upland cotton base would
than be calculated as follows: (1000 acres + 1300 acres + 1300 acres) / 3 equalling 1200 acres, thus
200 acres more than previously. Therefore, to ad d the 200,000 acres of base in 1993 (which Dr.
Glauber stated were actually added) a much larger amount of upland cotton would have been required
to be planted outside the programme in 1992. In addition to building of additional base, farmers
planted upland cotton outside the programme becaus e they did not comply with payment limit rules
and for some more idiosyncratic reasons.

22. In summary, the evidence of an expanding base is consistent with the assessment of
Professor Sumner that a substantial amount of acreage was planted to upland cotton outside the
programme. This evidence is not consistent w ith Dr. Glauber’s undocumented or unsubstantiated
claim that all upland cotton harvested was eligible for marketing loans.

23. To summarize, if the Panel were to accept the undocumented assertion by Dr. Glauber that
447,164 acres of cotton were planted on flex acres from other programme crop base acreage, then
there would be 1.54 million acres (1.99 million acres – 0.45 million acres) that were planted to upland
cotton but were not eligible for marketing loan pa yments. This 1.54 million represents 12 per cent of
planted acreage.
32 Thus, adjusting 52.35 cents per pound by 0.88 results in a support from the
marketing loan programme of 46.1 cents per pound . This is an increase of 1.76 cents over the
marketing loan level of support set forth in Appe ndix Table 1 to Professor Sumner’s 22 July 2003
Statement.

Deficiency Payments

24. Brazil has already rebutted the US argument th at it is inappropriate to adjust the support
provided by the deficiency payment programme by non-participation and the resulting non-eligibility
to receive payments.
33

25. The various “decisions” in MY 1992 with respect to the deficiency payment programme were
calculated to establish rules that encouraged some producers to fore go eligibility of the programme.
Furthermore, the record establis hes that US policy makers had re latively precise prior knowledge of
how many acres would remain out of the program me based on their policy choices on required land
idling and loan rates.
34

26. Dr. Glauber criticizes Professor Sumner for rely ing on a programme yield of 531 pounds per
acre to calculate the ratio of payment yield to expect ed yield and states that the true programme yield

preceding such crop year”). For a farmer within th e programme the acreage could never change, as all the
acreage was planted (or if idled or – in case of flex acreage – if planted to other crop, it was “considered”
planted to upland cotton). Thus, an increase of acreag e could only take place, if a farmer withdrew from the
programme and exceeded the planting limits imposed by the programme. Thus, MY 1992 base acreage is
constitutes the 3-year average of acreage planted and considered planted in MY 1989-1991.
31 Or of 3 additional acres are planted in the previous year, among other possible constellations.
32 Compare Annex 2 to Exhibit Bra-105, p. 3.
33 Brazil’s 22 August Comment on Question 66, para. 81.
34 Brazil’s 22 August Comment on Question 66, para. 81.

in MY 1992 was 602 pounds per acre. 35 Dr. Glauber references a USDA press release that is not
available to those outside the US government as his source of the payment yield information. 36
Assuming that the figure of 602 pounds per acre used by Dr. Glauber is correct, he incorrectly
continues to rely on Professor Sumner’s calculation of the expected yield by stating that the “expected
yield based on an average of the upland cotton yields over the five preceding crop years is 601 pounds
per acre.” Professor Sumner estimated the payment yield based on actual yields per planted acre,
whereas the payment yields that Dr. Glauber cites appears to be the approximate average yields per
harvested acre. To achieve an apples-to-apples comparison, Brazil has re-calculated the expected
yield for MY 1992 as the average yield per harvested acre during the 1990 to 1994 based on USDA’s
“Fact Sheet: Upland Cotton” (656.4 pounds per acre). 37 Thus, the relevant adjustment factor is not
1.002 as suggested by Dr. Glauber, but 0.917 (603 / 656.4).

27. Dr. Glauber offers no critique of Professor Sumner’s analysis of the mandatory land idling
cost component in the calculation of deficiency pa yment support. However, Dr. Glauber neglected to
include these costs associated with the particip ation in the programme. As Professor Sumner
explained, such costs are properly subtracted from th e gross benefits of the cotton deficiency payment
programme.

28. Brazil provides a revised calculation below, taking account of the revised yield adjustment
factor of 0.917 – reflecting the deficiency payment yield as provided by Dr. Glauber’s and the
expected comparable yield for MY 1992 that Dr. Gl auber erroneously did not correct. In addition,
Brazil continues to deduct the cost figure calcu lated by Professor Sumner from the deficiency
payment programme. The revised formula is as follows:

Deficiency payment support = 20.55 cents per pound * 0.75 * 0.917 – 0.84 cents per
pound = 13.29 cents per pound

Using the new payment yield and the new expected yield that is comparable to it, results in a
0.04 cents per pound upward adjustment to the 13.25 cents per pound presented by Professor Sumner
in his 22 July Statement.

Other Payments

29. Brazil has already responded at length to Dr. Glauber’s claims endorsing the arguments of the
United States that PFC, market loss assistance, di rect and CCP payments, as well as crop insurance
payments are not “support to” upland cotton. Dr. Glauber’s statement simply restates assertions in the
legal briefs of the United States and offers no economic analysis to support his assertions.

30. Dr. Glauber asserts that it is relevant that St ep 2 payments are not paid directly to producers.38
As Brazil explains in its 11 August Answer to Questi on 18, a basic principle is that the effect of a
subsidy is independent of w ho initially receives the subsidy. 39 That is the economic common sense
behind the United States notifying Step 2 payments as product-specific support to upland cotton. And
it is the basis for including such payments as “support to a specific commodity” “decided” by a

35 Exhibit US-24, p. 3.
36 The United States has not made this document av ailable and thus we are unable to evaluate its
applicability to the current situation. Professor Sumner had relied on the best information available to him and
Brazil, which was the average upland cotton yield per planted acre during the reference period of MY 1981-
1985.
37 Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4).
38 Exhibit US-24, p. 3.
39 Exhibit Bra-140 (Pindyck, Robert S. and Rubinfeld, Daniel L. , Microeconomics, 5th edition (2002),
Prentice Hall, New Jersey, p. 313-317).

Member with respect to MY 1992. The text of Ar ticle 13(b)(ii) requires, under any methodology, the
calculation of a level of support to upland cotton, not to producers of upland cotton.

31. Dr. Glauber’s assertions about “double coun ting” are also incorrect. All the support
programmes Dr. Glauber discusses (marketing loan payments, CCP payments and deficiency
payments) have production and trade effects largely independent of Step 2 payments. But the purpose
of calculating a rate of support under Article 13(b)(ii) is not to assess the amount of production,
export, and price effects of the simultaneous a pplication of all measures of support. Brazil will
present an equilibrium analysis of the fu ll economic effects of these support programmes
simultaneously for Brazil’s “Further Submission.” Such an analysis is, however, not required for the
purposes of calculating the rate of support under Artic le 13(b)(ii). The fact that the United States
notified Step 2 as “product-specific” support indicates its position that the Step 2 programme provides
additional support to upland cotton. This has certainly been the strongly held view of the US National
Cotton Council.
40 Thus, it was appropriate for Professor Su mner to include this production and trade-
distorting subsidy in the total rate of support.

32. Brazil notes that Dr. Glauber does not criticize any other calculation made by
Professor Sumner. For the convenience of the Panel, Brazil reproduces the chart containing
Professor Sumner’s calculation as amended following the detailed US critique of Professor Sumner’s
methodology. As the Panel will note, the results do not materially change. The support granted by
the United States in MY 1999-2002 exceeds the support decided in MY 1992. Thus, even under this
methodology, the United States does not enjoy pe ace clause exemption from actions based on
Articles 5 and 6 of the SCM Agreement or Article XVI:1 of GATT 1994.

Year 1992 1999 2000 2001 2002
 (Cents per pound)
1. Marketing Loan 46.10 50.36 50.36 50.36 52.00
2. Deficiency Payments 13.29 na na na na
3. Step 2 2.46 2.46 2.46 2.46 3.71
4. Crop Insurance 0.36 2.00 2.00 2.62 2.62
5. PFC Payments na 6.13 5.70 4.65 na
6. Market Loss na 6.10 6.07 6.42 na
7. Direct Payments na na na na 5.31
8. CCP Payments na na na na 10.65
9. Cottonseed Payments 0.00 0.97 2.27 0.00 0.61
10. Total Support 62.21 68.03 68.87 66.51 74.91

Paragraphs 135-146, and Exhibits US-25 through US-29

33. Brazil has demonstrated that under the ordina ry meaning of Article 10.2 of the Agreement on
Agriculture, in its context and according to the object and purpose of Article 10 and the Agreement on
Agriculture overall, export credit guarantees are s ubject to the general export subsidy disciplines
contained in that Agreement. 41 Article 10.2 announces Members’ in tent to work toward negotiations

40 Brazil Rebuttal Submission, para. 127.
41 See Brazil Statement at the First Panel Meeting, paras. 100-115; Brazil 11 August Responses to
Panel Questions 70 (para. 138); Brazil 22 August Re buttal Submission, paras. 99-100; Brazil 22 August
Comments on Answers to Panel Questions 74 (paras. 89-90), 80 (para. 98), 88(b) (paras. 117-119).

on specific disciplines for export credits. In the m eantime, the general disciplines on export subsidies
included in the Agreement on Agriculture apply to export credits, if those export credits constitute
export subsidies.42

34. The United States asserts that Article 10.2 carves out export credit guarantees from the
general export subsidy disciplines of the Agreemen t on Agriculture, including the anti-circumvention
provisions of Article 10.1. The Appellate Body has, however, concluded that to exempt or carve-out
particular categories of measures from general oblig ations such as the export subsidy obligations in
the Agreement on Agriculture, the exemption or carve-out must be explicit in the text of an
agreement.
43 Article 10.2 includes no such explicit carve -out or exemption. The negotiators knew
how to make such an exemption or carve-out explic it, as evidenced by, for example, Article 13 of the
Agreement on Agriculture, footnote 15 to Article 6.1(a) of the SCM Agreement, and the second
paragraph of item (k) of the Illustrative List of Export Subsidies.44

35. In support of its interpretation, the Unite d States appeals to “subsequent practice in the
application of the treaty which establishes the agreem ent of the parties regarding its interpretation,”
within the meaning of Article 31(3)(b) of the Vienna Convention.
45 According to the United States,
negotiations on agricultural export credit issues that have taken place in the OECD subsequent to the
effective date of the WTO Agreement, and a statement by the OECD Secretariat, constitute
“subsequent practice” establishing the agreement of WTO Members that Article 10.2 of the
Agreement on Agriculture exempts export credits from any and all disciplines.

36. The United States is wrong. The United States has not established “a ‘concordant, common
and consistent’ sequence of acts or pronouncements which is sufficient to establish a discernible
pattern implying the agreement of the parties [to a treaty] regarding its interpretation,” which is the
standard adopted by the Appellate Body to estab lish “subsequent practice” under Article 31(3)(b) of
the Vienna Convention .
46 It is evident from the positions taken by Canada, the European
Communities and New Zealand in this dispute that not even those WTO Members that participated in
the OECD negotiations agree with the United States’ interpretation of Article 10.2.47 Nor is there any
evidence of “subsequent practice” signifying agr eement on the United States’ interpretation amongst
the 136 WTO Members that did not participate in the OECD negotiations.

37. Brazil notes, moreover, that the WTO Secret ariat, which is in a better position to address
interpretations of the covered agreem ents than is the OECD Secretaria t, does not appear to agree that

42 Export credit guarantees are not per se subject to these disciplines, as they would be if they were
included in Article 9.1 of the Agreement on Agriculture ( See e.g. : Brazil’s 22 August Comment, para. 97,
New Zealand’s Answer to Third Party Question 35, EC’s Answers to Third Party Questions 35, para. 70).
Brazil has demonstrated that the GSM 102, GSM 103 and SCGP programmes constitute export subsidies under
Articles 1(e) and 10.1 of the Agreement on Agriculture, under Articles 1.1 and 3.1(a) of the SCM Agreement,
and under item (j) of the Illustrative List of Export Subsidies annexed to the SCM Agreement.
43 Appellate Body Report, EC – Sardines , WT/DS231/AB/R, para. 201-208; Appellate Body Report,
EC – Hormones , WT/DS26/AB/R, para. 128. See discussion at paragraphs 107-108 of the Oral Statement of
Brazil.
44 Oral Statement of Brazil, paras. 105-106.
45 Rebuttal Submission of the United States, para. 135.
46 Appellate Body Report, Chile – Agricultural Products (Price Band) , WT/DS207/AB/R, para. 213;
Appellate Body Report, Japan – Alcoholic Beverages , WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R,
p. 107.
47 See Third Party Submission of Canada (paras. 51-54); Third Party Submission of the
European Communities (paras. 28-31); Third Party Submission of New Zealand (paras. 3.13-3.16).

agricultural export credits are exempt from the general export subsidy disciplines of the Agreement on
Agriculture by virtue of Article 10.2.
48

38. The United States also argues that the negotiating history of Articles 9.1 and 10.2 of the
Agreement on Agriculture supports its argument th at export credit guarantees are exempt from the
general export subsidy disciplines of the Agreemen t on Agriculture. The United States raises three
arguments in this regard.

39. First, the United States addresses the negotiating history of Article 9.1.
49

40. In the DeZeeuw framework agreement, the United States points to paragraph 20(e), which
contemplated Members providing “data on financial outlays or revenue foregone . . . in respect of
export credits provided by governments or their agencies on less than fully commercial terms.”50 The
United States apparently considers that since paragraph 20(e) was not carried over into the Agreement
on Agriculture, export credits are not subject to the export subsidy disciplines in the Agreement.

