UNITED STATES – SUBSIDIES ON UPLAND COTTON
Document: Recourse to Arbitration by the United States under Article 22.6 of the DSU and Article 7.10 of the SCM Agreement DECISION BY THE ARBITRATOR
Date: 31 August 2009
Document codes: WT/DS267/ARB/2
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

UNITED STATES – SUBSIDIES ON UPLAND COTTON

Recourse to Arbitration by the United States
under Article 22.6 of the DSU
and Article 7.10 of the SCM Agreement

DECISION BY THE ARBITRATOR

I. INTRODUCTION
A. INITIAL PROCEEDINGS
1.1 On 21 March 2005, the Dispute Settlement Body ("DSB") adopted the Appellate Body report1
and the report of the Panel in this case2, as modified by the Appellate Body.
1.2 The Appellate Body upheld the conclusions of th e panel that the Step 2 payments made to
domestic users and those made to exporters were subsidies within the meaning of Article 3.1(b) of the
SCM Agreement (in the case of the former) and Article 3.1(a) of the same Agreement (in the case of
the latter), and were prohibited by those provi sions respectively and granted and maintained
inconsistently with Article 3 of that Agreement. The Appellate Body also upheld the Panel's findings
that the export credit guarantee programmes at i ssue, i.e. GSM 102, GSM 103 and SCGP, constituted
per se export subsidies within the meaning of Item (j) of the Illustrative List of Export Subsidies in
Annex I of the SCM Agreement and therefore were subsidies incons istent with Article 3.1(a) and 3.2
of the SCM Agreement. The Appellate Body also upheld the Panel's conclusion that the effect of
marketing loan programme payments, Step 2 paym ents, market loss assistance payments and counter-
cyclical payments (the "price-contingent subsid ies") was significant price suppression in the same
world market within the meaning of Article 6.3 (c) of the SCM Agreement.3
1.3 As recommended by the original panel under Article 4.7 of the SCM Agreement, the
compliance period for the prohibited subsidies expired on 1 July 2005. In accordance with Article 7.9
of the SCM Agreement, the compliance period for the actionabl e subsidies expired on 21 September
2005, six months after the date on which the DSB adopted the Appellate Body report.4
1.4 On 30 June 2005, the United States Department of Agriculture (the "USDA") announced that
the United States Commodity Credit Corporation (the "CCC") would no longer accept applications for
export credit guarantees under the GSM 103 programme. 5 The USDA also announced that the CCC
would use a new fee structure for the GSM 102 and SCGP programmes.6
1.5 In October 2005, the CCC ceased issuing export credit guarantees under the SCGP.7
1.6 On 1 February 2006, United States Congress adopted legislation repealing the Step 2
payments programme for upland cotton effective as of 1 August 2006.8

1 Appellate Body Report, , WT/DS267/AB/R (hereafter the
"Appellate Body Report").
2 Panel Report, , WT/DS267/R (herea fter the "Panel
Report").
3 See Appellate Body Report, para. 763 (c), (d) and (e).
4 See WT/DS267/21, WT/DS267/26.
5 See Panel Report, para. 3.16 (referring to "USDA announces changes to export credit guarantee
programs to comply with WTO findings", USDA Fore ign Agricultural Service (FAS) Online News Release
of 30 June 2005 (Exhibit Bra-502 submitted by Brazil to the Panel); and "Notice to GSM-103 Program
Participants", USDA FAS Program Announcement of 30 June 2005 (Exhibit Bra-503 submitted by Brazil to the
Panel)).
6 See Panel Report, para. 3.16.
7 See ibid. (referring to United States' first written submission to the Panel, para. 20, and "Summary of
FY 2006 Export Credit Guarantee Programme Activity for GSM-102 as of close of business: 9/30/2006"
(Exhibit Bra-513 submitted by Brazil to the Panel)).
8 See Panel Report, para. 3.7 (referring to Section 1103 of the Deficit Reduction Act of 2005, Public
Law No. 109-171 (Exhibit Bra-435 submitted by Brazil to the Panel)).

1.7 On 18 August 2006, Brazil requested the establishm ent of a panel pursuant to Article 21.5 of
the Dispute Settlement Understanding ("DSU") concer ning the alleged failure of the United States to
implement the recommendations and rulings of the DSB. 9 At its meeting of 28 September 2006 the
DSB decided, in accordance with Article 21.5 of the DSU, to refer this matter, if possible, to the
original Panel. The compliance panel report was circulated to Members on 18 December 2007.
1.8 With respect to the marketing loan and c ounter-cyclical payments, the compliance panel
found that the United States failed to comply with the DSB recommendations by acting inconsistently
with Articles 5(c) and 6.3(c) of the SCM Agreement:
"The United States acts inconsistently w ith its obligations under Articles 5(c)
and 6.3(c) of the SCM Agreement in that the effect of marketing loan and counter-
cyclical payments provided to US upland cotton producers pursuant to the FSRI Act
of 2002 is significant price suppression within the meaning of Article 6.3(c) of the
SCM Agreement in the world market for upland co tton constituting 'present' serious
prejudice to the interests of Brazil within the meaning of Article 5(c) of the
SCM Agreement. B y acting inconsistently with Artic les 5(c) and 6.3(c) of the
SCM Agreement the United States has failed to comply with the DSB
recommendations and rulings. Specifically, the United States has failed to comply
with its obligation under Article 7.8 of the SCM Agreement 'to take appropriate steps
to remove the adverse effects or ... withdraw the subsidy'."
10
1.9 The compliance panel concluded that "to th e extent that the measures taken by the
United States to comply with the recommendations and rulings adopted by the DSB in the original
proceeding are inconsistent with the obligations of the United States under the covered agreements,
these recommendations and rulings remain operative."11
1.10 On 12 February 2008, the United States notified the DSB of its intention to appeal certain
issues of law covered in the Report of the comp liance panel and certain legal interpretations
developed by the panel and filed a Notice of Appeal. 12 On 25 February 2008, Brazil notified the
DSB, pursuant to Article 16.4 of the DSU, of its in tention to appeal certain issues of law covered in
the Report of the compliance panel and certain legal interpretations developed by the Panel and filed a
Notice of Other Appeal.13
1.11 The Appellate Body report was circulated on 2 June 2008. The Appellate Body upheld the
compliance panel's conclusions with respect to the marketing loan and counte r-cyclical payments as
well as the conclusions on the GSM 102 export credit guarantees issued under the revised GSM 102
programme.14
1.12 The DSB adopted the Appellate Body report a nd the compliance panel report as modified by
the Appellate Body on 20 June 2008.

9 WT/DS267/30.
10 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 15.1(a).
11 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 15.2.
12 WT/DS267/33.
13 WT/DS267/34 .
14 Although the Appellate Body found that the compliance panel failed to make an objective
assessment of the revised GSM 102 programme pursuant to item (j) of the Illustrative List by not considering
certain re-estimated data submitted by the United States , it also found that this did not affect the compliance
panel's conclusion on the revised GSM 102 programme payments.

B. REQUEST FOR ARBITRATION AND ARBITRATION PROCEEDINGS
1.13 On 4 July 2005, Brazil notified the DSB of its "Recourse to Article 4.10 of the
SCM Agreement and Article 22.2 of the DSU" with respect to the prohibited subsidies found to be
inconsistent by the original Panel and the Appellate Body. 15 These prohibited subsidies were
identified as follows: (i) the export credit guarantees under the GSM 102, GSM 103 and SCGP
export credit guarantee programmes in respect of exports of upland cotton and other unscheduled
agricultural products supported under the programmes, and in respect of one scheduled product (rice);
(ii) Section 1207(a) of the Farm Security and Rura l Investment (FSRI) Act of 2002 providing for user
marketing (Step 2) payments to exporters of upla nd cotton; and (iii) Section 1207(a) of the FSRI Act
of 2002 providing for user marketing (Step 2) pa yments to domestic users of upland cotton. Brazil
requested an authorization to take appropriate countermeasures in the amount corresponding: (i) to
the Step 2 payments made in the most recent concl uded marketing year; and (ii) to the total amount of
exporter applications received un der GSM 102, GSM 103, and SCGP for the most recent concluded
fiscal year. Brazil also requested cross-sector susp ension of obligations under the TRIPS Agreement
and the GATS pursuant to Article 22.3(c) of the DSU.
1.14 On 5 July 2005, Brazil and the United States notified "Agreed Procedures under Articles 21
and 22 of the Dispute Settlement Understanding and Article 4 of the SCM Agreement in the follow-up
to the dispute" ("Agreed Procedures") to the DSB.
16
1.15 On 14 July 2005, the United States notified the DSB of its objection "to the appropriateness
of the countermeasures and the level of suspension of concessions or other obligations proposed by
Brazil". The United States also claimed that the pr inciples and procedures set forth in Article 22.3(c)
of the DSU for requesting cross-sector suspensi on of concessions and obli gations had not been
followed by Brazil.17
1.16 On 15 July 2005, at the meeting of the DSB, it was agreed that the matter raised by the
United States in WT/DS267/23 was referred to arb itration as required by Article 22.6 of the DSU and
Article 4.11 of the SCM Agreement. The Arbitrator was constituted on 19 July 2005. It was
composed of the members of the original Panel, namely Mr Darius Rosati as Chairman, and Mr Mario
Matus and Mr Daniel Moulis as Members.
18
1.17 On 17 August 2005, the United States and Brazil jointly requested suspension of the
arbitration proceedings according to their "Agr eed Procedures" until Brazil might subsequently
request the resumption or termination of the Arbitr ation. The Arbitrator suspended the arbitration
proceedings on 18 August 2005.19
1.18 On 6 October 2005, Brazil notified to the DSB its "Recourse to Article 7.9 of the
SCM Agreement and Article 22.2 of the DSU by Brazil" with respect to the actionable subsidies found
to be inconsistent by the original panel and th e Appellate Body. The subsidies in question were
identified as marketing loan programme payments, u ser marketing (Step 2) payments, market loss
assistance payments and counter-cyclical paymen ts. Brazil requested the DSB to grant Brazil
authorization to take countermeasures in the annual amount of US$1.037 billion until the
United States withdrew the relevant subsidies or re moved their adverse effects. Brazil also requested

15 WT/DS267/21.
16 See WT/DS267/22.
17 See WT/DS267/23.
18 See WT/DS267/24.
19 WT/DS267/25.

cross-sector suspension of obligations under the TRIPS Agreement and the GATS pursuant to
Article 22.3(c) of the DSU.20
1.19 On 17 October 2005, the United States notified to the DSB its objection to the level of
suspension of concessions or other obligations a nd the countermeasures proposed by Brazil. The
United States contended that the countermeasures proposed were not commensurate with the degree
and nature of the adverse effects determined to exist within the meaning of Article 7.9 of the
SCM Agreement. Further, the United States contended that the level of suspension proposed was not
equivalent to the level of nullifica tion or impairment within the meaning of Article 22.7 of the DSU.
The United States also claimed that the principles a nd procedures set forth in Article 22.3(c) of the
DSU had not been followed by Brazil in reques ting cross-sector suspension of concessions and
obligations.21
1.20 On 18 October 2005, at the meeting of the DSB, it was agreed that the matter raised by the
United States was referred to arbitration. On 18 November 2005, the Arbitrator was constituted. It
was composed of the members of the original Panel, namely Mr Darius Rosati as Chairman, and
Mr Mario Matus and Mr Daniel Moulis as Members.
22
1.21 On 21 November 2005, Brazil and the United States jointly notified the Arbitrator of their
request that the arbitration proceedings be suspende d until either party were to subsequently request
their resumption. The Arbitrator suspended the arbitration proceedings on 7 December 2005.23
1.22 On 25 August 2008, Brazil notified a request of resumption of these arbitration proceedings
(in relation to actionable subsidies) and also the resumption of the other arbitration proceedings (in
relation to prohibited subsidies).24
1.23 On 1 October 2008, due to the unavailability of two members of the Arbitrator upon
resumption of the proceedings, the parties agreed on the following composition of the Arbitrator for
both proceedings:
 Mr Eduardo Pérez-Motta, as Chairman
 Mr Alan Matthews
 Mr Daniel Moulis 25

1.24 An organizational meeting was held on 24 Oc tober 2008 to discuss the proposed working
procedures and timetables for both arbitration pr oceedings. The final working procedures and
timetables were sent to the parties on 29 October 2 008. Brazil requested a further extension of the
deadline for its written submission on 31 October 2008. The Arbitrator, after considering the
arguments of both parties in relation to Brazil's re quest, revised the timetables and sent them to the
parties on 19 November 2008.
1.25 On 31 October 2008, Brazil submitted its Met hodology Paper for the calculation of the
proposed countermeasures. The United States pr ovided a written submission on 9 December 2008.
Brazil provided its written submissi on on 13 January 2009. The Arbitr ator sent written questions to
the parties on 30 January 2009. The parties provided their replies to these questions on
13 February 2009.

20 See WT/DS267/26.
21 See WT/DS267/27.
22 See WT/DS267/28.
23 See WT/DS267/29.
24 See WT/DS267/38, WT/DS267/39.
25 See WT/DS267/24/Add.1, WT/DS267/28/Add.1.

1.26 The Arbitrator met with the parties on 3 March 20 09. After the meeting, the Arbitrator posed
additional written questions to the parties on 6 March 2009 and received their written responses on
20 March 2009. The parties also provided th eir comments on each other's written responses to
questions from the Arbitrator on 31 March 2009. On 20 April 2009, the Arbitrator informed the
parties that in light of the voluminous materials re ceived from parties after the meeting with parties,
and also taking into account the time needed for tran slation of the reports into the other two working
languages, the issuance date of the Arbitrator's Deci sion was delayed. The Arbitrator asked the
parties an additional question on 11 June 2009. On 30 June and 5 August 2009, the Arbitrator
informed the parties of further delays in the ci rculation of the Decision. The Decision by the
Arbitrator was circulated on 31 August 2009.
C. O
RGANIZATION OF THE PROCEEDINGS AND PRESENTATION OF THE DECISION
1.27 As described above, two separate arbitrati on proceedings were initiated pursuant to
Article 22.6 of the DSU in this dispute, one in re lation to the prohibited subsidies at issue in the
underlying proceedings, and the other in relation to the actionable subsidies. These proceedings were
conducted in parallel and the same persons served as arbitrators in both proceedings. The parties
presented single submissions in relation to both proceedings.
1.28 The Arbitrator therefore sought the views of the parties whether it should issue a single
decision or two decisions for both proceedings and how it should treat the arguments presented in the
parties' single submissions.
1.29 The United States indicates that there are two arbitration requests and two arbitrations, and
that it therefore expects the Arbitrator to issue a separate decision for each of the two arbitrations.
With respect to the use of submissions, the United States indicates that the sections of the submissions
that are not clearly related to prohibited subsidies or to actionable subsidies may be relevant to either
proceeding.26 Brazil on the other hand argues that the two proceedings should be harmonized as
much as possible and considers that a single decision would be sufficient for the two arbitrations.
Also, Brazil has no objection to the Arbitrator taki ng into account arguments made in the entirety of
Brazil's submissions for the purpose of rendering decisions in either proceeding.
27
1.30 With respect to the treatment of the parties' submissions, the Arbitrator notes that although
each party submitted a single written submission, th e sections on prohibited subsidies are separate
from the sections on actionable subsidies. It is therefore generally possible to distinguish the
arguments relating to the proposed countermeasures against the prohibited subsidies at issue, from
those relating to countermeasures against the actionable subsidies. In addition, some sections of the
submissions, such as the introduction and the sections on cross-retaliation, may be relevant to both
proceedings. The Arbitrator will therefore refer to such arguments in this Decision as appropriate.
1.31 With respect to the presentation of its Decisi on, the Arbitrator notes that the United States
presented two distinct objections to the two distinct requests for countermeasures presented by Brazil.
Although the conduct of the two pr oceedings was harmonized and the parties both provided a single
written submission covering both the prohibited and actionable subsidies at issue, the fact remains that
there are two arbitration proceedings, and that the proceedings against prohibited subsidies are based
on Article 4.10 of the SCM Agreement whereas the proceedings relating to the actionable subsidies in
the same dispute are based on Article 7.9 of the SCM Agreement. Under these circumstances, and in
the absence of an agreement of the parties on th e issuance of a single decision, the Arbitrator
considered it appropriate to issue a separate decision with respect to each of the two proceedings.