41. Brazil notes, however, that paragraph 20(g ) addressed “export performance-related taxation
concessions or incentives.” This provision was also not carried over into the Agreement on
Agriculture. Nonetheless, panels and the Appellate Body have rule d that export performance-related
taxation concessions or incentives like the United St ates’ FSC and ETI measures are subject to the
general export subsidy disciplines of the Agreement on Agriculture, including Article 10.1.

42. Similarly, the United States points to A ddendum 10 of Chairman Dunkel’s Note on Options,
which includes an illustrative list of export subsidy practices. 51 A number of the items on that
illustrative list were eventually included, with m odifications, in Article 9.1 of the Agreement on
Agriculture.52 Others were not, including item (h), wh ich refers to “[e]xport credits provided by
governments or their agencies on less than fully co mmercial terms,” and item (i), which refers to
“[s]ubsidized export credit guarantees or insuran ce programmes.” The United States apparently
considers that since items (h) and (i) were not ca rried over into the Agreement on Agriculture, export
credits, including export credit guarantees and insura nce programmes, are not subject to the export
subsidy disciplines in the Agreement.

43. Brazil notes, however, that item (g) of Chairm an Dunkel’s illustrative list refers to “[e]xport
performance-related taxation concessions or incentives ot her than the remission of indirect taxes.”
This provision was also not carried over in Article 9.1 of the Agreement on Agriculture. Nonetheless,
as Brazil has already noted, panels and the Appellate Body have ruled that export performance-related
taxation concessions or incentives like the United St ates’ FSC and ETI measures are subject to the
general export subsidy disciplines of the Agreement on Agriculture, including Article 10.1.

44. Brazil assumes that the United States simply overlooked paragraph 20(g) of the DeZeeuw
framework agreement and item (g) from Chairman Dunkel’s illustrative list when it states, in
paragraph 143 of its Rebuttal Submission, that

48 G/AG/NG/S/13 (26 June 2000), para. 44 (“[A]s matters currently stand the only rules and disciplines
on agricultural export credits are those of the Agreement on Agriculture but only to the extent that such
measures constitute export subsidies for the purposes of the Agreement on Agriculture.”).
49 Rebuttal Submission of the United States, paras. 136-138.
50 See Exhibit US-25.
51 Exhibit US-27.
52 Paragraph 48(a) corresponds to Article 9.1(a), paragraph 48(e) to Article 9.1(e), paragraph 48(f) to
Article 9.1(d), paragraph 48(j) to Article 9.1(f), paragraph 48(k) to Article 9.1(c).

the negotiating history reveals that the Members very early specifically included
export credits and export credit guarant ees as a subject for negotiation and
specifically elected not to include such practices among export subsidies. In contrast,
the negotiating history reveals no comparable discussion involving FSC.
45. In light of these facts, it is evident that the negotiating hist ory of Article 9.1 does not offer
support for the United States’ argument that export credit guarantees are exempt from the general
export subsidy disciplines of the Agreement on Agriculture.

46. Second, the United States argues that changes introd uced to the text of Article 10.2 between
the Draft Final Act and the final version of the Ag reement on Agriculture mean that export credits are
not subject to the export subsidy disciplines included in the Agreement.
53

47. The version of Article 10.2 included by negotia tors in the Draft Final Act read as follows:

Participants undertake not to provide export credits, export credit guarantees or
insurance programmes otherwise than in c onformity with internationally agreed
disciplines.
The United States argues that this version of Article 10.2 “would clearly prohibit the use of export
credit guarantees except in conformity with [interna tionally] agreed disciplines,” which it asserts
“would include those contemplated by the SCM Agreement.”
54

48. The version of Article 10.2 included in the Agreement on Agriculture reads as follows:

Members undertake to work toward the de velopment of internationally agreed
disciplines to govern the provision of export credits, export credit guarantees or
insurance programmes and, after agreement on such disciplines, to provide export
credits, export credit guarantees or insurance programmes only in conformity
therewith.
The United States argues that having changed the draf t, “[t]he Members clearly subsequently decided
not to condition the use of export credit guarantees on conformity with the export subsidy disciplines
of the Agreement on Agriculture or the SCM Agreement.”
55

49. The United States’ interpretation of the nego tiating history requires the Panel to accept that
the version of Article 10.2 included in th e Draft Final Act would have imposed a greater burden on
Members than does the version of Article 10.2 ultim ately included in the Agreement on Agriculture.
In fact, however, Article 10.2 of the Draft Final Ac t was amended to make it clear that negotiators
expected Members actually to pursue negotiations on specific disciplines. Whereas the version of
Article 10.2 included in the Draft Final Act di d not include an undertaking to pursue those
negotiations, the final version of Article 10.2 does include such an undertaking. The amendment did
not relieve the Members of any burden, but instead increased the burden.

50. At least some Members understood this to be the case, since soon after the conclusion of the
Uruguay Round, they launched negotiations in the OECD on specific export credit disciplines.
56 The

53 Rebuttal Submission of the United States, paras. 140-142.
54 Rebuttal Submission of the United States, para. 140.
55 Rebuttal Submission of the United States, para. 141.
56 The United States’ assertion that the phrase “internationally agreed disciplines” in Article 10.2 of the
Draft Final Act referred to those disciplines “contemplated by the SCM Agreement of the Draft Final Act” is not
credible. Where negotiators meant to refer to pendin g WTO agreements outside of the draft Agreement on

United States implies that Brazil’s “admission” th at those negotiations have not yet resulted in
agreement on specific disciplines for export credits is fatal to its claims. Brazil has demonstrated
elsewhere, however, that while those negotiati ons are pending, nothing in Article 10.2 (or
Article 1(e)) exempts export credits from the gene ral disciplines on export subsidies included in, for
example, Article 10.1 of the Agreement on Agricultu re. If export credits constitute export subsidies,
they are subject to those disciplines. As noted above, the Appellate Body has concluded that to
exempt particular categories of measures from general obligations such as Article 10.1, the exemption
must be explicit.
57 The negotiators knew how to make exemp tions explicit, but did not do so in the
case of export credits.58

51. Third, the United States argues that “Brazil’s interpretation would require export credit
guarantees in agriculture to be subject to more di sciplines than any other practice addressed in the
Agreement on Agriculture,” since “not only would export credit guarantees constitute export subsidies
and be subject to all of the export subsidy disciplin es, but Member’s [sic] would also be specifically
obligated to work toward and then apply additional disciplines.”59 This statement is incorrect for
several reasons:

 As clarified by Brazil, New Zealand a nd the European Communities, since export
credits are not included in Article 9.1, they do not necessarily “constitute export
subsidies.”60 They only constitute export subsidies if they are financial contributions
that confer benefits and are contingent on e xport, or if they satisfy the elements of
one of the items on the Illustrative List of Export Subsidies annexed to the SCM
Agreement.

 Export credits are only “subject to all of the export subsidy disciplines” of the
Agreement on Agriculture if they lead to circumvention of a Member’s export
subsidy reduction commitments.

 It is not clear that any specific disciplines resulting from negotiations undertaken
pursuant to Article 10.2 will be “additiona l” to those already included in the
Agreement on Agriculture or the SCM Agre ement. Those negotiations are not yet
completed. Depending on the agreement ne gotiated, it is presumably possible that
the resulting text could replace the disci plines included in the Agreement on
Agriculture.

52. Therefore, the United States’ argument is inaccurate, and does not support its assertion that
export credit guarantees are exempt from the general export subsidy disciplines in the Agreement on
Agriculture, even if they meet the definition of “export subsidy.”

Agriculture, they cited those WTO ag reements by name. For example, Article 5.8 of the Draft Final Act
(regarding special agricultural safeguards) refers specifically to the GATT and the Safeguards Agreement.
Similarly, the final version of Article 13 of the Agreem ent on Agriculture includes numerous specific citations
to the SCM Agreement.
57 Appellate Body Report, EC – Sardines , WT/DS231/AB/R, para. 201-208; Appellate Body Report,
EC – Hormones , WT/DS26/AB/R, para. 128. See discussion at paragraphs 107-108 of the Oral Statement of
Brazil.
58 See, e.g., Article 13 of the Agreement on Agriculture, footnote 15 to Article 6.1(a) of the SCM
Agreement, and the second paragraph of item (k) of the Illustrative List of Export Subsidies.
59 Rebuttal Submission of the United States, para. 142.
60 See e.g.: Brazil’s 22 August Comment, para. 97, New Zealand’s Answer to Third Party Question 35,
EC’s Answers to Third Party Questions 35, para. 70.

Paragraphs 147-152

53. The United States argues that it did not include the quantities exported under the CCC
programmes in its calculation of average export subsidies during 1986-1990 (the base period from
which export subsidy reduction commitments were calculated during the Uruguay Round)
61 because it
did not consider that CCC export credit guarantees are export subsidies subject to reduction
commitments.62 According to the United States, subjecting export credit guarantee programmes to
export subsidy reduction commitments in the Agr eement on Agriculture would therefore lead to
“gross injustice.”63

54. This is not the logical conclusion to be dr awn, however. It appears that during the Uruguay
Round negotiations the United States took the same position as it has taken in this dispute – that CCC
export credit guarantee programmes do not constitute e xport subsidies within the meaning of item (j)
and Articles 1.1 and 3.1(a) of the SCM Agreem ent and that CCC export credit guarantees are,
therefore, not subject to the general export subsidy disciplines included in the Agreement on
Agriculture.64 The United States did not feel compelled to include the CCC export credit guarantees
in its calculation of export subsidy reduction comm itments because it did not consider that they
constituted export subsidies under those provisions. Br azil agrees that not all export credit guarantees
are export subsidies and that, therefore, not all export credit guarantees are subject to export subsidy
reduction commitments. However, if those guarant ees meet the criteria of item (j) or constitute
subsidies contingent upon export performance under Ar ticles 1.1 and 3.1(a) of the SCM Agreement,
they are export subsidies.
65 (Brazil has demonstrated that the GSM 102, GSM 103 and SCGP
programmes are export subsidies. It follows that GSM 102, GSM 103 and SCGP are subject to
reduction commitments and, in fact, circumvent or threaten to circumvent the US export subsidy
commitments.)

Paragraphs 156-157, 160-162 and Exhibits US-31 and US-32

55. The United States argues that it would not give an accurate picture to compare the reestimates
made in any given year (and recorded in the US budget) with the cohort-specific subsidy estimates for
guarantees disbursed in that year. Specifically, the United States argues that “upward reestimates and
downward reestimates reflected in a single budget cannot necessarily be applied against each other for
a notional ‘net reestimate.’”
66 Brazil has never argued otherwise. In the chart included in paragraph
115 of its 22 August Rebuttal Submission, Brazil compares cohort-specific original subsidy estimates
to cohort-specific reestimates, cumulated over the period 1992-2002, to give a picture of the long-
term operating costs and losses of the “programmes, ” as required by item (j) (rather than costs and
losses for a particular cohort). The United States itsel f uses this same method (albeit with different
data) in paragraph 161 of its 22 August Rebuttal Submission.

56. With respect to FCRA-related data, it would in fact only be inappropriate to attempt to tie a
cohort-specific subsidy estimate for one year to fiscal year, non-cohort-specific reestimates recorded
in the budget for any one year. Brazil has never made this comparison. As the United States notes,

61 Rebuttal Submission of the Untied States, para. 148.
62 Rebuttal Submission of the United States, para. 149.
63 Rebuttal Submission of the United States, paras. 147-153, see the heading to that section.
64 Rebuttal Submission of the United States, para. 151. The arguments of the United States in this case
demonstrate that it continues to be of the view that its programmes do not constitute export subsidies within the
meaning of Articles 1.1 and 3.1(a), including item (j) of the SCM Agreement, no r within the meaning of
Articles 1(e), 10.1 and 8 of the Agreement on Agriculture.
65 Brazil’s 22 August Comment on Question 80, para. 98. See also EC’s 11 August Answer to Third
Party Question 30, para. 65. New Zealand’s 11 August Answer to Third Party Question 35.
66 Rebuttal Submission of the United States, para. 160.

this would be inappropriate because reestimates r ecorded in the budget as made in a year do not
necessarily relate to subsidy estimates for guarantees di sbursed in that year. If the data is presented
cumulatively over a period constituting the l ong term, however, and does not purport to tie cohort-
specific subsidy estimates to fiscal year, non-cohort-s pecific reestimates record ed in the budget for
any one year, a comparison is perfectly acceptabl e. Specifically, comparing the cumulative subsidy
estimates to the cumulative reestimates shows whether the “programme” is loss-making or profit-
generating over the long term. Making a comparis on of the cumulative figures does not require that
the estimates and reestimates recorded in the budget for any year correspond.

57. For example, this approach can be applied to the data included in Exhibit US-31 to the
United States’ 22 August Rebuttal Submission. The “subsidy” column included in Exhibit US-31 lists
the subsidy estimate from the “prior year” column of the US budget for each cohort during the period
1992-2003. Subtracting cumulative annual downward reestimates from and adding cumulative annual
upward reestimates to the cumu lative original subsidy amount yields a positive subsidy of
$500 million.
67 Adding administrative expenses over the period 1992-2003 increases this amount by a
further $43 million. 68 Taking the data provided by the Unite d States in Exhibit US-31 at face value
demonstrates that the CCC guarantee programmes are lo sing money. This result is not tainted by the
“apples-to-oranges” criticism levied in paragr aph 160 of the United States’ 22 August Rebuttal
Submission.

58. Nor does Brazil’s treatment of the data include d in the chart at paragraph 165 of its 11 August
Answers to Questions suffer from an “apples-to-oranges comparison” between fiscal year and cohort-
specific data, as the United States alleges at paragraph 160 of its 22 August Rebuttal Submission. The
chart at paragraph 165 is wholly unrelated to the FCRA cost formula. It tracks the results of a
formula Brazil has constructed to verify, by alte rnative means, that long-term operating costs and
losses for the CCC export guarantee programmes outpace pr emiums collected. The data in that chart
are not FCRA-related subsidy estimates that are reco rded on a cohort basis or that are subject to
reestimates mandated by the FCRA. Instead, the le ft-hand column of that chart records revenue
collected on a fiscal year (not a cohort-specific) basi s, and the right-hand column of that chart records
costs incurred on a fiscal year (not a cohort-specific) basis. Over the period 1993-2002, total revenue
in the left-hand column is significantly less than to tal costs in the right-hand column. This entails no
“apples-to-oranges comparison,” and demonstrates that the CCC export guarantee programmes
constitute export subsidies under item (j) of the Illustrative List of Export Subsidies.

59. In the chart included at paragraph 161 of its 22 August Rebuttal Submission, the
United States nets cumulative reestimates on a co hort basis against the original, cohort-specific
subsidy estimate from the US budget. There ar e some factual problems with the US data.
69

67 (2,737 – 297) – (2,629 + 870) + (1,262 + 297) = 500. Since no reestimates have yet been made for
2004, Brazil has reduced the original subsidy amount included in Exhi bit US-31 by the $297 million estimate
included in the 2004 budget. Had the United States subtracted downward reestimates from and added upward
reestimates to the original subsidy estimate included in the “budget year” column of the “guaranteed loan
subsidy” line of the annual US budget, it would have yielded a positive subsidy, and thus a loss, of
$2.038 billion. See Exhibit Bra-192.
68 See paragraph 132 of Brazil’s 22 July Statement at the First Panel Meeting, and accompanying
citations.
69 First, the United States has offered no documentation verifying the accuracy of the reestimate figures
provided in the chart for the period 1993-2000. In contrast, the chart included in paragraph 115 of Brazil’s
22 August Rebuttal Submission provides cumulative reestimates on a cohort basis that are taken directly from
Table 8 of the Federal Credit Supplement included with the 2004 US budget. See Exhibit Bra-182. Second,
although the United States asserts that it has netted cumulative reestimates against the “ original subsidy
estimate,” it has in fact netted cumulative reestimates ag ainst the “guaranteed loan subsidy” figure included in
the “prior year” column of the US budget, which yields a lower number. Using, subsidy data from the US
budget for “prior year,” the chart included at paragraph 115 of Brazil’s 22 August Rebuttal Submission would

Resolving these problems is not particularly impo rtant, however, since the chart included at
paragraph 161 of the United States’ 22 August Rebuttal Submission itself shows a cumulative positive
subsidy for the programmes of over $381 million for the period 1992-2002.70 This positive subsidy is
consistent with CCC’s 2002 financial statements, wh ich provide a cumulative, running tally of the
subsidy figure for all post-1991 CCC export credit guarantees in the amount of $411 million. 71 The
CCC export guarantee programmes have lost money over the period 1992-2002.

60. The United States’ point seems to be th at because subsidy reestimates are generally
downward, the CCC programmes genera te profits over the long term. Ho wever, all this means is that
CCC’s original estimates were too high.
72 The real test is the result when cohort-specific reestimates
are netted against the original subsidy estim ates for each cohort and cumulated over a period
constituting the long term, so that the long-term costs and losses of the programmes can be
determined, as required by item (j). Netting r eestimates against original subsidy estimates on a
cohort-specific basis yields a positive subsidy, rev ealing that over the long term, the CCC is losing
money with its export guarantee programmes. This result is obtained whether the Panel accepts the
chart at paragraph 161 of the United States’ 22 Au gust Rebuttal Submission, the chart at paragraph
115 of Brazil’s 22 August Rebuttal Submission,
73 or the cumulative subsidy figure included in CCC’s
2002 financial statements.74

61. The United States may be suggesting that r eestimates will always, eventually, result in
negative subsidies and profits. The data shows that this is not the case, however. Netting reestimates
against original subsidy estimates does not consis tently yield a negative subsidy, or profits, on a
cohort basis. The charts included at paragra ph 161 of the United States’ 22 August Rebuttal
Submission and at paragraph 115 of Brazil’s 22 August Rebuttal Submission demonstrate this. Nor is
it even relevant to focus on the results of individua l cohorts, since item (j) require an analysis of the
“long-term” costs and losses of export guarantee “progr ammes,” rather than cohorts. That is why
Brazil, and presumably the United States, has calculate d cumulative results for the charts included at

still yield a positive subsidy of $211 million, to which the $43 million in administrative expenses should be
added, for a total loss of $254 million over the period 1992-2002. See Exhibit Bra-193. Third, the United States
has not included administrative expenses for the CCC export guarantee programmes, which amount to $43
million for the period 1992-2003.
70 Even accepting the validity of the data entered in the US char t, Brazil notes that summing up those
figures yields a result different from the $381.35 million total provided by the United States. Using the US data,
Brazil reaches a subsidy figure net of reestimates of $230,127,023.
71 Exhibit Bra-158 (US Department of Agriculture, Office of Inspector General, Financial and IT
Operations, Audit Report, Commodity Credit Corporation’s Financial Statements for Fiscal Year 2002 , Audit
Report No. 06401-15-FM (December 2002), Notes to the Financial Statements, p. 19).
72 Brazil notes that according to USDA’s Inspector General, CCC estimates are in fact understated. In
audit reports for fiscal years 1999, 2000 and 2001, CCC’s estimates and reestimates were found to have
“understated” costs and losses by amounts ranging from to $11 million to $430 million. Exhibit Bra-194 (US
Department of Agriculture Office of Inspector General Great Plains Region Audit Report, Commodity Credit
Corporation’s Financial Statements for Fiscal Year 2001, Audit Report No. 06401-4-KC, February 2002, p. 11);
Exhibit Bra-195 (US Department of Agriculture Office of Inspector General Financial and IT Operations Audit
Report, Audit Report No. 06401-14-FM, Commodity Credit Corporation’s Financial Statements for Fiscal
Year 2000, June 2001, p. 9); Exhibit Bra-196 (US Department of Agriculture Office of Inspector General
Financial and IT Operations Audit Report, US Department of Agriculture Consolidated Financial Statements for
Fiscal Year 1999, Report No. 50401-35-FM, February 2000, p. 9).
73 Again, using “prior year” subsidy figures for this chart results in a positive subsidy of $211 million
over the period 1992-2002. See Exhibit Bra-193 (Net Lifetime Reestim ates of Guaranteed Loan Subsidy by
Cohort)
74 Exhibit Bra-158 (US Department of Agriculture, Office of Inspector General, Financial and IT
Operations, Audit Report, Commodity Credit Corporation’s Financial Statements for Fiscal Year 2002 , Audit
Report No. 06401-15-FM (December 2002), Notes to the Financial Statements, p. 19).

paragraph 161 of the United States’ 22 August Rebu ttal Submission and at pa ragraph 115 of Brazil’s
22 August Rebuttal Submission.

62. In any event, if CCC considered that it w ould eventually make money on its guarantees on a
cohort basis, why does it continue to offer original estimates that are so high? While some factors
included in the estimation process are dictated by the FCRA and the US Office of Management and
Budget, the original subsidy estimate is primarily driven by CCC’s historical experience with its
guarantees. Brazil has elsewhere noted that acco rding to the US Federal Accounting Standards
Advisory Board, the Government-Wide Audited Fi nancial Statements Task Force on Credit Reform,
the Office of Management and Budget and the De partment of Agriculture itself, “[m]ethods of
estimating future cash flows for existing credit programmes need to take account of past
experience,”
75 “[a]ctual historical experience of the performance of a risk category is a primary factor
upon which an estimation of default cost is based,” 76 and technical assumptions underlying subsidy
calculations reflect “historical cash reports and loan performance.” 77 If historical experience dictated
that CCC would consistently make profits, CCC would reflect that historical experience in its subsidy
estimates. Actual historical experience is, after all, a “primary factor” on which those estimates are
based. That CCC continues to provide significant positive original subsidy estimates demonstrates
that its actual historical experience does not suggest that it will make money on its loan guarantees.
Since those estimates are calculated and recorded on a net present value basis , CCC apparently
continues to consider that it will incur significant net costs at the time the cohorts are closed.

63. CCC’s apparent views regarding its histor ical experience with the export guarantee
programmes are justified. Evidence regarding CCC’s actual historical experience confirms that the
long-term operating costs and losses for the CCC gua rantee programmes outpace premiums collected.
At paragraph 109 of its 22 August Rebuttal Submission, Brazil summarizes this evidence. 78
Although, the United States implies at paragraph 172 of its 22 August Rebuttal Submission that
Brazil’s evidence is all “between 10 and 20 years” old, a cursory review of the evidence, which
includes data from the 2004 US budget and CCC’s 200 2 financial statements proves otherwise.
Therefore, even if the Panel agrees with the Unite d States’ conclusion, at paragraph 162 of its 22
August Rebuttal Submission, that the FCRA cost formula is not an ideal way to determine the costs of
the CCC export guarantee programmes, Brazil has established by alternative means that CCC
premiums fail to meet the long-term operating costs and losses of the programmes.

75 Exhibit Bra-162 (Government-Wide Audited Financial Statements Task Force on Credit Reform,
ISSUE PAPER, Model Credit Programme methods and Documentation for Estimating Subsidy Rates and the
Model Information Store, 96-CR-7 (1 May 1996), p. 2).
76 Exhibit Bra-118 (Federal Accounting Standards Advisory Board, S TATEMENT OF FEDERAL
FINANCIAL ACCOUNTING STANDARDS NO. 19, Technical Amendments to Accounting Standards for Direct Loans
and Loan Guarantees in Statement of Federal Financial Accounting Standards No. 2 (March 2001), p. 16
(para. 36)). See also Exhibit Bra-160 (US Department of Agricultu re, Office of the Chief Financial Officer,
Credit, Travel, and Accounting Division, Agriculture Financial Standards Manual (May 2003), p. 120 (“In
estimating default costs, the following risk factors are considered: (1) loan performance experience; . . .”)).
77 Exhibit Bra-163 (Office of Management and Budget Annual Training, Introduction to Federal Credit
Budgeting, 24 June 2002, p. 9).
78 Contrary to the United States’ assertion at paragraph 170 of its Rebuttal Submission, Brazil has not
misread Note 5 to CCC’s 2002 financial statements. The amounts in the “subsidy allowance” column are in fact
the amounts of receivables associated with post-1991 CCC guarantees that CCC considers unco llectible. The
Panel will recall that under the FCRA, the subsidy allowa nce is recorded on a net present value basis, which
means that it represents the cost CCC considers it will incu r on a guarantee cohort at the time that cohorts is
closed. The $770 million listed in the “subsidy allowa nce” column in the receiva bles table for post-1991
guarantees is therefore as uncollectible as the $ 2,567 billion listed in the “uncollectible” column of the pre-1992
CCC guarantee receivables table ( See Notes to Financial Statements contained in Exhibit Bra-158 (US
Department of Agriculture, Office of Inspector General, Financial and IT Operations, Audit Report, Commodity
Credit Corporation’s Financial Statements for Fi scal Year 2002, Audit Report N° 06401-15-FM
(December 2002) p. 14).

Paragraph 169 and Exhibit US-33

64. The United States has asserted that there are no “arrearages” with respect to debt
reschedulings.
79 Brazil has two comments. First, the United States does not state the source of the
data it included at Exhibit US-33. Second, Brazi l maintains that it is not appropriate to treat
rescheduled debt as recoveries.80 The US assumption that there will be no arrearages not only ignores
the cost of rescheduling but also the fact that there may be further defaults on rescheduled debt. 81
Although rescheduled debt is treated as a receiva ble, CCC acknowledges in its financial statements
that not all receivables are deemed collectible. 82 Moreover, Brazil presumes that rescheduled debt is
subject to the FCRA estimation or reestimation process, which involves calculations of net present
value of what the CCC expects to lose (or gain) on the rescheduled debt. The CCC does not assume
that all rescheduled debt will be collected.

Paragraphs 172, 174-175

65. The United States has argued that Brazil improperly relies on CCC losses incurred via Iraqi
and Polish defaults. The United States implies th at these defaults occurred between 10 and 20 years
ago.
83 This is incorrect. The US General Accounting Office (“GAO”) reports that the losses in Iraq
occurred over the period 1990-1997. 84 (The United States makes no specific challenge to the
$2 billion in Polish defaults.) Thus, defaults a nd losses did not occur as long ago as the United States
suggests.