26 US responses to questions from Arbitrator, question 2.
27 Brazil's responses to questions from the Arbitrator, question 2.

II. OVERALL APPROACH OF THE ARBITRATOR
2.1 The United States has initiated these proceedings pursuant to Article 22.6 of the DSU and
Article 7.10 of the SCM Agreement.
2.2 Article 22.6 of the DSU provides in relevant part:
"When the situation described in paragraph 2 occurs, the DSB, upon request, shall
grant authorization to suspend concessions or other obligations within 30 days of the
expiry of the reasonable period of time unl ess the DSB decides by consensus to reject
the request. However, if the Member con cerned objects to the level of suspension
proposed, or claims that the principles and procedures set forth in paragraph 3 have
not been followed where a complaining pa rty requested authorization to suspend
concessions or other obligations pursuant to pa ragraph 3(b) or (c), the matter shall be
referred to arbitration. Such arbitration sha ll be carried out by the original panel, if
members are available, or by an arbitrat or appointed by the Director-General and
shall be completed within 60 days after the date of expiry of the reasonable period of
time."
2.3 With regard to countermeasures taken in respon se to actionable subsidies under Part III of the
SCM Agreement, however, Article 7.10 of that Agreement provides the following mandate for the
arbitrator:
"In the event that a party to the dispute requests arbitration under paragraph 6 of
Article 22 of the DSU, the arbitrator sha ll determine whether the countermeasures are
commensurate with the degree and nature of the adverse effects determined to exist."
2.4 In this proceeding, the United States challeng es two distinct aspects of Brazil's proposed
countermeasures. The United States objects first to the level of suspension of concessions or other
obligations and the countermeasures proposed by Brazil. In addition, the United States claims that the
principles and procedures set forth in DSU Article 22.3 have not been followed by Brazil and
therefore the United States requests the Arbitrator to reject Brazil's request to suspend concessions
with respect to TRIPS and GATS.
28 We will therefore consider these two aspects in turn. In light of
the fact that our determination in relation to the level of the proposed countermeasures may have an
impact on our determination in relation to the form of countermeasures to be taken, we consider first
the level of the proposed countermeasures.
2.5 As a preliminary matter, however, we must consider whether changes that have taken place in
the legal basis for the granting of ML and CCPs a ffect Brazil's entitlement to seek countermeasures n
relation to these payments.
III. PRELIMINARY ISSUE: DO CHANGES IN THE LEGAL BASIS OF THE
MARKETING LOAN AND COUNTERCYCLICAL PAYMENTS AFFECT BRAZIL'S
ENTITLEMENT TO TAKE COUNTERMEASURES?
3.1 The United States argues that ML and CCP s ubsidies under the Farm Security and Rural
Investment Act of 2002 ("2002 Farm Bill") will no longe r be made, so that there is no longer a legal
basis for authorizing countermeasures, since the measures have been withdrawn with the expiry of the

28 WT/DS267/23.

2002 Farm Bill. 29 We must therefore consider, as a preliminary matter, whether this circumstance
affects Brazil's entitlement to seek countermeasures in relation to these payments.
A. ARGUMENTS OF THE PARTIES
3.2 The United States argues that the marketing loan and counter-cyclical payments challenged
by Brazil during both the original and compliance panel proceedings were payments authorized by the
2002 Farm Bill. Given that the 2002 Farm Bill has e xpired, the United States argues that the subsidy
has been withdrawn and that, as a result, there is no longer a basis to authorize countermeasures with
respect to these payments. In addition, the United States considers that the condition under
Article 22.8 of the DSU that the suspension shall onl y be applied until the rem oval of the inconsistent
measure has been met, and therefore no countermeasure can be authorized now.30
3.3 Brazil considers that there is no factual basis for the United States to claim that the ML and
CCP subsidies have "expired". In Brazil's view, not hing in the 2008 Farm Bill that repealed the 2002
Farm Bill materially changed either the ML programme or the CCP programme as it applies to cotton.
Brazil observes that the United States makes no assertions that the substance of ML and CCP
subsidies has been changed in the 2008 Farm Bill. Nor could it, in Brazil's view, as demonstrated by
USDA's "Side-By-Side" comparison of the provisions of the 2002 and 2008 Farm Bills.31
3.4 Brazil indicates that USDA states that the 2008 Farm Bill "[c]ontinues nonrecourse
commodity loans with marketing loan provisions fo r 2008-12 crops", including cotton, and "[r]etains
eligibility provisions" that existed in the 2002 Farm Bill. Brazil claims that Section 1202(a)(6) of the
2008 Farm Bill continues the same loan rate of US$0.52 cents pe r pound that was applicable under
the 2002 Farm Bill. Similarly, with respect to th e counter-cyclical payment program, Brazil cites the
relevant excerpt from USDA's "Side-By-Side" as confirming the unchanged continuation of that
programme in the 2008 Farm Bill.32
3.5 Brazil argues that despite the technical change in the legal basis for ML and CCP subsidies,
the United States continues to provide them "under the same conditions and criteria as the marketing
loan payments and counter-cyclical payments" subject to the origin al and compliance panels' findings
of present serious prejudice. That is, the Unite d States cannot escape its implementation obligation
simply through the technical change of replaci ng one measure – ML and CCP subsidies under the
2002 Farm Bill – by another measure – ML and CCP subsidies under the 2008 Farm Bill.
3.6 Citing the Appellate Body's statement in US – Continued Suspension , Brazil argues that
unless and until the United States has achieved "subst antive compliance" with the recommendations
and rulings by eliminating or withdrawing all of the adverse effects – including the threat of
continuing future adverse effects – Brazil has the right to pursue countermeasures commensurate with
the degree and nature of the adverse effects determined to exist.
3.7 In response to a question from the Arbitrator , the United States argues that Brazil uses a
comparison of the provisions of the 2002 and 2008 Fa rm Bills to show that the change "did not
reduce, or otherwise impact in any significant way" marketing loan or countercyclical payments for
cotton. But, in the United States' view, the 2008 Fa rm Bill has only recently been put into effect, and
that it is difficult to make any such conclusion on the basis of actual data. Therefore the United States
claims that Brazil's conclusion is only speculation that reflects Brazil's assumptions regarding how the
marketing loan and countercyclical payments will be made in the future. The United States says that,

29 US written submission, paras. 235 and 236.
30 US written submission, paras. 235-238.
31 See Brazil's written submission, para. 438.

over time, the marketing loan and countercyclical pa yments will be affected by many factors other
than the Farm Bill, including farmers' decisions in the United States and worldwide, the state of
industries that use cotton as an input, etc. In additi on, the United States claims that even if future
payments were certain, the effects of those payments on price would still be a matter of speculation.33
B. ASSESSMENT BY THE ARBITRATOR
3.8 The Arbitrator takes note of the parties' ag reement that the 2002 Farm Bill has expired and
that the 2008 Farm Bill has been enacted as of 3 January 2008. 34 The issue before the Arbitrator is
that the United States claims that the 2002 Farm Bill under which ML and CCPs have been made has
expired and these subsidies have been withdrawn, and that, therefore, there is no longer a basis to
authorize countermeasures with respect to these payments.
3.9 We first note that, as a result of the origin al proceedings, the DSB recommended that the
United States withdraw the ML and CCPs or remove their adverse effects. The compliance panel then
found that the United States had failed to comply with the DSB recommendations with respect to
these measures by acting inconsistently with Articles 5(c) and 6.3(c) of the SCM Agreement:
"The United States acts inconsistently w ith its obligations under Articles 5(c)
and 6.3(c) of the SCM Agreement in that the effect of marketing loan and counter-
cyclical payments provided to US upland cotton producers pursuant to the Farm Bill
of 2002 is significant price suppression within the meaning of Article 6.3(c) of the
SCM Agreement in the world market for upland co tton constituting 'present' serious
prejudice to the interests of Brazil within the meaning of Article 5(c) of the
SCM Agreement. By acting inconsistently with Artic les 5(c) and 6.3(c) of the
SCM Agreement the United States has failed to comply with the DSB
recommendations and rulings. Specifically, the United States has failed to comply
with its obligation under Article 7.8 of the SCM Agreement 'to take appropriate steps
to remove the adverse effects or ... withdraw the subsidy'."
35
3.10 These conclusions were upheld by the Appella te Body, and the reports of the compliance
panel and of the Appellate Body were adopted on 20 June 2008.
3.11 A multilateral determination has therefore b een made, in the context of compliance
proceedings initiated under Article 21.5 of the DSU, that the United States has failed to comply with
the recommendations and rulings of the DSB with re spect to the ML and CCPs. As we understand it,
the United States is in essence requesting us to find that this determination is no longer pertinent,
because the legal basis upon which the payments at issue were made at the time of the ruling no
longer exists.
3.12 As an Arbitrator acting under Article 22.6 of the DSU and Article 7.10 of the DSU, our task is
to review, under the applicable legal standard, th e countermeasures proposed by Brazil in relation to
the ML and CCPs, following the determination of n on-compliance that has been made in relation to
them. As the Appellate Body noted in US – Continued Suspension , "the authorization to suspend
concessions is ... granted following a long process of multilateral dispute settlement in which relevant
adjudicative bodies, as well as the DSB, render multila teral decisions at key stages of the process" 36,
which may include compliance proceedings, followed by an arbitration to determine the level of
suspension of concessions.