66. Moreover, the United States argues that the Pa nel should only look into the question whether
“current” premium rates are adequate to cover th e long-term operating costs and losses of the
programmes.85 The United States relies on a “present ten se” argument to exclude major defaults in
Iraq and Poland that occurred in the recent past. Even if the Panel only looks to “current” premiums,
item (j) calls for an analysis of “long-term” operating costs and losses.86 The United States apparently
agrees, since it looks to the performance of th e CCC programmes in such years as 1994 and 1995 (a
time period even longer ago than part of the defaults in Iraq 87) to claim that premium rates charged
were adequate to meet costs,88

67. If the United States believes that it is only appropriate to look at current premiums, given the
present tense of the term “are” in item (j), then th e FCRA cost formula is useful. The FCRA cost
formula measures the net present value “of the following cash flows: (i) payments by the Government

79 Rebuttal Submission of the United States, para 169.
81 Oral Statement of Brazil, para. 122. Brazil’s 11 August Answer to Question 77, para. 162.
82 See Brazil’s 22 August Comments, para. 99. Exhibit Exhibit Bra-158 (US Department of
Agriculture, Office of Inspector General, Financial and IT Operations, Audit Report, Commodity Credit
Corporation’s Financial Statements for Fiscal Year 2002 , Audit Report No. 06401-1 5-FM (December 2002),
Notes to the Financial Statements, p. 14).
83 Rebuttal Submission of the United States, para. 172.
84 Bra-157 (US General Accounting Office, R EPORT TO THE CHAIRMAN, TASK FORCE ON URGENT
FISCAL ISSUES, COMMITTEE ON THE BUDGET, HOUSE OF REPRESENTATIVES, International Trade: Iraq’s
Participation in US Agricultural Export Programmes , GAO/NSIAD-91-76 (November 1990), p. 27
(Table IV.2)).
85 Rebuttal Submission of the United States, para. 174.
86 The United States has elsewhere endorsed a 10-year period (First Submission of the United States,
87 Compare Rebuttal Submission of the United States, para. 172 and 175.
88 Rebuttal Submission of the United States, para. 175.

. . . and (ii) payments to the Government” of guarantees at the time they are disbursed.
89 In other
words, it measures the amount CCC expects today to lose (or gain) on a guarantee cohort at the time
the cohort is closed tomorrow. Even if this invol ves some estimates, the Un ited States has noted that
those estimates are acceptable.90 In fact, the US budget for fiscal year 2004 demonstrates that current
premiums paid for guarantees disbursed in fiscal years 2002-2004 will generate losses worth hundreds
of million of dollars.91 Thus, current premiums are inadequate to cover the long-term operating costs
and losses of the CCC export credit guarantee pr ogrammes. These programmes constitute export
subsidies.

Paragraphs 186-191 and Exhibits US-34 through US-37

68. Brazil has argued that since CCC export credit guarantees from the GSM 102, GSM 103 and
SCGP programmes are unique financial instruments for agricultural commodity transactions that are
not available on the commercial market – certainly not for terms longer than the marketing cycles of
the eligible commodities – they co nfer “benefits” within the meaning of Article 1.1(b) of the SCM
Agreement.
92 The United States asserts that “financing is available in the marketplace that is
analogous to the export credit guarantee programmes” – namely, forfaiting.93

69. The United States’ assertion should be rejected . As discussed below, the two instruments are
not “analogous,” and are, in fact, different.

70. Brazil begins with a very rough sketch of th e role a forfait can play in a typical transaction
involving agricultural commodities. In a typical tran saction, an importer will issue a promissory note
to an exporter for the agreed price. The exporter will generally demand that the note be backed by a
guarantee (or an aval) from the importer’s ba nk and/or, as the United States points out in
paragraph 187 of its 22 August Rebuttal Submissi on, by a guarantee from the importer’s government
export credit agency.

71. A forfait comes into play because, while both the exporter and the importer want the
transaction to occur, they have different interests. The exporter wants to get paid immediately on a
cash basis, and the importer wants credit that it can repay on a deferred basis. Even with a guarantee
from the importer’s bank or a government export cr edit agency, the exporter bears responsibility for
collecting the receivables (in the absence of defau lt). A forfaiter (which could be the exporter’s own
bank) will step in and purchase the promissory note at a discount to face value, without recourse to the
exporter.
94 The exporter will receive payment immediatel y from the forfaiter. The forfait essentially
enables the exporter to convert a credit sale into a cash sale.

72. A forfaiter will generally demand that the importe r’s obligation is backed by a guarantee from
a bank or the importer’s government export credit agency. 95 Rather than substituting for a guarantee,

89 Exhibit Bra-117 (2 U.S.C. 661a(5)(C)).
90 Rebuttal Submission of the United States, para. 171.
91 See chart at paragraph 161 of the Rebuttal Submission of the United States. See also Exhibit Bra-127
(US budget for FY 2004, p. 107) referencing guaranteed loan subsidy amounts of $97 million, $294 million and
$297 million respectively. Brazil notes that the figure for FY 2002 has been reestimated to $137,008,586 since
the publication of the FY 2004 budget (See Rebuttal Submission of the United States, chart at para. 161).
92 First Submission Brazil, para. 289; Oral Statement of Brazil, para. 116; Brazil 11 August Comment
93 Rebuttal Submission of the United States, para. 186.
94 See Exhibit Bra-197 (http://www.nedcor.co.uk/forfait-website/forfaiting.htm).
95 United Rebuttal Submission of the United States, para. 187. See also Exhibit Bra-198
(Vincent Whittaker, “The Quick Buck, International Finance, and Forfaiting,” 23 Thomas Jefferson Law Review
249, 258 (Spring 2001) (“In most cases, the forfaiter requires the obligation of the importer to be guaranteed by
a bank in the importer’s country because of the impossibility of evaluating the credit risk of every importer in

therefore, guarantees and forfaiting are complementary instruments. For this reason alone, the US
assertion that the two instruments are analogous is incorrect.

73. There are other differences between the two in struments. The importer realizes a tangible and
extremely valuable benefit from a CCC guarantee; na mely, the bank prices financing to the importer
based on the credit rating of the United States, rather than the credit rating of the importer itself.
Importantly, the CCC guarantee allows the importer to secure financing in the first place. As the
regulations for the GSM and SCGP programmes st ate, the programmes operate in cases where banks
“would be unwilling to provide fi nancing without CCC’s guarantee.”
96 Forfaiting helps an exporter
accept deferred payment terms for the importer, but does not otherwise beneficially affect the price
for the financing secured by the importer. Nor woul d a bank require that forfaiting be involved in a
transaction as a prerequisite for it to provide financing to the importer.

74. As a further distinction between the two in struments, while there is a secondary forfaiting
market,
97 there is no secondary market for CCC guarantees. 98 Purchasers in the secondary market for
forfaiting instruments assume that forfaited promisso ry notes will yield more at maturity than the
purchaser paid for them in the secondary market. 99 Since no secondary market exists for CCC
guarantees, apparently no such assumption can be made with respect to CCC guarantees (which itself
reveals much about the quality of those guarantees).

75. Most importantly, the pricing for forfaiting inst ruments is substantially different than pricing
for CCC guarantees. As noted above, a forfaiter purchases an exporter’s trade receivables at a
discount to face value. The discount rate and asso ciated commitment fees are driven by the risks
involved – country risk, political risk, currency risk, entity risk (essentially, the risk of the guarantor),
etc., and by the length of the underlying credit.
100

76. Brazil has attached as Exhibit Bra-199 a list of indicative forfaiting rates that vary greatly
from market to market. 101 In contrast, the United States has confirmed that country risk “has no
impact on the premiums payable” under the GSM 102, GSM 103 and SCGP programmes. 102 Brazil
provided the Panel with evidence documenting that GSM and SCGP fees were the same whether
guarantees were for transactions with the Domi nican Republic, Ghana, Japan, South Korea or
Vietnam (among others).103

77. Moreover, the very lowest rate in the forfaiting rate list included in Exhibit Bra-199 is
1.6638 per cent (6-month tenor). The rates fo r GSM 102 and GSM 103 guarantees are prohibited by
law from being greater than 1 per cent, 104 and are currently (as they ha ve been at least since 1994) 105

every country, particularly when medium or small sized companies are involved.”)). See also Id., p. 259 (“[I]f a
bank guarantee is required, it must be unconditional, irrevocable and freely transferable.”).
96 Exhibit Bra-38 (7 CFR 1493.10(a)(2); 7 CFR 1493.400(a)(2)). See Brazil 11 August Response to
Question 82(a) (paras. 183-184).
97 Exhibit Bra-198 (Vincent Whittaker, “The Quic k Buck, International Finance, and Forfaiting,” 23
Thomas Jefferson Law Review 249, 251-252 (Spring 2001)).
98 See US 11 August Answer to Question 86 (para. 184).
99 Exhibit Bra-198 (Vincent Whittaker, “The Quic k Buck, International Finance, and Forfaiting,” 23
Thomas Jefferson Law Review 249, 251-252 (Spring 2001)).
100 Exhibit Bra-198 (Vincent Whittaker, “The Quick Bu ck, International Finance, and Forfaiting,” 23
Thomas Jefferson Law Review 249, 256 (Spring 2001)).
101 Exhibit Bra-199 (Trade and Forfaiting Review, “A rgentina Trade Finance to the Rescue,” Volume
6, Issue 9, July/August 2003)
102 United States 11 August Response to Question 86 (para. 184).
104 United States 11 August Responses to Question 84 (para. 179).
105 Brazil 11 August Comment to Question 84 (para. 193).

no greater than 0.663 per cent for GSM 102 (36-month tenor)
106 and 0.05 per cent for GSM 103 (120-
month tenor).107

78. Furthermore, although the United States’ asserti on that the tenor of forfaiting instruments can
range from six months to 10 years is accurate, forfaiting instruments for agricultural commodities will
not exceed tenors of 360 days, or in other words will not exceed a tenor “matching the typical period
of consumption of most commodities.”
108 This is consistent with Br azil’s statement that commercial
financing for exports of agricultural goods that exceeds the marketing cycl es of the agricultural good
is not available on the marketplace.109

79. Under Article 10.3 of the Agreement on Agri culture, the United States bears the burden of
demonstrating that no export subsidies have been granted in respect of quantities of agricultural
commodities exported in excess of its reduction commitments. 110 Although it is not its burden to do
so, Brazil has demonstrated that CCC export credit guarantees are financial contributions that confer
benefits and are contingent on e xport, within the meaning of Articles 1.1 and 3.1(a) of the SCM
Agreement. With respect to “benefit,” CCC regulations concerning the GSM and SCGP programmes
demonstrate that the programmes grant better-than-market terms per se .111 Brazil has also
demonstrated that CCC export cr edit guarantees confer benefits per se since they are unique financial
instruments for agricultural commodity transactions that are not available on the commercial market –
and certainly not for terms longer than the marketing cycles of the eligible commodities.

80. The United States has not established that forfaiting is analogous to CCC export credit
guarantees. Even if it had done so, and the market terms for forfaiting instruments could theoretically
serve as a benchmark against which to judge whet her CCC export credit guarantees confer “benefits,”
the United States has not: (i) established the terms on which forfaiting is provided on the market; or,
(ii) demonstrated that CCC export credit guarantees do not provide terms better than those provided
for forfaiting instruments. Th e United States acknowledges, at paragraph 191 of its 22 August
Rebuttal Submission, that it has not provided market terms for forfaiting instruments that could serve
as a benchmark. Thus, the United States has not met its burden under Article 10.3 of the Agreement
on Agriculture.

Brazil’s Comment on Question 67a posed by Panel to the United States

81. While Brazil obviously does not know how the United States will ultimately respond, Brazil
offers the following information supporting Braz il’s calculations of the amounts provided to these
four crops as “support to upland cotton.”

82. First, to the extent that the United States cr iticizes Brazil’s calculations made to determine the
different per acre payments for direct payment and CCP crops in paragraph 42 of its Rebuttal
Submission, Brazil notes that these calculations are confirmed by the Food Agricultural Policy
Research Institute at the Un iversity of Missouri (FAPRI).
112 As Brazil further notes that the FAPRI

106 Exhibit Bra-155 (US Department of Agriculture Foreign Agricultural Service, “Notice to GSM-102
and GSM-103 Programme Participants,” 24 September 2002).
107 Exhibit Bra-155 (US Department of Agriculture Foreign Agricultural Service, “Notice to GSM-102
and GSM-103 Programme Participants,” 24 September 2002).
108 Exhibit Bra-198 (Vincent Whittaker, “The Quick Bu ck, International Finance, and Forfaiting,” 23
Thomas Jefferson Law Review 249, 254 (Spring 2001)).
110 See First Submission of Brazil, paras. 263-268.
111 See Brazil’s 11 August Answer to Question 82, paras. 182-189.
112 http://www.fapri.iastate.edu/Outlook2003/Pa geMker/OutlookPub%20USCrops.pdf. The
information on CCP and direct payment per acre payments in US dollars for each of the programme crops is
found in the last two lines of pages 55 (wheat), 57 (rice), 59 (corn), 61 (sorghum), 63 (barley), 65 (oats), 69

baseline itself and FAPRI analysis has often been influential in US policy formation process,
including in analysis of the FSRI Act of 2002, for which FAPRI won the USDA’s highest honour.113

83. Second, FAPRI’s 2003 US Baseline is a l ong-run scenario projecting what would happen to
various elements of US agriculture under the 2002 FSR I Act. In this analysis, FAPRI includes all of
the different types of support provided by the 2002 FSRI Act into its projections of, inter alia, upland
cotton planted acreage, production, exports, prices, revenue, costs, etc. In doing so, the FAPRI
economists assume that, inter alia, upland cotton producers were holding upland cotton base acreage
and receiving upland cotton CCP and direct payments.
114 These CCP payments and direct payments
are reflected in their analysis of “Gross Market Revenue” to upland cotton producers on page 79 of
their report, which constitutes the sum of LD P (marketing loan), CCP revenue, and direct
payments.115

84. In addition, FAPRI states that “US cotton producers do not benefit from the projected price
increases. Higher prices are offset by lower payments from the loan programme and the CCP
programme.”
116 This reflects the FAPRI economists’ assumption that upland cotton producers receive
upland cotton direct and CCP payments.

(soybeans), 75 (peanuts) and 79 (upland cotton). Brazil notes that its figures for soybeans and peanuts differ
slightly. The underlying reason for this difference is that Brazil had to base its figures on its estimates about the
payments yields and it appears that FAPRI’s figures for payment yields are slightly different from Brazil’s.
113 See for example, “Analysis of the grain, oilseed and cotton provision of the, ‘Agriculture,
Conservation, and Rural Enhancement Act of 2001 – S.1731.’” FAPRI-UMC Report #18-01 November 2001.
http://www.fapri.missouri.edu/FAPRI_Publications.htm. Also see
http://www.card.iastate.edu/about_card/news/press_releases/Highest_Honor.html
114 FAPRI’s 2003 US Baseline,
http://www.fapri.iastate.edu/Outlook2003/PageMker/OutlookPub%20USCrops.pdf, p. 78.
115 FAPRI’s 2003 US Baseline,
http://www.fapri.iastate.edu/Outlook2003/PageMker/OutlookPub%20USCrops.pdf, p. 79.
116 FAPRI’s 2003 US Baseline,
http://www.fapri.iastate.edu/Outlook2003/PageMker/OutlookPub%20USCrops.pdf, p. 78.

List of Exhibits

G/AG/AGST/USA Exhibit Bra- 191
Reestimated Guaranteed Loan Subs idy based on Original Budget Year
Estimate.
Exhibit Bra- 192
Net Lifetime Reestimates of Guaranteed Loan Subsidy by Cohort. Exhibit Bra- 193
US Department of Agriculture Office of Inspector General Great Plains
Region Audit Report, Commodity Credit Corporation’s Financial
Statements for Fiscal Year 2001, Audit Report N° 06401-4-KC,
February 2002
Exhibit Bra- 194
US Department of Agriculture Office of Inspector General Financial and
IT Operations Audit Report, Audit Report N° 06401-14-FM,
Commodity Credit Corporation’s Fi nancial Statements for Fiscal
Year 2000, June 2001
Exhibit Bra- 195
US Department of Agriculture Office of Inspector General Financial and
IT Operations Audit Report, US Department of Agriculture
Consolidated Financial Statements for Fiscal Year 1999, Report N°
50401-35-FM, February 2000
Exhibit Bra- 196
http://www.nedcor.co.uk/forfait-website/forfaiting.htm Exhibit Bra- 197
Vincent Whittaker, “The Quick Bu ck, International Finance and
Forfaiting,” 23 Thomas Jefferson Law Review (Spring 2001)
Exhibit Bra- 198
Trade and Forfaiting Review, “Argentina Trade Finance to the Rescue”
Volume 6, Issue 9 July/August 2003
Exhibit Bra- 199

Support” for price-based support either shall
117 or can 118 be calculated using a price gap
methodology, which does not rely on budgetary outlays.

 Second, Brazil conflates “non-product-speci fic support” with “support to a specific
commodity” by attempting to allocate certain payments to upland cotton. To do so, however,
Brazil relies on a reading of the definition of “non-product-specific support” in Article 1(a)
that ignores the most relevant context for this term – that is, the (immediately preceding)
definition of product-specific support in that sa me article. Indeed, Brazil’s approach would
appear to render the concept of “non-produc t specific support” so narrow that it becomes
almost, if not completely, meaningless.

 Third, Brazil mischaracterizes US direct payments and production flexibility contract
payments as non-green box support. Brazil has not established that these measures fail to
conform to the policy-specific criteria in Annex 2. In fact, Brazil has not even established –
pursuant to Brazil’s own reading of the first sentence of Annex 2, paragraph 1, as a stand-
alone obligation – that these payments have more than “minimal[] trade-distorting effects or
effects on production.”
119

3. The weakness of Brazil’s interpretation that “support” in the Peace Clause means “budgetary
outlays” can be seen in this example. Even if US measures were exactly the same in every year of the
implementation period as they were in the 1992 mark eting year (that is, the same deficiency target
price, same marketing loan rate, same acreage reduction percentage, same normal flex acres with
planting flexibility
120, etc.), under Brazil’s inte rpretation, US measures would have breached the
Peace Clause in each and every year in which outlays increased due to external factors, for example,
whenever market prices dipped below the 1992 level.

 Would 1999-2002 US measures identical in every respect to those in 1992 “grant support in
excess of that decided during the 1992 marketing year”?

 In other words, if a Member had decided its support during 1992 for the period through 2004
and never changed its decision, could the Member be deemed to grant support in excess of the

117 In the case of market price support. In fact, Annex 3, paragraph 8, states: “Budgetary outlays made
to maintain this gap, such as buying-in or storage costs, shall not be included in the AMS.”
118 In the case of non-exempt direct payments dependent on a price gap. See Agreement on
Agriculture, Annex 3, paragraph 10.
119 Of course, the US view is that the “fundamental requirement” of the first sentence is met by a
measure that conforms to the basic criteria and any applicable policy-specific criteria. In this regard, Brazil errs
in claiming that the United States has “acknowledged that such effects can be presumed if the specific criteria in
paragraph 6 of Annex 2 are not complied with.” Brazil’s Rebuttal Submission, para. 8 fn. 13. In fact, we
believe the opposite. Meeting the basic and policy-specific criteria of Annex 2 establishes that a measure meets
the “fundamental requirement” of paragraph 1. However, the converse is not necessarily true. So, according to
Brazil’s approach, Brazil would bear th e burden of establishing that a measure that did not comply with the
basic and policy-specific criteria in Annex 2 failed to meet the “fundamental requirement” of paragraph 1 of
Annex 2.
120 Recall that “under 1992 programme provisions, producers of non-cotton programme crops (i.e.,
wheat, corn, barley, grain sorghum, oats, and rice) could plant up to 25 per cent of their [non-cotton] crop
programme base to cotton as Normal Flex Acres or Optional Flex Acres. Acreage Reduction Programme
compliance reports indicate that, in 1992, 447,164 acres of cotton were planted on a much larger quantity of
available Normal Flex Acres and Option Flex Acres of non-cotton programme base.”) Exhibit US-24 (Report
by Dr. Joseph Glauber, Deputy Chief Economist, US Department of Agriculture). In 1992, there were
153.9 million acres of non-cotton “complying base” and 197.2 million acres of non-cotton “effective base.” See
Exhibit US-39. Thus, the marketing loan was effectively available with respect to all upland cotton production.

level decided during 1992 just because outlays increased, for example, because market prices
changed?
121

We believe the answer must be “No” because ma rket prices are not “decided” by a Member (as
paragraphs 8 and 10 of A nnex 3 recognize). And yet, the situa tion in this dispute is analogous: the
United States has changed its measures to reduce the product-specific level of support (by eliminating
deficiency payments) since 1992, and yet Brazil cl aims that the Peace Clause has been breached
simply because lower market prices resulted in increased price-based outlays.

4. Market prices are beyond the control of th e United States, and therefore the United States
cannot “decide” them. Removing the effect of market prices beyond the control of the United States
from the measure of support demonstrates that US measures do not and did not grant support in
excess of that decided during the 1992 marketing year. In fact, whether gauged (as the United States
believes is compelled by the Peace Clause) via the rate of support expressed by US measures
122, or via
the AMS for upland cotton (calculated through a price gap methodology), or via the erroneous
calculations of Brazil’s expert (but limited to product-specific support), the result is exactly the same:
in no marketing year from 1999 through 2002 have US measures breached the Peace Clause.

II. Brazil’s AMS Calculation Is Flawed and, Had It Consistently Reflected a Price Gap
Calculation, Would Demonstrate No Peace Clause Breach

5. We recall that Brazil has argued that budge tary outlays are the only measurement of
“support” for purposes of the Peace Clause proviso comparison, without any foundation in the Peace
Clause text and despite the context provided by Annex 3, which explicitly indicates that Members
have agreed “support” can be measured without using budgetary outlays. Brazil itself concedes that
US measures do not decide support on the basis of budgetary outlays:

Brazil acknowledges that the United States could not possibl[y] determine its
expenditures as they would depend to a certain extent on market prices that were also
influenced by factors outside the control of the US Government.
123
The United States agrees with this statement by Br azil and believes that this statement demonstrates
that Brazil’s approach to the Peace Clause comparison is not based on the text nor is it realistic.
Instead, in order to hope to succeed, Brazil’s claims require Brazil to use budgetary outlays and so to
take into account low prevailing market prices. An Aggregate Measurement of Support calculation
using a price gap methodology – that is, that eliminates the effect of market prices and reflects instead
the eligible production and applied administered pric e decided by a Member – reveals that in no year
from 1999-2002 have US measures breached the Peace Clause.

6. Brazil has argued that “there are only tw o types of methodologies that would allow an
expression in monetary terms of a decision (or decisions) taken by the United States in MY 1992
regarding its level of support to upland cotton. Th e first is budgetary expenditures. The second is the
calculation of AMS for a particular commodity.” 124 In both its table of expenditures 125 and its AMS

121 Other factors beyond a Member’s control could also influence outlays, such as whether some
additional producers chose to begin participating in the support programmes.
122 Even taking into account the maximum theoretical effect on the deficiency payment effective price
of the 1992 acreage reduction percentage (10 per cent) and normal flex acres (15 per cent) for the 1992
marketing year. Since the acreage reduction percentage was lower for 1993 marketing year (7.5 per cent versus
10 per cent) support, which was also decided during the 1992 marketing year, the adjusted level of support
(68.27625 cents per pound) was even higher for the 1993 marketing year.
123 Brazil’s Comments on US Answers, para. 66 fn. 49.

table
126, Brazil has attempted to allocate non-product-sp ecific support to a specific commodity. There
is no basis in Annex 3 to do so. Annex 3, paragr aph 1, explicitly requires an AMS to be calculated
“on a product-specific basis for each basic agri cultural product” and separately requires that non-
product-specific support be calculated and “totalle d into one non-product-specific AMS in total
monetary terms.” The point bears emphasis: “for each basic agricultural product,” Annex 3 states that
an AMS “shall be calculated on a product-specific b asis.” Similarly, were “support to a specific
commodity” (upland cotton) to be calculated usi ng an Aggregate Measurement of Support, it must be
calculated “on a product-specific basis.”

7. As a result, both Brazil’s expenditure table and its AMS table run counter to the terms of
Annex 3. Were the Panel to calculate an AMS for upland cotton for marketing years 1992 and 1999-
2002, the United States has set forth a calculation consistent with Annex 3 in its rebuttal
submission.
127 By using a price-gap methodology for both deficiency payments and marketing loan
payments128, the upland cotton AMS in 1992 is far higher than in any marketing year from 1999 to
2002, reflecting the US decision to move away fr om the high support levels of product-specific
deficiency payments.

8. In fact, we note that the AMS data presente d in paragraph 115 of the US rebuttal submission
understates the AMS for marketing year 1992. For example, the United States reduced the price gap
calculation for 1992 basic deficiency payments by an adjustment factor (approximately .875) to
replicate the calculation used in G/AG/AGST/USA, p. 18. Without the adjustment, which is not
called for by paragraphs 10 and 11 of Annex 3, the 1992 deficiency payment calculation would have
been $858 million, rather than $755 million as reported in paragraph 115.
129 (In case of interest, we
also present below the deficiency payment calculati on in more detail, reflecting more accurate data,
which would increase the deficiency payment calculation slightly, to $867 million.) 130 T h i s

127 US Rebuttal Submission, paras. 114-118.
128 Brazil has stated (with respect to deficiency paym ents) that “the formula approach under Annex 3,
paragraphs 10-11 of the Agreement on Agriculture [is] warranted for upland cotton AMS calculations.” Brazil’s
Rebuttal Submission, para. 73 fn. 172. Because the Peace Clause proviso comparison must compare the support
that challenged measures grant to “t hat decided during the 1992 marketing year,” the price gap methodology is
the only AMS approach that reflects only the United States’ decisions and not market prices beyond the
United States’ control. For the same reason, it is equally appropriate to use the price gap methodology for
marketing loan payments.
129 Total deficiency payments calculated via the price gap methodology equal unadjusted basic
deficiency payments ($724 million / 0.875) + 50/92 deficien cy payments ($30 million) – that is, $858 million.
See US Rebuttal Submission, para. 115 fn. 144.
130 To calculate the deficiency payment support using the price gap methodology and consistent with
the 1995 US WTO notification and G/AG/AGST/USA, we made the following calculations.
Total deficiency payments are equal to basic deficiency payments plus 50/92 payments. Basic
deficiency payments are equal to eligible production ti mes a price gap measured as the difference between the
target price and a fixed reference pri ce. Eligible production is measured as eligible base acreage times average
programme yield. Eligible base acreage is equal to participating base acreage minus Acreage Conservation
Reserve acres minus Normal Flex Acres minus acres en rolled in the 50/92 programme. The fixed reference
price is the1986-88 average of the higher of the market price or loan rate for each year.
Payments for the 50/92 programme were calculated in a similar fashion by multiplying base acres in
the 50/92 programme times the average programme yield times 92 per cent of the price gap.
In 1992, the target price was 72.9 cents per pound and the fixed reference price for 1986-88 was
57.9 cents per pound. This gives a price gap of 15.0 cents per pound. Eligible production for basic deficiency
payments in 1992 was equal to 5,544 million pounds (9.226 million acres times the average programme yield of
601 pounds per acre). Multiplying the price gap times eligible production gives basic deficiency payments
equal to $832 million.
The same formula is used to calculate deficiency payments under the 50/92 programme. For 1992, the
price gap is the same as that calculated for the basic deficiency payments (15 cen ts per pound). Eligible

calculation, moreover, uses the actual payment ac reage (that is, acres planted for harvest or
participating in the 50/92 programme on which paym ent was received) to calculate the “eligible
production.” Using instead the base acreage minus the 10 per cent acreage reduction figure and the
15 per cent normal flex acres (14.9 million effective base acres 131 x .75 = 11.175 million acres) and
multiplying by the programme yield (602 pounds per acre), the “quantity of production eligible to
receive the administered price” 132 is 6,727 million pounds, yielding a price gap deficiency payment
calculation of $1,009 million. Thus, the figure in paragraph 115 of the US rebuttal reflected a
conservative approach that understated the support resulting from a price gap calculation.