33 US responses to questions from the Arbitrator, question 64, para. 164.
34 Exhibit Bra-735.
35 WT/DS267/RW, para. 15.1(a).
36 Appellate Body Report, US – Continued Suspension, para. 317.

3.13 In this case, the compliance panel determined that "the effect of marketing loan and counter-
cyclical payments provided to US upland cott on producers pursuant to the FSRI Act of 2002 is
significant price suppression within the meaning of Article 6.3(c) of the SCM Agreement in the world
market for upland cotton constituting 'present' serious prejudice to the interests of Brazil within the
meaning of Article 5(c) of the SCM Agreement" and that the United States had therefore failed to
comply with the recommendations and rulings of the DSB.37
3.14 It is, in our view, appropriate for us, as arb itrators acting under Article 22.6 of the DSU, to
take into account this determination made in the context of compliance proceedings under Article 21.5
of the DSU and to assume a priori, on that basis, that the United States has not complied with the
relevant recommendations and rulings of the DSB.
3.15 At the same time, we note that panels, incl uding compliance panels, have the discretion to
take into account a modification or a repeal of the measure before them subsequent to their
establishment. We note in particular the following ruling by the Appellate Body in EC – Bananas III
(Article 21.5 – Ecuador II) in relation to the jurisdiction of compliance panels:
"We thus consider it to be within the discr etion of the panel to decide how it takes
into account subsequent modifications or a repeal of the measure at issue.
Accordingly, panels have made findings on expired measures in some cases and
declined to do so in others, depending on the particularities of the disputes before
them."38
3.16 In these proceedings, the United States argues that because the legal basis of the initial
measures has ceased to exist, it has complied with the DSB's recommendations and rulings since the
rulings of the DSB, and since the referral of the matter before us to arbitration, and requests us to take
this circumstance into consideration.
3.17 We note that it is normally not the task of arbitrators acting under Article 22.6 of the DSU to
review whether compliance has been achieved or no t, as arbitral proceedings under this provision
assume that there has been no compliance, and th is will normally have been determined through
compliance proceedings under Article 21.5 of the DSU, as was the case here.
3.18 However, even assuming that we may be entitled, as Arbitrator acting under Article 22.6 of
the DSU and Article 7.9 of the SCM Agreement, to make a determination whether the United States
has in fact come into compliance with the r ecommendations and rulings of the DSB since the
adoption of the compliance reports, we are not pers uaded that the United States has demonstrated to
us that it has complied with the relevant recommendations and rulings of the DSB.
3.19 We note that "compliance" with the recommendations and rulings of the DSB must be
understood to refer to "substantive compliance". As was recently stated by the Appellate Body in
US – Continued Suspension:
"The requirements in Article 21.5 to examine whether compliance measures exist and
whether the measures taken to comply are consistent with the covered agreements
also suggest that substantive compliance is required, rather than formal removal of
the inconsistent measure."39

37 See Panel Report, US – Upland Cotton (Article 21.5 – Brazil) , para. 10.255. See also Appellate
Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 448(c).
38 Appellate Body Report, EC – Bananas III (Article 21.5 – Ecuador II), para. 270.
39 Appellate Body Report, US – Continued Suspension, para. 308.

3.20 It is clear, therefore, that a mere formal removal of the inconsistent measure would not
necessarily mean that compliance has been achieve d, if "substantive compliance" has not been
achieved.
3.21 Both the original and compliance panels exam ined the ML and CCPs in the context of the
2002 Farm Bill. Brazil does not dispute that the 200 2 Farm Bill has expired, but it observes that the
2008 Farm Bill now provides a continuation of the mark eting loan programme at the same rate as that
provided by the 2002 Farm Bill and that the counte r-cyclical payments provisions provided in 2002
Farm Bill are retained in the 2008 Farm Bill.
3.22 Brazil has in particular presented a "side-by -side" comparison between the 2002 and 2008
Farm Bills, posted on the website of the USDA. 40 (see Annex 1) From this comparison table, it is
clear that the main features of the CCP as original ly provided in 2002 FSRI Act have been retained in
the 2008 Farm Bill. In fact, Section 1104 of both the 2002 FSRI Act and the 2008 Farm Bill
provides: "(a) ... for each of the ... crop year fo r each covered commodity, the Secretary shall make
counter-cyclical payments to producers on farms for which payments yields and base acres are
established with respect to the covered commodity if the Secretary determines that the effective price
for the covered commodity is less than the target price for the covered commodity". Therefore, the
substance of the provisions on CCP as original ly provided in the 2 002 FSRI Act has been
incorporated in the 2008 Farm Bill. It is also noteworthy from Section 1104 of both Bills that the
target prices for the selected commodities are also unchanged. The only change is the inclusion of
additional commodities.
41
3.23 Similarly, a reading of both the 2002 Farm Bill and the 2008 Farm Bill also reveals that the
provisions on ML in the 2002 Farm Bill were retain ed in the 2008 Farm Bill. These main provisions
include Sections 1201and 1202, 1203 and 1204 of the Bills.
3.24 Section 1201 concerns "Availability of non r ecourse marketing assistance loans for loan
commodities" in both Farm Bills. This provision includes detailed rules on "Availability", "Terms and
conditions", "Eligible production" and "Compliance with conserva tion and wetland requirements".
The only difference is that under the "Availab ility" item, the 2002 Farm Bill provided for an
application period from 2002 to 2007, whereas the 2008 Farm Bill provides for an application period
from 2008 to 2012. Section 1202 of both Farm Bills provides "Loan Rates for non recourse
marketing assistance loans", in which the rates fo r most of the products are unchanged (e.g., cotton:
0.52 cents), and a few rates have been slightly ad justed. Section 1203 of both Farm Bills provides a
"Term of Loan" of 9 month duration. Section 1204 of the two Bills provides an identical "Repayment
of Loans" mechanism.
3.25 Therefore, from the wording of the relevant se ctions of the two Bills, we consider that the
legal basis for the "marketing loan measure" is uncha nged. In other words, the substance of the rules
that the original panel and the Appellate Body found not to be in compliance with the
SCM Agreement, and which the compliance panel and the Appellate Body found not to have been
withdrawn, have been retained. The new legislat ive instrument in which they are found has not
wrought any substantive changes to their nature, in terms of their "structure, design and operation".
42
3.26 The United States has not challenged Brazil's assertion that the relevant provisions under the
2008 Farm Bill are essentially the same as under the 2002 Farm Bill, and it has not provided any
indication as to why the same payments might not continue under the 2008 Farm Bill.

40 Exhibit Bra-752 (2008 Farm Bill Side-By-Side, USDA,
http://www.ers.usda.gov/FarmBill/2008/Titles/TitleIcommodities.htm) (accessed December 2008).
41 See 2002 FSRI Act, Exhibit Bra-29, 2008 Farm Bill , Exhibit Bra-735.
42 See Panel Report, para. 7.1289.