9. In this regard, the United States notes Brazil’s argument with respect to the 1995 Statement of
Administrative Action, which explained that P eace Clause protection would apply “unless the AMS
for the particular commodity exceeds the level decided in the 1992 marketing year.”
133 We agree with
Brazil that this reference to “AMS” is “non-te xtual[]” because the Peace Clause uses the term
“support decided” and not “AMS.” 134 However, to the extent that the Panel were to examine “the
AMS for the particular commodity” – that is , the upland cotton AMS – the United States has
demonstrated that in no year from 1999-2002 does that AMS exceed the 1992 level.

III. The US Level of Support Argument Do es Take Into Account All Product-Specific
Support That Challenged US Measures Grant

10. Brazil has argued that “the United States ‘72.9 methodology’ does not – and cannot account
for cottonseed payments, Step 2 payments, storage pa yments and interest rate subsidies,” which the
United States has identified as product-specific support. 135 Brazil then alleges that the US
methodology “would sanction the cover-up of hundreds of millions – if not billions – of dollars of
expenditures.”136 Over-heated rhetoric aside, Brazil’s argument is simply erroneous.

production under the 50/92 programme was 254 million pounds (404 thousand acres times the average
programme yield of 50/92 participants of 628 pounds per acre). Deficiency payments under the 50/92
programme were thus equal to $35 million (0.92 times 254 million times $0.15).
Total deficiency payments under the price gap me thodology were thus equal to $867 million ($832
million plus $35 million). Sources: US Department of Agriculture, Compliance Report for 1992 Acreage
Reduction Programme (1993) (Exhibit US-39); Commodity Credit Corporation Commodity Estimates Book for
the FY 1995 President's Budget (February 1994); G/AG/AGST/USA, p. 18.
131 See Exhibit Bra-105, Annex 2 (1st source document: US Department of Agriculture, Provisions of
the Federal Agricultural Improvement and Reform Act of 1996 , at 142) (giving 1992 e ffective base acreage of
14.9 million acres); id., Annex 2 (2nd source document: Daniel A. Sumner, Farm Programmes and Related
Policy in the United States, at 4) (same).
133 We also note that Brazil never quotes that passage in full since the first half reflects the US view
throughout this dispute that “exempt from actions” means not liable to a legal process or suit. See 1995
Statement, at 68 ( “Under Article 13(b)(ii) and (iii), governments may not initiate adverse effects, serious
prejudice or non-violation nullification and impairment challenges in the WTO . . . .”) (emphasis added). There
are numerous other statements in the 1995 Statement that Brazil similarly does not draw to the Panel’s attention.
See id. at 67 (“Article 13, commonly referred to as the peace clause, reflects an agreement among WTO
countries to refrain from challenging certain of each other’s agricultural subsidy programmes . . . through WTO
dispute settlement procedures . . . .”) (emphasis added); id. (“Article 13(b) addresses possible challenges to
domestic support measures falling outside the green box in circumstances in which the WTO member providing
the subsidy is meeting its total AMS commitments.”) (emphasis added).
134 Brazil’s Opening Statement, para. 35; Brazil’s Rebuttal Submission, para. 75; see also 1995
Statement of Administrative Action, at 68 (subsequently in same paragraph quoted by Brazil stating “a WTO
Member will not be protected by the P eace Clause if its support for the product is above that decided during the
1992 marketing year.”) (emphasis added).
135 Brazil’s General Comment on US Answers to Questions 47-69 from the Panel (para. 55).
136 Brazil’s General Comment on US Answers to Questions 47-69 from the Panel (para. 56).

11. Brazil argues that the United States has not acc ounted for Step 2 payments. The United States
directs the Panel’s attention to the US rebuttal s ubmission, paragraphs 111 and 113, and the US first
written submission, paragraph 111. The United Stat es has noted that, because th e availability of Step
2 payments is contingent on certain price conditions existing during the marketing year, the level of
support decided must relate to the payment paramete rs. While these have changed slightly with the
2002 Act, these minor adjustments do not alter the revenue ensured for producers by the marketing
loan rate of 52 cents per pound because Step 2 mere ly provides an alternative avenue of providing
support (through processors rather than directly to producers). In addition, these minor adjustments
cannot overcome the greater than 20 cents per pound difference in product-specific support between
marketing years 1992 and 1999-2002.

12. Brazil argues that the United States has not accounted for cottonseed payments. The
United States directs the Panel’s attention to the US rebuttal submission, paragraph 111 fn. 136, 137
and paragraph 113. While the United States mainta ins that these measures are not within the Panel’s
terms of reference
137, we note that cottonseed payments fo r the 1999, 2000, and 20 02 crops ranged in
value between 0.6 to 2.3 cents per pound (factoring expenditures – the way these measures were
decided – over production). Thus, given the great er than 20 cents per pound difference in product-
specific support between marketing years 1992 a nd 1999-2002, cottonseed payments too do not
materially affect the comparison between marketing year 1992 and any other year.

13. With respect to storage payments and inter est rate subsidies, we note that these are US
Government estimates of support provided throug h activities relating to operating the upland cotton
marketing loan programme.
138 This support is already captured, however, in the level of support
expressed by the marketing loan rate. Were these costs not borne by the United States, the costs to the
producer would reduce the guaranteed revenue belo w the loan rate. In fact, Annex 3 of the
Agreement on Agriculture explains that, for purposes of market price support calculated using a price
gap, “[b]udgetary payments made to maintain this gap, such as buying-in or storage costs, shall not be
included in the AMS.” Similarly, where the support provided by marketing loans is measured using a
price gap methodology (the only appropriate AMS calculation for purposes of the Peace Clause) 139,
“payments made to maintain this gap,” such as stor age payments and interest rate subsidies, should
not be counted separately.

IV. Brazil’s New Green Box Arguments Are in Error

14. In its rebuttal submission and comments on US answers to questions from the Panel, Brazil
advances two novel arguments. First, Brazil for th e first time responds to the US argument that
Brazil’s interpretation of paragraph 6(b) would create an inconsistency between that provision and the
fundamental requirement of the firs t sentence of Annex 2, paragraph 1.
140 Second, Brazil argues that
the US interpretation of Annex 2, paragraph 6(b), would render paragraph 6(e) of that Annex a nullity.
Neither of these arguments withstands scrutiny.

15. First, Brazil misunderstands the US argument that Brazil’s reading of paragraph 6(b) creates
an inconsistency between that pa ragraph and the fundamental requirement of the first sentence of
Annex 2, paragraph 1, and therefore its arguments go astray. The United States has noted that if
payments under a decoupled income support measure we re reduced or eliminated if a recipient were
to produce any commodity, then the amount of paymen ts would be (on Brazil’s reading) linked to the
type of production and therefore in consistent with paragraph 6(b), even though such a measure would

137 See US Rebuttal Submission, paras. 106-09.
138 For example, for storage payments we estimate e xpenses incurred with respect to upland cotton put
under loan and pledged as collateral.
139 See US Rebuttal Submission, paras. 114-17.
140 Brazil’s Rebuttal Submission, paras. 4-9.

meet the fundamental requirement of Annex 2. Brazil does not contest that such a measure would
meet that fundamental requirement but instead argues that “requiring no production, i.e., on all base
acres is not a ‘type of production’” because “[t]he notion of ‘type of production’ in paragraph 6(b) is
necessarily linked to the amount of payment to some ‘type’ of commodity that is ‘produced’ and not
to a production requirement itself.”141

16. With respect, if one were to credit this argument, then Brazil would appear to have
misunderstood its own objection to US direct payments and production flexibility contract payments.
That is, in the US example, payments are re duced or eliminated if a recipient produces any type of
commodity. Similarly, Brazil’s objection to US gree n box payments is that payments are reduced or
eliminated if a recipient produces certain types of commodities. Thus, in the former example, the
amount of payment is “based on” (in the sense of being reduced by) “the type” of production
undertaken by the producer – for example, production of upland cotton, fruits, vegetables, or wild rice
– just as in Brazil’s argument on US green box payments, the amount of payment is “based on” (in the
sense of being reduced by) “the type” of production undertaken by the producer – that is, fruit,
vegetable, or wild rice production. Brazil’s objection to US green box payments under paragraph 6(b)
would therefore apply with equal force to the US example, 142 again, posing an inconsistency between
Brazil’s interpretation of paragraph 6(b) and the fundamental requirement of Annex 2.143

17. Brazil also argues that the US interpretati on of paragraph 6(b) “would render Annex 2,
paragraph 6(e)[,] a nullity” because the “US interpre tation of paragraph 6(b) as not requiring the
production of ‘certain crops’ is the same as 6(e)’s prohibition on not requiring production of ‘any
crops.’”
144 Brazil’s own re-phrasing of the US argument, however, points to the distinction between
the obligations contained in these two provisions. Paragraph 6(e) establishes that under a green box
measure: “No production shall be required in order to receive such pa yments.” Thus, there can be no
production requirement “in order to receive such payments,” but the provision is silent with respect to
the amount of such payments at any particular time and any links to the “type or volume of
production.” That is, were paragr aph 6(e) alone part of Annex 2, a Member could arguably link the
amount of payments to requirements on the “type or volume of production” so long as payment
eligibility were not contingent on production.

18. Paragraph 6(b) forecloses that option by prohibiting a green box measure from linking the
“amount of such payments in any given year” to “the type or volume of production.” That is, not only
may a green box measure not require production, but the measure may not require a particular “type
or volume of production” in order to obtain a payment amount. As the United States has noted, both
direct payments and production fl exibility contract payments meet that test because no “type or
volume of production” is required to receive paymen ts. For example, with respect to the fruits,
vegetables, and wild rice planting flexibility issue, a payment recipient need not undertake any “type
or volume of production” in order to receive the fu ll “amount of payments” to which the farm’s base
acres are entitled. Rather, the recipient need only desist from planting certain commodities. Thus,
Brazil’s objection is nothing more than a statement that, under US green box measures, the amount of
payments is linked to production not undertaken by the producer.

141 Brazil’s Rebuttal Submission, para. 6. Brazil c oncludes the thought: “Otherwise, it logically could
not be a ‘type’ of production. It would be nothing at all.”
142 See Brazil’s Rebuttal Submission, para. 4 (“The relevant text of paragraph 6(b) prohibits any
linkage of the ‘amount of payments’ to any ‘type of production’ of an agricultural product.”) (emphasis added).
143 Brazil’s reference to paragraph 6(e) does not answer this objection. Brazil argues that “negotiators
addressed any possible misunderstanding in this regard by including the very concept of prohibiting the
requirement to produce in paragraph 6(e).” Brazil’s Rebuttal Submission, para. 6. However, as Brazil
immediately points out, conformity with paragraph 6(e) “does not exempt . . . payments from conforming to the
requirement of paragraph 6(b).”
144 Brazil’s Comment on US Answer to Question 32 from the Panel (para. 44).

19. Finally, we note that Brazil’s reading of paragraph 6(b) could prevent Members from
imposing on decoupled income support payment reci pients any conditions relating to the type of
production – for example, the planting of illegal cr ops or production of una pproved biotech varieties
or environmentally damaging pro duction. As a practical matter, no Member could accept not being
able to impose any such conditions on payment recipi ents. The result of Brazil’s reading, then, would
be to read decoupled income support out of Anne x 2. This may be a favourable result from the
Brazilian perspective, but the Pane l should not adopt an interpretati on of paragraph 6(b) not required
by the text, not consistent with its context (in pa rticular, the fundamental requirement of Annex 2),
and with such potentially far-reaching results.

V. Answer to Additional Question 67 bis from the Panel

 67 bis. Please state the annual amount granted by the US government in each of the
1999, 2000, 2001 and 2002 marketing years (as applicable) to US upland cotton
producers, per pound and in total expe nditures, under each of the following
programmes: production flexibility contract payments, market loss assistance payments,
direct payments and counter-cyclical payments.

20. The Panel’s question would require ascertain ing for each programme the amount of upland
cotton produced by recipients of payments under the programme. However, the United States does
not maintain and cannot calculate this information – that is, it does not maintain information on the
amount of expenditures made under the cited progra mmes to US upland cotton producers. This is
because the payments do not relate to, and do not de pend on, what crop, if any, is actually produced.
Instead, each of these programmes ma kes payments with respect to past production on base acreage
in a fixed and defined base period, not with respect to whether one is currently a producer.

21. Thus, the United States did track total expend itures with respect to base acres of wheat, corn,
barley, grain sorghum, oats, upland cotton, and ri ce under the expired production flexibility contract
payments and market loss assistance payments and do es track total expenditure with respect to base
acres of wheat, corn, barley, grain sorghum, oats, upland cotton, rice, peanuts, soybeans, sunflower
seed, canola, rapeseed, safflower, flaxseed, mustard seed, crambe, and sesame seed under the direct
payments and counter-cyclical payments.
145 However, the fact that a recipient at one time produced
one of these crops says nothing about what crops the reci pient is currently producing, if any. In other
words, payments made on the basis of past production of upland cotton do not tell anything about
whether the recipient is currently producing cotton, corn, livestock, hay, or any other crop or is not
producing at all. As a result, it is not possible to derive from these payments whether the payment is
being received by an upland cotton producer.

22. The Panel’s question points to a fundamental difficulty with Brazil’s approach. Brazil would
have the Panel allocate “support to a specific commodi ty” – upland cotton – on the basis that certain
of these measures determine payment amounts (for base acres) based on current or recent market
prices for that commodity. However, how could the payment be “support to a specific commodity”
(support “provided for an agricultural product in fa vour of the producer of the basic agricultural
product”) if there need be no production of upland cotton in order to receive payment?

23. Brazil attempts to avoid this result by ar guing that various US payments (direct, counter-
cyclical, production flexibility contract, and market loss assistance payments) are not non-product-
specific support because they are not payments to “producers in general.” The United States has
addressed this erroneous interpretation in detail in its rebuttal submission. In short, Brazil’s reading
requires ignoring the definition of product-specific support in Article 1(a) (that is “support . . .

145 See US First Written Submission, para. 57 fn. 46.

provided for an agricultural product in favour of the producers of the basic agricultural product”),
which Brazil has not interpreted, in over 450 pa ges of submissions and statements, even once. 146 In
fact, Brazil’s reading of the definition of non-product-specific support (“support provided in favour of
agricultural producers in general”) reads the phrase “in general” as meaning “in a body; universally;
without exception.” However, this dicti onary definition is considered “obsolete” 147 and so would
hardly be the “ordinary meaning” of the term.

24. As Brazil has conceded, moreover, payments made with respect to upland cotton base acres
are not necessarily in favor of upland cotton produ cers since those acres may not be planted to upland
cotton – indeed, may not be planted at all. We note that Brazil has adjusted its entire AMS calculation
to reflect its belated realization that, under its own theory, “only the portion of . . . payments [on
“upland cotton” base acres] that actually benefits acres planted to upland cotton can be considered
support to upland cotton.”
148 But Brazil’s adjustment is not enough. Brazil simply takes the ratio of
actual upland cotton acreage to “upland cotton” b ase acreage under a given programme. However,
there is no reason why upland cotton acreage need be planted on “upland cotton” base acreage.
Consider this example:

 One farm could have 100 base acres of upland cotton and currently plant those 100 acres to
corn; direct and counter-cyclical payments w ould be made on those 100 “upland cotton” base
acres that actually are planted to corn.

 Another farm could have 100 base acres of corn and currently plant those 100 acres to upland
cotton; direct and counter-cyclical payments would be made on those 100 “corn” base acres
that actually are planted to upland cotton.

 Brazil’s approach (dividing upland cotton planted by upland cotton base acres) would simply
say that all of the direct and counter-cyclical pa yments on “upland cotton” base acres are
“support to upland cotton” because there ar e 100 “upland cotton” base acres on which
payments were made and 100 acres currently pl anted to upland cotton, even though these are
found on completely separate farms.

Thus, Brazil’s ratio does not identify, even on Brazil’s own terms, the alleged support to upland cotton
(that is, “payments that actually benefit[] acres planted to upland cotton”) under these programmes.
149

25. Brazil’s own approach would require Brazil to match up payments for upland cotton base
acres with the amount of upland cotton production on those base acres, but Brazil has not done so. 150

146 See, e.g., Brazil’s Rebuttal Submission, para. 19 (again misquoting the definition of product-specific
support in Article 1(a) by eliminating the phrase suppo rt provided “for an agricu ltural product” and failing to
interpret that definition according to the customary rule s of interpretation of public international law); Brazil’s
Comments on US Answer to Question 43 from the Panel (paras. 58-60) (criticizing US interpretation of product-
specific support but failing to interpret that definition according to the customary rules of interpretation of
public international law); Brazil’s Comments on US An swer to Question 38 from the Panel (paras. 48-49)
(same).
147 See The New Shorter Oxford English Dictionary , vol. 1, at 1073 (first definition of “in general”: “†
(a) in a body; universally; without exception”); id., vol. 1, at xv (sec. 4.5.2: Status symbols) (“The dagger [†]
indicates that a word, sense, form, or construction is ob solete. It is placed before the relevant word(s) or
relevant sense number.”).
148 See, e.g., Brazil’s Answer to Question 67 from the Panel (table, fn. 2, 3, 4, 5).
149 We also would reiterate that such payments w ould not be “support to a specific commodity” as
explained in Article 1(a) and reflected in Annex 3.
150 For example, Brazil admits that “this acknowle dged legal flexibility to grow other crops does not
answer the question of whether the pr oducers planting 14.2 million aces of upland cotton in MY 2002 received
direct and counter-cyclical payments. Nor does it answer the question of whether the 14.2 million acres planted

At best, Brazil speculates as to the likelihood of a person with cotton base acres actually producing
upland cotton on those base acres, and even that speculation is flawed.
151 However, such an approach
amounts to little more than speculation and, even if Brazil’s erroneous interpretation were used, does
not meet Brazil’s burden of establishing a prima facie case.

26. In addition, under Brazil’s ow n approach, the payments made in relation to corn base acres
would be support for corn even if planted to upland cotton. However, Brazil’s approach would
appear to result in double counting the support – the same payment would be support to corn (because
it was related to corn base acres) and support to upland cotton (because cotton was produced on base
acres eligible for payments). In other words, Brazil is trying to have it both ways:

 First, Brazil argues that payments made based on production on base acres during a base
period is support to the crop that was produced during that base period, regardless of what is
actually produced currently (that is, payments made for upland cotton base acreage is support
to upland cotton even if the producer is now growing corn on that acreage).

 Second, Brazil argues that payments made under these programmes are support to the crop
that is currently being produ ced, even if the crop being produced is different from the base
crop (that is, payments made for corn base acreage is support to upland cotton if upland
cotton is being produced on the corn base).

27. Furthermore, because payments under the cited programmes are made with respect to historic
acres and yields during a base period, it is not possi ble to calculate the “annual amount granted by the
US government . . . to US upland cotton producers, per pound.” Counter-cyclical payments, for
example, determine the payment rate for base peri od production as the difference between a target
price and the sum of the direct payment rate plus the higher of the market price or the loan rate.
However, the per pound payment rate for upla nd cotton base acres applies only for base period
production (base acres x payment yields), not current production. Thus, to express these payments per
pound begs the question: “Per pound of what?” Any production figure used – whether base period
production or production in any year from 1999 through 2002 – results in a highly artificial per pound

to upland cotton in MY 2002 were planted on upland cotton base acreage.” Brazil’s Rebuttal Submission,
para. 38 (emphasis in original). The United States agrees completely, and while Brazil’s approach would
require that these questions be answered, Brazil has not answered them, even thou gh under Brazil’s approach,
Brazil would have the burden of proof in this regard. Rather, Brazil tries to construct a series of assumption
based on what Brazil considers “likely” or “maybe” or “probably.”
151 See Brazil’s Rebuttal Submission, paras. 24-50. Brazil makes a lengthy presentation of new data
and calculations, including some with respect to crops other than upland cotton, to assert that these four
payments are support for upland cotton because without them upland cotton farmers could not cover their costs.
However, Brazil’s approach is flawed in terms of its facts and the premises on which it relies. In the time
available we have not been able to identify and describe all the flaws and inaccuracies in Brazil’s presentation of
the data. Simply by way of example, however, we note that (1) Brazil includes a figure for cottonseed payments
in its graph purporting to show MY 2001 market revenue and government support (Rebuttal Submission,
paragraph 30), but Brazil’s own table at paragraph 84 of its rebuttal submission reflects that there were no
cottonseed payments for the 2001 marketing year; (2) Brazil’s theory would appear to be that cotton production
on cotton base acres are “necessary ” because without government payments costs of produc tion would not be
covered, but Brazil presents information only with respect to one year, marketing year 2001, with record low
prices - Brazil does not explain its theory or present an y data with respect to other years with more typical
prices; (3) Brazil asserts that upland cotton production “is produced only in particular regions . . . and producers
tend to specialize and not readily switch to other crops” – whereas cotton is produced in 17 of the 50 United
States and, for all US cotton farms, average cotton area is approximately 38 per cent of a farm’s acres (469 of
1,222 acres) (US Department of Agriculture, Charact eristics and Production Costs of US Cotton Farms
(October 2001).)

rate since (as noted above) these payments will be or were (as the case may be) received by a recipient
regardless of whether he or she produced any upland cotton production.

28. We are able to provide to the Panel the tota l outlays under the cited programmes with respect
to upland cotton base acreage:

Total Outlays Under Certain Programmes with respect to Upland Cotton Base Acres (millions
US$)

Payments152

MY1999

MY2000

MY2001

MY2002

Production
flexibility contract

614

575

474

452

Market loss
assistance

613

612

524

NA

Direct

NA

NA

NA

not yet
available
153

Counter-cyclical

NA

NA

NA

not yet
available154

VI. Payments With Respect to Base Peri od Production of Certain Commodities But Not
Others Are Not Inherently Product-Specific Support

29. Brazil has argued that production flexibility contract payments, market loss assistance
payments, direct payments, and counter-cyclical payments are product-specific support. The
United States had addressed some infirmities in Brazil’s approach in response to Additional
Question 67bis from the Panel and in previous submissions.
155 The United States now briefly
addresses two arguments presented by Brazil.

30. First, Brazil argues that each of these paym ents is product-specific because base acreage is
defined as acreage on which only some commodities we re historically produced during a defined and
fixed base period. This argument, again, rests on an “obsolete” definition of “in general” (in the
definition of non-product-specific support) as “unive rsal” or “without exception” and a determined
refusal to quote accurately and interpret the defin ition of product-specific support in Article 1(a). 156

152 See Exhibit US-38 (http://www.fsa.usda.gov/dam/BUD/bud1.htm) (for crop years 1999, 2000, and
2001).
153 The US Department of Agriculture estimates that direct payments for the 2002 marketing year with
respect to upland cotton base acres will total $173 million. Exhibit US-18
(www.fsa.usda.gov/dam/BUD/estimatesbook.htm).
154 The US Department of Agriculture estimates that counter-cyclical payments for the 2002 marketing
year with respect to upland cotton base ac res will total $873 million. Exhibit US-18
(www.fsa.usda.gov/dam/BUD/estimatesbook.htm).
155 See, e.g., US Rebuttal Submission, paras. 79-92, 99-105.
156 We note that, once again, Brazil has misquoted the definition of product-specific support in
Article 1(a). Brazil quotes that definition as follows : “For support not provided to agricultural producers in
general, the test is whether the support is ‘provided in favour of the producers of the basic agricultural
product.’” Brazil’s Rebuttal Submission, para. 19. The act ual text of Article 1(a), in pertinent part, reads:

That these payments are made with respect to base acreage for only some commodities is not relevant
to the question whether they are support “provide d for an agricultural product in favour of the
producers of the basic agricultural product.”
157 None of these payments satisfies either part of this
definition: they are neither provided “for an agricu ltural product” (rather, they are made with respect
to historic production of several products) nor “in favour of the producers of the basic agricultural
product” (no production is necessary for payments to be made).

31. Brazil also appears to now argue that the re quirement under paragraph 6(a) of Annex 2 that
eligibility for payments under a decoupled inco me support measure “shall be determined by
clearly-defined criteria such as income, status as a producer or landowner, factor use or production
level in a defined and fixed base period” requires that these payments be made to all producers for all
commodities. This approach would seriously lim it the ability of Members to move to decoupled
income support. It is not clear that any Member would be willing to switch to decoupled income
support if it required expanding suppor t to whole new classes of producers or commodities. We can
find no basis for this approach in the text of paragraph 6(a). This definition does not require
comprehensive coverage of all or nearly all produc tion in “a defined and fixed base period”; it merely
requires “clearly-defined criteria.” Thus, under Brazil’s reading, a measure could satisfy the
requirement of Annex 2, paragraph 6(a), and yet qualify as product-specific support under
Article 1(a).

32. Second, Brazil again selectively quotes the stat utory definition of “producers” to suggest that
recipients of these payments had to be growers who “shared in the risk of producing a crop.”
158 As
the United States has previously noted, the statute defines “producers” (those eligible in the first
instance to receive payment) as persons who “wou ld have shared had th e crop been produced.” 159
Thus, both the 2002 and 1996 Acts make clear that a payment recipient need not produce any crop
(including upland cotton) to receive payment. It is thus a serious error to imply that a payment
recipient is necessarily a “produ cer” in the Agreement on Agricultu re rather than a “producer”
(meaning “recipient”) in the statutory sense.