3.27 The United States argues, however, that becau se the 2008 Farm Bill only recently came into
effect, it is difficult to make any conclusion on the basis of actual data to the effect that payments
would continue at the same level under the 2008 Farm Bill, so that this conclusion is only speculation
that reflects Brazil's assumptions regarding how the marketing loan and countercyclical payments will
be made in the future.
3.28 These elements suggest that the United States in fact recognizes that ML and CCPs may
continue to be granted under the 2008 Farm Bill, althoug h it considers that the amount of payments
that might be made under the 2008 Farm Bill is still un certain, in light of its recent entry into force.
To the extent that the 2002 Farm Bill has been terminated, but h as been replaced with another Bill
providing for essentially the same measures that were found to be inconsistent as they applied under
the original legal instrument, this would not provide a basis upon which to conclude that the
United States has complied with the recommendations and rulings relating to these measures. Rather,
it would need to be established that the inconsistenc ies that were the object of the rulings have been
remedied. As the Appellate Body expressed it, "s ubstantive compliance is required, rather than
formal removal of the inconsistent measure" in order to achieve full implementation of the DSB's
recommendations and rulings. 43 Nor can any uncertainty about what might happen in the future
dissuade this Arbitrator from assessing the adverse eff ects determined to exist in relation to a measure
which did exist and which, on the facts, continues to exist.44
3.29 In the circumstances of this case, the elements before us suggest that, although the legal basis
for the granting of ML and CCPs has been modified, such payments continue to be offered and may
continue to be made under a new legal basis. We have not been provided with any indication that the
payments that may be made under the 2008 Farm Bill would be of a different nature than those that
gave rise to the rulings at issue. On the contrary , it seems the United States does not dispute that such
payments may occur.
3.30 To the extent that we might be entitled to revi ew, in the context of these proceedings whether
compliance has been achieved, we would therefore not have a sufficient basis to conclude, in light of
the elements before us, that it has been.
3.31 Furthermore, we note that the findings in the underlying proceedings related to the different
types of payments at issue, rather than to the 2002 Farm Bill as such. The compliance panel explicitly
states that "the [original] panel did not state that it had found that, in additio n to subsidies paid in
MY 1999-2002, the Farm Bill itself was inc onsistent with Articles 5 and 6 of the SCM Agreement".45
Rather, it is the payments under this Bill that were the measures at issue.
3.32 In light of these elements, the Arbitrator c oncludes that the United States has failed to
establish that there is no longer any legal basis fo r Brazil to seek countermeasures in relation to the
ML and CCPs.
3.33 We must therefore now consider whether Br azil's proposed level of countermeasures is
"commensurate with the degree and nature of the a dverse effects determined to exist", in accordance
with Article 7.9 of the SCM Agreement. For this purpose, we must first clarify the meaning of these
terms.

43 See Appellate Body Report, US – Continued Suspension, para. 308.
44 We note in this respect that wherever the level of countermeasures is determined in the form of a
fixed amount to be applied on an annual basis, it is inhe rent in this approach that this amount will not exactly
track the future evolution of the situation in consideratio n of the actual level of payments to occur in the future
under the subsidies at issue. Yet, the United States takes no issue with this approach as a matter of principle.
The fact that the actual level of future payments under the programs may be uncertain to date cannot in itself be
an obstacle to calculating a level of countermeasures to be applied.
45 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 9.49.

IV. ASSESSMENT OF BRAZIL'S PROPOSED LEVEL OF COUNTERMEASURES
A. MAIN ARGUMENTS OF THE PARTIES
4.1 In its request to the DSB, Brazil requested authorization to take countermeasures in the annual
amount of US$1.037 billion until such time as the United States withdraws or removes the adverse
effects of certain price-contingent subsidies de termined to have caused significant price suppression
in the world upland cotton market. These subsidie s included marketing loan programme payments,
user marketing (Step 2) payments, market loss assistance payments and counter-cyclical payments.
4.2 In its Methodology Paper, Br azil further explained that suppressed prices on the world cotton
market have two types of negative consequences for farmers worldwide: income losses on actual
production ("sales value effects") and a replacement of foreign supply by US production on the world
market ("reduced production effects"). To quantify these effects, Brazil relies on a partial equilibrium
model already referred to in the compliance pro ceedings, the "Sumner model". By Brazil's own
description, "the issue that the economic model addre sses is the magnitude of the impact that specific
US cotton subsidies have on quantities supplied and on world market prices for cotton".
46
4.3 Brazil quantifies the adverse effects of these subs idies to cotton farmers in the rest of the
world, based on Marketing Year (MY) 2005. Brazil estimates that world market prices were
suppressed by 10.75 per cent in MY 2005. It estimates that the subsidies caused US cotton production
to be 18.8 per cent higher than it would otherwise ha ve been but for the subsidies, and that this
increased production boosted imports by approximately 24 per cent in the same year. Brazil further
estimates that the subsidies have led to a re placement of foreign cotton supply amounting to
2.2 per cent of actual production. On this basis, Brazil concludes that "adverse effects in MY 2005
amounts to US$3.335 billion, consisting of US$2. 73 billion in sales value effects and US$605 million
in reduced production effects".
47 However, Brazil limits its request for countermeasures to an amount
of US$1.037 billion, in line with its original request.
4.4 The United States considers that the requested countermeasures "far exceed what would be
commensurate with the adverse effects determined to exist". 48 The United States first notes that the
current conditions for US cotton producers provide guidance for the effects of US cotton support
payments, and that since the 2006 marketing year, the US cotton sector has experienced a significant
contraction in production, exports and domestic use. According to the United States, total cotton
harvested area for the United States is forecasted at only 7.8 million acres in 2008, the lowest in
25 years49, and that US shares of exports and world production in 2008 will reflect several years of
decline, with US production in that year being 43 per cent below the 2005 crop. The United States
notes that Brazilian cotton production trended up in 2007 and that Brazil's exports were expected to
reach a record in 2008.
4.5 The United States further identifies a number of "legal, economic and conceptual errors" in
Brazil's calculations. Specifically, the United Stat es identifies the following errors: (i) the decision
not to limit the calculations to only the effects of the programs on Brazil; (ii) flawed choices for key
parameters in the model; (iii) the isolation of data to a single year; and (iv) the failure to limit the
proposed countermeasures to the portion of the effect s of the payments that result in the finding of
inconsistency with the SCM Agreement. Brazil disagrees with each of these arguments.

48 US written submission, Section IV, para. 229 ff.
49 US written submission, para. 231.

B. MANDATE OF THE ARBITRATOR AND BURDEN OF PROOF
4.6 We recall that Article 7.9 of the SCM Agreement provides that:
"In the event that the Member has not take n appropriate steps to remove the adverse
effects of the subsidy or withdraw the subs idy within six months from the date when
the DSB adopts the panel report or the Appellate Body report, and in the absence of
agreement on compensation, the DSB shall grant authorization to the complaining
Member to take countermeasures, commensur ate with the degree and nature of the
adverse effects determined to exist, unless the DSB decides by consensus to reject the
request."
4.7 In addition, Article 7.10 of the same Agreemen t defines the mandate of the arbitrator as
follows:
"In the event that a party to the dispute requests arbitration under paragraph 6 of
Article 22 of the DSU, the arbitrator sha ll determine whether the countermeasures are
commensurate with the degree and nature of the adverse effects determined to exist."
4.8 In these proceedings, we are therefore called upon to determine whether the countermeasures
proposed by Brazil in relation to the marke ting loans and countercyclical payments are
"commensurate with the degree and nature of the a dverse effects determined to exist" within the
meaning of Article 7.9 of the SCM Agreement. The United States identifies a number of "errors" in
Brazil's request, including legal errors.
4.9 The United States agrees that, as the party cha llenging the proposed countermeasures, it
bears the burden of demonstrating that th e countermeasures proposed by Brazil are not
"commensurate with the degree and nature of the a dverse effects determined to exist" within the
meaning of Article 7.9 of the SCM Agreement.50
4.10 The United States observes, however, that Braz il is obligated to provide the evidence to
support its arguments and to provide the relevant facts for the Arbitrator to fulfil its mandate.51
4.11 The basis for these proceedings is a challenge initiated by the United States in relation to
Brazil's request to be authorized by the DSB to take countermeasures in relation to certain
inconsistent measures. These circumstances are anal ogous to the situation in arbitral proceedings
initiated under Article 22.6 of the DSU alone, and in arbitral proceedings initiated under Article 22.6
of the DSU and Article 4.10 of the SCM Agreement in relation to prohibited subsidies.
4.12 In the context of proceedings under Article 4.11 of the SCM Agreement and Article 22.6 of
the DSU, arbitrators have consistently determ ined that the party objecting to the proposed
countermeasure bears the burden to establish a prima facie case or presumption that the
countermeasures are not "appropriate" within the meani ng of Article 4.11 and that it is then up to the
party proposing the countermeasures to rebut such presumption.
52
4.13 The same approach applies, in our view, to proceedings under Article 22.6 of the DSU and
Article 7.10 of the SCM Agreement. We therefore find that the United States bears the initial burden
of establishing the countermeasures are not "commens urate with the degree and nature of the adverse
effects determined to exist" and that Brazil bears the burden of rebutting such conclusions.