33. Nowhere in Brazil’s submission is there any s uggestion of how its approach can be found in
the Agreement on Agriculture. It does not make sense of the definitions of product-specific support
and non-product-specific support in Article 1(a), wh ich Brazil has recognized guide the interpretation
of the phrase “support to a specific commodity” in the Peace Clause. In sum, Brazil’s argument

“support . . . provided for an agricultural product in favour of the producers of the basic agricultural product”
(emphasis added). What Brazil describes as “the narrow US Article 13(b)(ii) specificity standard” in fact flows
from an interpretation of Article 13 that makes sense of the entire text of Article 1(a) and not just selected parts
of it.
157 Indeed, Brazil’s argument in paragraph 36 of its rebuttal submission rests on a non sequitur .
Brazil’s statement is that: “Thus, direct payments are not available to the great majority of US producers of
agricultural commodities, i.e., they are not provided to US agricultural producers in general.” (Emphasis in
original.) The illogic in Brazil’s statement is that, by removing the requirement to produce any particular crop
or any crop at all in order to receive these payments, the United States does in fact make the payments available
to producers in general. Recipients are free to produce a broad range of commodities, and so are producers of
agricultural commodities “in general.” Brazil appears to acknowledge that the payments are not in fact tied to
current production when, in paragraph 50, Brazil concedes that the payments are made to “upland cotton base
acreage holders” rather than to upland cotton producers.
158 See Brazil’s Rebuttal Submission, paras. 24 (quoting first half of definition), 29 (“Thus, as with PFC
payments, market loss assistance payments were not paid to agricultural producers in general but rather to only
a select group of US producers), 36 (“Direct payments are targeted support to “producers” farming, inter alia,
on upland cotton base acreage.”), 48 (“But the evidence demonstrates that CCP funds in MY 2002 paid to
“historic” (i.e., 1998-2001 or 1993-1995) upland cotto n producers are paid to a tiny fraction of total US
producers of agricultural commodities.”).
159 US Rebuttal Submission, paras. 36-38.

provides ample evidence that the phrase “support to a specific commodity” in the Peace Clause must
be interpreted in the context provided by the Ag reement on Agriculture. To divorce it from that
context may result in an unworkable and illogical interpretation along the lines suggested by Brazil.

VII. Brazil’s New Arguments Relating to Crop Insurance Do Not Demonstrate that Crop
Insurance Payments Are Product-Specific Support

34. Brazil presents a number of arguments claimi ng that crop insurance payments are “support to
a specific commodity.” In part, this argument relies on the notion that such payments are not support
provided to agricultural producers “in general” a nd, hence, not non-product-specific support. We
note, however, that in making these arguments Braz il avoids any reference to the definition of
product-specific support in Article 1(a). This is a fundamental interpretive error: Brazil cannot claim
that payments are not support to “agricultural pr oducers in general” under Article 1(a) without
providing an interpretation of the other component of support in Article 1(a), namely, product-specific
support (support “provided for an agricultural pr oduct in favour of the producers of the basic
agricultural product”). In fact, given that crop insurance support is available to approximately 100
agricultural commodities, representing approximately 80 per cent of US area planted and greater than
85 per cent of the value of all US crops, crop in surance payments are not support “provided for an
agricultural product.”160 The support to these approximately 100 commodities is the same: that is, the
crop insurance premium subsidies do not vary by commodity or plan of insurance.

35. Brazil’s specific arguments fail to addr ess the definition of product-specific support in
Article 1(a); thus, each fails to demonstrate that crop insurance payments are “support to a specific
commodity” rather than “support to several commodities.”

36. First, Brazil argues that certain policies (and accompanying premiums) on irrigation failures
are available only to upland cotton and a few othe r commodities. The United States has previously
addressed this argument and directs the Panel’s attention to that argument.
161

37. Second, Brazil argues that a larger pool of types of insurance policies are offered to upland
cotton than most other crops. Brazil has not ex plained how the types of crop insurance policies
offered by private companies
162 can affect whether US crop insurance payments (premium subsidies
that do not vary by commodity or insurance plan) are product-specific or not. Brazil’s “facts” are also
misleading in some instances and erroneous in othe rs. For example, Brazil suggests that “in many
instances, the policies available for cotton en terprises are not available for other crops.” 163 However,
we note that commodities other than upland cotton can be insured under the same types of policies as
upland cotton.164

160 US Rebuttal Submission, paras. 93-98.
162 Under the Agricultural Risk Protection Act, new insurance products must be developed by the
private sector and approved by the Board of Directors of the Federal Crop Insurance Corporation. The US
Department of Agriculture is expressly prohibited from conducting research and development on new products.
Thus, the variety and availability of insurance products reflects the fact that private companies, not the US
Government, have developed and offered these products.
164 Upland cotton producers can insure their crops under the following types of policies: Actual
Production History, Group Risk Plan, Income Protection, Crop Revenue Coverage, and Revenue Assurance.
Other crops that are eligible for the policies include:
for Actual Production History – Alfalfa seed, all other grapefruit, almonds, apples, avocados, barley,
blueberries, cabbage, canola, cigar binder tobacco, cigar filler tobacco, cigar wrapper tobacco, corn, cotton, ELS
cotton, crambe, cranberries, cultivated wild rice, dry be ans, dry peas, early and midseason oranges, figs, flax,
forage production, fresh apricots, fresh freestone peac hes, fresh market tomatoes, fresh nectarines, grain
sorghum, grapefruit, grapes, green peas , late oranges, lemons, macadamia nu ts, mandarins, Maryland tobacco,

38. Third, Brazil argues that are there specific upland cotton provisions in certain policies.
165
This is true – an insurance product offered by a pr ivate company must be tailored for the situation and
desires of the insurance purchasers – but also irre levant as the policies are generally similar in
underwriting rules and share the same subsidy schedule.

39. Fourth, Brazil argues that upland cotton produ cer participation rates in the crop insurance
programme “is much higher that for other crops.”166 We first note that Brazil neglects to mention that
participation rates for the major field crops are generally quite high (over 75 per cent of insurable
acres). Any producer who received disaster assistance was required to purchase federal crop
insurance in the following year; cotton participati on may be slightly higher because of droughts that
have hit cotton regions in recent years. More im portantly, that cotton producers may choose to take
up crop insurance more than producers of other co mmodities might is irrelevant to whether the
payments are provided “for an agricultural product. ” Again, the crop insurance premium subsidy is
identical for all commodities and for each plan of insurance.

40. Fifth, Brazil argues that tracking the cost of reinsurance provided to private companies is
“further evidence that USDA treats crop insuran ce for upland cotton separately from crop insurance
provided to other crops.”167 Of course, the way the US Department of Agriculture “tracks cost[s]” is
irrelevant to the analysis of whether crop insura nce payments provide support “for an agricultural
product.” Brazil also misinterprets the Standard Reinsurance Agreement between the US Government
and private insurers. Under that Agreement, ne t underwriting gains and losses for each insurer are
calculated at the state level over all crops , not separately for individual crops (such as upland
cotton).168 Thus, Brazil errs when it claims that rein surance provides evidence that crop insurance for
upland cotton is treated separately from crop insurance provided to other crops.

41. Sixth, Brazil claims that “the 2000 ARP Act denies subsidies to producers of other
agricultural products.”
169 It is true that there are certain products for which policies have not been
developed. However, development of new polic ies is ongoing; for example, provisions of the
Agricultural Risk Protection Act of 2000 allow for the development of livestock insurance products.
A number of livestock products are currently availabl e on a pilot basis, includi ng price insurance for
hogs and feeder cattle and gross margin insurance. We also note that producers may currently insure
livestock and dairy revenue as part of whole farm insurance offered through the Adjusted Gross
Revenue Insurance.170 Finally, Brazil’s argument here again reads domestic producers “in general’ to
mean “universally” or “without exception”; as no ted above, that definitio n is now considered
obsolete.

millet, Minneola tangelos, mint, mustard, navel oranges, oats, onions, Orlando tangelos, peaches, peanuts, pears,
plums, popcorn, potatoes, processing apricots, processing beans, processing cling peaches, processing freestone,
prunes, rice, Rio Red and Star Ruby grapefruit, Ruby Red grapefruit, rye, safflower, soybeans, sugar beets,
sugarcane, sunflowers, sweet corn, sweet oranges, sweet potatoes, table grapes, tomatoes, Valencia oranges,
walnuts, wheat;
for Group Risk – corn, cotton, forage production, grain sorghum, rangeland, soybeans, wheat;
for Income Protection – barley, corn, cotton, grain sorghum, soybeans, wheat; and
` for Revenue Assurance – barley, canola, cotton, grain sorghum, rice, soybeans, sunflowers, wheat.
See http://www3.rma.usda.gov/apps/sob/current_week/crop2003.pdf.
168 The provisions of the Standard Reinsurance Agreement are available on the Risk Management
Agency website at: http://www.rma.usda.gov/pubs/ra/98SRA.pdf.
170 More information on Adjusted Gross Revenue Insurance can be found on the Risk Management
Agency website at: http://www.rma.usda.gov/pubs/2003/PAN-1667-06rev.pdf.

42. Finally, with respect to Brazil’s references to the literature on the effects of crop insurance on
production,171 the findings are (contrary to what Brazil has claimed) mixed. While several studies
(such as those cited by Brazil) have suggested crop insurance payments may have a slight effect on
acreage, the effects on production are less clear. 172 If crop insurance encourages moral hazard
problems (as claimed by Brazil), crop yields will be adversely affected as producers attempt to
increase crop insurance indemnities. If moral hazar d and adverse selection problems are severe, crop
insurance support could potentially have a negative effect on production. 173 The potential production
effects of crop insurance payments, moreover, go es to whether such payments are “amber box”
support but does not figure in the question whether such payments (which are offered at the same rate
across commodities and policies) can be support “for an agricultural product.”

VIII. Brazil May Not Act Unilaterally on Procedural Matters

43. The United States takes note of Brazil’s stat ement in its 25 August 2003 letter to the Panel
174
that, concerning paragraph 20 of the Panel’s determin ation of 20 June 2003, “Brazil interpreted this
ruling as permitting it to provide no later than 22 Augu st all of its evidence and argument that had not
already been provided in its earlier submissions. This is the manner in which it treated the new
evidence and arguments presented by the United States in its Rebuttal Submissions.” The
United States is unable to reconcile Brazil’s positi on concerning its own ability to provide evidence
and arguments at any time up through August 22 with Brazil’s repeated assertions that the
United States “should have” provided particular mate rial in its replies to the Panel’s questions. 175
There is of course no basis for Brazil’s assertions that particular material “should have been” provided
in replies to questions rather than in a rebuttal s ubmission. There is no basis for Brazil to dictate to
another Member what it may or may not include in its rebuttal submission. Brazil is fabricating an
obligation and attempting to impose it on the United States at the same time that it exempts itself from
this obligation. In this, Brazil’s approach is similar to its repeated attempts in this dispute to add to
the obligations in the Agreement on Agriculture and the Subsidies Agreement.

171 Brazil’s Rebuttal Submission, paras. 60-67.
172 The US Department of Agriculture, Economic Research Service, studies cited by Brazil only
examine the effects of crop insurance subsidies on acreage. They do not consider effects on crop yields.
173 Recent studies by Smith and Goodwin (1996) , Babcock and Hennessy (1996) and Goodwin and
Smith (2003) suggest that farms with more insurance te nd to use less inputs like fertilizer and pesticides and
vice versa. This demonstrates a potential moral hazard problem with crop insuranc e that suggests that crop
insurance participation may have a negative effect on yields. See Babcock, B. and D. Hennessy. “Input Demand
Under Yield and Revenue Insurance” American Journal of Agricultural Economics 78(1996):416-27; Goodwin,
B. and V. Smith. “An Ex Post Evaluation of the Conservation Reserve, Federal Crop Insurance, and other
Government Programmes: Programme Participation and Soil Erosion.” Journal of Agriculture and Resource
Economics 28(2003):201-216; Smith, V. and B. Goodwin. “Crop Insurance, Moral Hazard and Agricultural
Chemical Use.” American Journal of Agricultural Economics 78(1996):428-38.
174 The United States also notes that the Panel’s communication of 19 August 2003 had not indicated
that the parties would have an oppor tunity to comment on each other’s re quests to comment. Had there been
such an opportunity, the United States would have been happy to comment on Brazil’s request of
23 August 2003. Perhaps Brazil could reconsider whether it has a basis to assert a right to decide that it may
unilaterally provide comments to the Panel while denying the United States the same procedural rights. Under
Brazil’s approach, it would not have needed to request permission from the Panel to file comments on
Wednesday, August 27, but could have simply provided those comments, unsolicited, while denying equal
access for the United States. The United States is grateful that the Panel’s extremely prompt reply to the US
request obviated any need to respond to Brazil’s unauthorized and out of order comments on that request.
175 See Brazil’s 23 August 2003 letter to the Panel.

IX. Conclusion

44. The United States has demonstrated that us ing any measurement that reflects the support
“decided” by the United States rather than factor s (such as market prices) beyond the United States’
control, US support to upland cotton in mark eting years 1999-2002 has not exceeded the 1992
marketing year level. The question then is wh ether the Panel will find that the United States has
breached the Peace Clause simply b ecause market prices were lower in some recent years than they
were in 1992.

45. The United States submits that the Peace Clau se must be interpreted in a way that permits
Members to comply in good faith – that is, Members must be able to tell if they will breach the Peace
Clause or not. Brazil’s budgetary outlays approach does not do that. Brazil’s approach would mean
that Members could not know if they had complied with the Peace Clause until it was too late to do
anything about it. The best way to interpret the Peace Clause in a way that allows Members to
comply is to use the “support” as “decided” by a Member during the 1992 marketing year as the basis
for comparison. Recognizing, as the United States be lieves is required by the Peace Clause text, that
“decided” and “grant” cover only those parameters over which Members exercise control would also
be consistent with this approach of allowing “g ood faith” compliance since it would permit Members
to control whether their measures conformed to their obligations.

46. The United States has disciplined itself to gr ant support not in excess of that decided during
the 1992 marketing year. Therefore, we are entitle d to the protection of the Peace Clause, and we
respectfully request the Panel to find that Brazil may not maintain this action challenging these
conforming US measures.

List of Exhibits

1. US Department of Agriculture, Fiscal Year Actual Budgetary Expenditures by Crop Year
(http://www.fsa.usda.gov/dam/BUD/bud1.htm)

2. US Department of Agriculture, Complian ce Report for 1992 Acreage Reduction Programme