50 US responses to questions from the Arbitrator, question 41, para. 49.
51 US responses to questions from the Arbitrator, question 41, para. 50.
52 See Decision of the Arbitrator, Brazil – Aircraft (Article 22.6 – Brazil), paras. 2.8-2.9.

4.14 The Arbitrator is also of the view that this allocation of burden of proof does not alleviate the
burden on each party to establish the facts that it a lleges during the proceedings. As observed by the
arbitrator on US – FSC (Article 22.6 – EC) , "it is generally for each party asserting a fact, whether
complainant or respondent, to provide proof thereof". 53 Accordingly, it is also for Brazil to provide
evidence in support of the facts that it advances. The Arbitrator will consider all the evidence and
arguments provided by both parties (United States and Brazil) to determine whether the proposed
countermeasures are "commensurate with the degree a nd nature of the adverse effects determined to
exist".
4.15 The United States further considers that once the burden of proof has been met, the Arbitrator
is not limited to agreeing or disagreeing with the parti es. Rather, the Arbitrator's task is to determine,
in the case of actionable subsidies, countermeasures "commensurate with the degree and nature of the
adverse effects determined to exist". 54 Brazil also observes that, if the United States succeeds in
establishing that Brazil's formula does not meet the applicable legal standard, the Arbitrator can
consider adjustments to Brazil's formula, or if none are possible, alternative formulae. 55 Brazil further
notes that, while the Arbitrator enjoys flexibility to make adjustments to Brazil's formula, Brazil
expects that in the interest of due process, the Arbitrator would offer the parties the opportunity to
comment on any material departures it wishes to explore.
56
4.16 We agree that, in the event that we find that Brazil's proposed countermeasures are not
commensurate with the degree and nature of the adve rse effects determined to exist, we would be
required also to determine what would constitute such countermeasures. This would enable the
complaining party to seek an authorization consistent with our decision, as foreseen in Article 22.7 of
the DSU. In order to fulfil this part of our ma ndate, we may be required to adopt an approach or
methodology that differs from those proposed by the parties.
4.17 We now turn to a consideration of the terms of the applicable legal standard for the review of
Brazil's countermeasures, before considering Brazil's proposed countermeasures in light of these
determinations.
C. C
OUNTERMEASURES "COMMENSURATE WITH THE DEGREE AND NATURE OF THE ADVERSE
EFFECTS DETERMINED TO EXIST" (ARTICLE 7.9 AND 7.10 OF THE SCM AGREEMENT)
4.18 Paragraphs 9 and 10 of Article 7 of the SCM Agreement are "special or additional rules and
procedures" identified in Appendix 2 of the DSU. 57 Article 1.2 of the DSU provides that "to the
extent that there is a difference between the ru les and procedures of this Understanding and the
special or additional rules and procedures set forth in Appendix 2, the special or additional rules and
procedures in Appendix 2 shall prevail".
4.19 The terms of Article 7.9 of the SCM Agreement, as a "special or additional rule and
procedure", should be interpreted on their own terms. It is clear that they may embody different rules,
which would prevail in case of conflict. Nonetheless, Article 22.6 of the DSU remains relevant, as the
general legal basis under which the proceedings are conducted. Indeed, Article 7.9 of the

53 Decision of the Arbitrator, US – FSC (Article 22.6 – US), para. 2.11.
54 US responses to questions from the Arbitrator, question 70, para. 3.
55 Brazil's responses to questions from the Arbitrator, question 70, para. 6.
56 Brazil's responses to questions from the Arbitrator, question 70, para. 8. See also the US comments
57 Throughout this section of the report, we will refer to the terms "commensurate with the degree and
nature of the adverse effects determined to exist" in Article 7.9 of the SCM Agreement. This reference should
be understood to refer also to the same terms in Article 7.10 of the SCM Agreement. We assume that these
terms have the same meaning in both provisions.

SCM Agreement refers expressly to Article 22.6 of the DSU as the legal basis for arbitral proceedings
relating to countermeasures in relation to actionable subsidies.
4.20 In accordance with the terms of Article 3.2 of the DSU, the terms of Article 7.9 of the
SCM Agreement should be interpreted in accordance with the customary rules of interpretation of
public international law, as reflected in particular in Articles 31 and 32 of the Vienna Convention on
the Law of Treaties ("Vienna Convent ion"). In particular, as reflect ed in Article 31.1 of the Vienna
Convention, "a treaty shall be inte rpreted in good faith in accordance w ith the ordinary meaning to be
given to the terms of the treaty in their context and in the light of its object and purpose".
4.21 For the sake of clarity, it is useful to start the analysis with the terms of the provisions first,
and to then turn to their context and object and purpose.
1. The terms of Article 7.9 of the SCM Agreement
4.22 With respect to countermeasures in relation to actionable subsidies, Article 7.9 of the
SCM Agreement provides that:
"[T]he DSB shall grant authorisation to the complaining Member to take
countermeasures, commensurate with the degree and nature of the adverse effects
determined to exist ..."
4.23 This text therefore comprises three elements:
(a) "countermeasures";
(b) "commensurate with the degree and nature" and
(c) "the adverse effects determined to exist".
We consider the meaning of these elements in turn.

(a) "countermeasures"
4.24 We note at the outset that the term "counterm easures" is used to designate retaliatory
measures in the WTO Agreement only in the SCM Agreement. This contrasts with the terms of
Article 22 of the DSU, which refers to the "sus pension of concessions or other obligations".
However, it is not argued by either party in these proceedings that the term "countermeasures" would
designate, in the SCM Agreement, anything other than a temporary suspension of certain obligations,
and this is what we understand this term to refer to.
4.25 The prefix "counter-" can be defined as meaning "against, in return".
58 The Oxford English
Dictionary further cites the term "counter-measure" as an illustration of a situation in which this prefix
is used to indicate something that is "[d]one, directed, or acting against, in opposition to, as a
rejoinder or reply to another thing of the same kind already made or in existence". Another dictionary
defines the term "countermeasure" as an "action or device designed to negate or offset another".59
4.26 Brazil draws attention to the fact that the te rm "countermeasures" refers to measures taken
"against" something, to "counteract" something. In the context of Article 7.9 of the SCM Agreement,
Brazil notes, the term refers to "affirmative action taken against the responding Member's failure to

58 Oxford English Dictionary, at www.oed.com.
59 Merriam Webster Dictionary, at www.merriamwebster.com.

remove the adverse effects of a subsidy or to withdraw that subsidy, as required by Article 7.8".60 The
United States seems to essentially agree with this basic premise. 61 In light of the definitions
highlighted above, we also agree that "counter measures" are, in essen ce, measures taken to
"counteract" something, and specifically, in the context of Article 7.9 of the SCM Agreement,
measures taken to act against, or in response to, a failure to remove the adverse effects of, or
withdraw, an actionable subsidy within the required time period.
4.27 In Brazil's view, the dictionary meanings of this term further indicate that it refers to
retaliatory action that goes "beyond the me re rebalancing of trade interests".
62 The United States, on
the contrary, highlights that definitions of the term "counter" include notions of "balance" and
"duplicate", so that an appropriate countermeasu re would be one that would "balance out the
inconsistency or duplicate the loss of concessions resulting from the breach".63
4.28 We are not convinced that the use of the te rm "countermeasures" necessarily connotes, in and
of itself, an intention to refer to retaliatory ac tion that "goes beyond the mere rebalancing of trade
interests"64, as Brazil suggests. As noted above, the term indicates that the action is taken in response
to another, in order to "counter" it. This does not necessarily connote, in our view, an intention to "go
beyond" a rebalancing of trade interests. Indeed, we are not convinced that the dictionary meanings
of the term, in and of themselves, provi de any compelling guidance as to the exact level of
countermeasures that may be permissible under Article 7.9 of the SCM Agreement. We also note that
the term "countermeasures" is similarly used in Article 4.10 of the SCM Agreement, where the
permissible level of countermeasures is defined differently, in terms of "appropriateness".
4.29 Brazil also refers to the use of the term "c ountermeasures" in public international law, as
reflected in the Articles on State Responsib ility of the International Law Commission (ILC) 65, as an
"additional interpretative considera tion", to highlight that, "under the ILC Articles, countermeasures
are taken with the goal of encouraging – 'induci ng' – the responsible State to comply with its
obligations, without making it impossible to comply, and without punishing the respondent."66
4.30 We note that the term "countermeasures" is the general term used by the ILC in the context of
its Articles on State Responsibility to designate te mporary measures that injured States may take in
response to breaches of obligations under international law. 67 This has been noted by arbitrators in
the context of interpreting Article 4.10 of the SCM Agreement.68

61 See US responses to questions from the Arbitrator, question 43, para. 56: "the "countermeasures" are
to "counter the inconsistency with the SCM Agreement."
63 US responses to questions from the Arbitrator, question 43, para. 56.
65 The International Law Commission was established by the UN General Assembly for the promotion
of the progressive development of international law and its codification. The Commission adopted in 2001 a set
of draft articles on responsibility of States for interna tionally wrongful acts consistin g of 59 articles as well as
commentaries thereto. The General Assembly, in re solution 56/83 of 12 December 2001, as recommended by
the Commission, took note of the articles on responsibility of States for internationally wrongful acts, the text of
which was annexed to the resolution, commended them to the attention of Governments without prejudice to the
question of their future adoption or other appropriate action. See http://www.un.org/law/ilc/.
67 See http://untreaty.un.org/ilc/texts/instruments/english/commentaries/9_6_2001.pdf.
68 See Decision by the Arbitrator, US – FSC (Article 22.6 – US), para. 5.58.

4.31 We agree that this term, as understood in public international law, may usefully inform our
understanding of the same term as used in the SCM Agreement.69 Indeed, we find that the term
"countermeasures", in the SCM Agreement, describes measures that are in the nature of
countermeasures as defined in the ILC's Articles on State Responsibility.
4.32 At this stage of our analysis, we therefore find that the term "countermeasures" essentially
characterizes the nature of the measures to be authorized, i.e. temporary measures that would
otherwise be contrary to obligations under the re levant WTO Agreement(s) and that are taken in
response to a breach of an obligation under the SCM Agreement. This is also consistent with the
meaning of this term in public international law as reflected in the ILC Articles on State
Responsibility.
4.33 As to the permissible level of countermeasures that may be authorized under Article 7.9 of the
SCM Agreement, that Article provides specific instruction, through the terms "commensurate with the
degree and nature of the adverse effects determined to exist". We now consider these terms.
(b) "commensurate with the degree and nature of the adverse effects determined to exist"
4.34 The expression "commensurate with the degree and nature of the adverse effects determined
to exist" contains two elements: the term "comme nsurate" and the "degree and nature of the adverse
effects determined to exist". We consider these elements successively.
(i) "commensurate"
4.35 Brazil notes that dictionary definitions of th e term "commensurate" point to a notion of
"correspondence" in "extent, magnitude or degree" as well as to "proportion" and that this term
defines "a particular relationship between two th ings, in this case "countermeasures" on the one hand,
and "the degree and nature of the adverse effects determined to exist", on the other".70
4.36 Dictionary definitions of this term include: "e qual in measure or extent: coextensive" and
"corresponding in size, extent, amount, or degree: proportionate"71, "of equal extent, coextensive".72
4.37 In light of these elements, we agree that the term "commensurate" essentially connotes a
"correspondence" between two elements. In the c ontext of Article 7.9, the "correspondence" is
between the countermeasures and the "degree and nature of the adverse effects determined to exist".
4.38 Brazil also highlights that this term "does not connote equality, but adequacy, congruity,
harmony, and proportion. These words, which ca rry both qualitative and quantitative dimensions,

69 We also note however that, by their own terms, the Articles of the ILC on State Responsibility do not
purport to prevail over any specific provisions relating to the areas it covers that would be contained in specific
legal instruments. We note in particular the following Commentary of the ILC:

"In common with other chapters of these artic les, the provisions on countermeasures are
residual and may be excluded or modified by a special rule to the contrary (see article 55).
Thus, a treaty provision precluding the suspension of performance of an obligation under any
circumstances will exclude countermeasures with respect to the performance of the obligation.
Likewise, a regime for dispute resolution to which States must resort in the event of a dispute,
especially if (as with the WTO dispute settlemen t system) it requires an authorization to take
measures in the nature of countermeasures in response to a proven breach."

71 Merriam Webster Dictionary online, at www.merriam-webster.com
72 Shorter Oxford English Dictionary, p. 459.

show that countermeasures are not defined with th e precision of equality, but more broadly in both
qualitative and quantitative terms".73
4.39 We agree that the term "commensurate" does not suggest that exact or precise equality is
required, between the two elements to be compared , i.e. in this case, the proposed countermeasures
and the "degree and nature of the adverse effects dete rmined to exist". To that extent, we agree that
the term "commensurate" connotes a less precise degree of equivalence than exact numerical
correspondence. Nonetheless, the term "commensurat e" does indicate, in our view, a relationship of
correspondence and proportionality between the two elemen ts, and not merely a relationship of
"adequacy" or "harmony" as suggested by Brazil. We do not exclude that this correspondence may be
qualitative as well as quantitative. The exact nature of the correspondence at issue will further be
informed by the identification of what exactly the proposed countermeasures are required to be
"commensurate" with. This is defined through the terms "the degree and nature of the adverse effects
determined to exist".
(ii) The "degree and nature" of the adverse effects
4.40 The text of Article 7.9 refers to the "degree and nature" of the adverse effects rather than their
"level" or "magnitude". Brazil highlights in this respect the difference with the terms of Article 22.4
of the DSU, which requires "equivalence" in the "lev el" of nullification or impairment suffered by the
complaining Member. Brazil invites the Arbitrator to approach the determin ation with reference to
the notion of "reasonableness" and points to a finding by the Appellate Body in the context of another
provision, to the effect that "reasonableness" implies a degree of flexibility that involves a
consideration of the specific circumstances of the case.74
4.41 We agree that the reference to both the "degree" and the "n ature" of the adverse effects
determined to exist suggests that the correspondence that is required to exist, between the proposed
countermeasures and the "degree and nature of th e adverse effects", may encompass both quantitative
and qualitative elements. The "degree" of the ef fects could be understood as a quantitative element,
whereas the reference to the "nature" of the a dverse effects seems to point to something more
qualitative.
4.42 In this respect, both parties suggest that the "nature" of the adverse effects may be understood
in the context of the various types of adverse e ffects that may arise under Articles 5 and 6 of the
SCM Agreement. Brazil notes that the "nature" of the a dverse effects determined to exist will vary
from case to case, and could involve a range of types of effects, depending on the specific
subparagraph of Article 5 or 6 at issue.
75 The United States also observes that "the nature of the
adverse effects can be understood on the basis of the findings in the particular dispute".76
4.43 We agree that the reference to the "nature" of the adverse effects may be understood to refer
to the different "types" of adverse effects that are foreseen in Articles 5 and 6, and that this therefore
invites a consideration of the specific type of "adver se effects" that have been determined to exist as a
result of the specific measure in relation to which countermeasures are being requested. These effects
could manifest themselves in a variety of ways, each reflecting a specific type of trade distortion.
4.44 Brazil also notes that the "degree" of adverse effects refers to the "extent or scope" of the
adverse effects "in terms of their intensity or capacity or potential for causing disruption of markets or

74 See Brazil's written submission, para. 57.
76 US responses to questions from the Arbitrator, question 66, para. 175.

trading relationships".77 Brazil also observes that there may be a correlation between the "nature" and
"degree" of the adverse effects, in that "the broade r the scope of the nature of the adverse effects, the
more likely the "degree" of adverse effects will be more severe in terms of actual or potential market
disruption".78
4.45 The United States, for its part, considers that th e reference to the "degree and nature" of the
adverse effects "is a reminder that countermeasures s hould fit only that part of the subsidy that is
inconsistent". The United States also argues th at the language of Article 7.9 ensures that
countermeasures are limited to "what is necessary to address the adverse effects of the subsidies", and
not more. The United States considers that anything above that "would be punitive". The
United States thus concludes that "the Arbitrators must be satisfied that the countermeasure does not
exceed what would be sufficient to respond to that part of the effects of the actionable subsidies that
has been found to cause significant price suppression and adverse effects on Brazil".
79
4.46 We understand these arguments of the parties as essentially drawing attention to the
permissible scope of what may be taken into account in assessing the "commensurateness" of the
proposed countermeasures in relation to the "degree and nature" of the adverse effects determined to
exist in the specific case at hand. The United States ' arguments essentially highlight the fact that the
proposed countermeasures may not exceed the scope of the findings, as they relate only to those
adverse effects that have been determined to exist in the specific case at hand, and that this is the only
basis for the findings in relation to the subsidy at issue. Brazil's arguments, on the other hand, point to
the fact that the full extent of the degree and nature of these adverse effects must be taken into
account.
4.47 We agree in principle with both of these pr opositions. In assessing the "commensurateness"
of the proposed countermeasures to the "degree and natu re" of the adverse effects determined to exist,
we are entitled to take into account fully the "d egree and nature" of these adverse effects as they
present themselves in the case at hand, but we are not permitted to do more than that. In other words,
the "degree and nature" of the adverse effects dete rmined to exist in the case at hand constitute the
entirety of what we may and must consider in assessing the "commensurateness" of the proposed
countermeasures in that case.
4.48 The parties disagree as to what exactly this imp lies in the circumstances of this case. We will
consider this question in Secti on IV.D.1 below in the context of our assessment of Brazil's proposed
countermeasures in this case. We now turn to th e final element of the terms of Article 7.9, the
"adverse effects determined to exist".
(iii) The "adverse effects determined to exist"
4.49 Brazil observes that the term "adverse effects dete rmined to exist" sends the treaty interpreter
back to the precise findings on adverse effects made by the panels and the Appellate Body as these
constitute the "adverse effects determined to exist". We agree.
4.50 The expression "adverse effects determined to exist" refers us to the specific "adverse effects"
within the meaning of Articles 5 and 6 of the SCM Agreement that form the basis of the underlying
findings in the case at hand.

79 US written submission, para. 300.

4.51 We note in this respect that Article 5 of the SCM Agreement identifies three categories of
"adverse effects to the interests of other Members", that "no Member should cause, through the use of
any subsidy referred to in paragraphs 1 and 2 of Article 1". These are:
(a) injury to the domestic industry of another Member;
(b) nullification or impairment of benefits accruing directly or indirectly to other
Members under GATT 1994 in particular the benefits of concessions bound under
Article II of GATT 1994;
(c) serious prejudice to the interests of another Member."
4.52 Article 7.1 further provides the possibility fo r any WTO Member to request consultations
with another Member, whenever it has reason to belie ve that "any subsidy referred to in Article 1,
granted or maintained by another Member, results in injury to its domestic industry, nullification or
impairment or serious prejudice".
4.53 In principle, therefore, the "adverse effects determined to exist" in the underlying proceedings
ultimately leading to a request for countermeasures under Article 7.9 of the SCM Agreement may be
in the form of injury to the domestic industry of a Member, nullification or impairment, or serious
prejudice to the interests of another Member.
2. Context
4.54 A number of provisions within the SCM Agreement provide useful context for the
interpretation of Article 7.9. As noted above, the notion of "adverse effects" and the definition of the
various types of adverse effects under Articles 5 a nd 6 of the Agreement shed light on the expression
"degree and nature of the adverse effects determined to exist".
4.55 Article 4.10 of the SCM Agreement and Article 22.4 of the DSU also provide useful context
for a proper understanding of this provision. Article 4.10 of the SCM Agreement provides the legal
standard for countermeasures in relation to pr ohibited subsidies. Under that provision,
countermeasures in relation to prohibited subs idies must be "appropriate", and "not …
disproportionate in light of the fact the subsidi es dealt with under these provisions are prohibited".
The clear difference in the wordi ng of both provisions within the SCM Agreement confirms to us that
the terms of Article 7.9, which expressly refer to the "degree and nature of the adverse effects
determined to exist", are intended to closely tailor, in all cases, the countermeasures to the legal basis
for the underlying findings. We also note that there is no suggestion, in Article 7.9, that there would
be any flexibility to take into account any consider ations other than the "degree and nature of the
adverse effects determined to exist". This can be understood to reflect the specificity of the legal
basis on which findings arise in relation to ac tionable subsidies, which are not prohibited per se. The
scope of potential countermeasures is accordingly limited in scope, to the "degree and nature" of those
effects of the subsidy that are the basis for the successful challenge.
4.56 These elements confirm our understanding of the meaning of the terms of Article 7.9, as we
have determined it so far on the basis of the terms of the provision.
3. Object and purpose
4.57 The question of the objective of retaliatory me asures in the WTO has been addressed in the
context of proceedings under Article 22.4 of the DSU. The arbitrator on EC – Bananas III (US)
(Article 22.6 – EC) thus found that:

"[T]he overall objective of compensation or the suspension of concessions or other
obligations as described in Article 22.1:
'Compensation and the suspension of concession or other obligations
are temporary measures available in the event that the
recommendations or rulings are not implemented within a reasonable
period of time. However, neither compensation nor the suspension of
concessions or other obligations is preferred to full implementation of
a recommendation to bring a measure into conformity with the
covered agreements. Compensation is voluntary and, if granted, shall
be consistent with the covered agreements.'
Accordingly, the authorization to suspe nd concessions or other obligations is a
temporary measure pending full implementation by the Member concerned. We
agree with the United States that this temporary nature indicates that it is the purpose
of countermeasures to induce compliance. But this purpose does not mean that the
DSB should grant authorization to suspend concessions beyond what is equivalent to
the level of nullification or impairment. In our view, there is nothing in Article 22.1
of the DSU, let alone in paragraphs 4 and 7 of Article 22, that could be read as a
justification for counter-measures of a punitive nature."
4.58 This objective of suspension of concessions or other obligations under Article 22.4 of the
DSU has been recently confirmed by the Appellate Body in US – Continued Suspension.
80 Arbitrators
have also found that the objective of countermeasures under Article 4.10 of the SCM Agreement is to
"induce compliance".81
4.59 We see no reason to assume that c ountermeasures under Article 7.9 of the SCM Agreement
would serve a different purpose. The authorizatio n of countermeasures in relation to actionable
subsidies arises in circumstances comparable to t hose relating to countermeasures under Article 4.10
of the SCM Agreement or Article 22.4 of the DSU, i.e. in a situation where the responding Member
has failed to comply with the recommendations and ru lings of the DSB in the prescribed time period.
As under Article 22.4 of the DSU and Article 4.10 of the SCM Agreement, countermeasures under
Article 7.9 of the SCM Agreement constitute temporary measures ta ken in response to a continued
breach of the obligations of the Member concerned, and pending full compliance with the
recommendations and rulings of the DSB. We consider, therefore, that countermeasures under
Article 7.9 of the SCM Agreement also serve to "induce compliance".
4.60 However, we do not consider that this purpose in and of itself provides specific indications as
to the level of countermeasures that may be permissible unde r this provision. Indeed, this purpose is
common to all three legal bases for countermeasure s or suspension of obligations under the WTO
Agreements, each of which defines the permissibl e level of countermeasures in relation to the
measures that it relates to. In the case of countermeasures relati ng to actionable subsidies under the
SCM Agreement, the permissible level of countermeasures is defined, as we have seen above, through
the terms "commensurate with the degree and nature of the adverse effects determined to exist".
4.61 We note that this distinction is also found under general rules of international law, as reflected
in the ILC's Articles on State Responsibility, wh ich have been referred to by Brazil in these
proceedings. Article 49 of these Articles defines "inducing compliance" as the only legitimate object

80 See Appellate Body Report, US – Continued Suspension, para. 309.
81 See Decision by the Arbitrator, US – FSC (Article 22.6 – US), para. 5.57; Decision by the Arbitrator,
Canada – Aircraft Credits and Guarantees (Article 22.6 – Canada) , paras. 3.47-3.48; Decision by the
Arbitrator, Brazil – Aircraft (Article 22.6 – Brazil), paras. 3.44, 3.54, 3.57 and 3.58.

of countermeasures, while a separate provision, Ar ticle 51, addresses the question of the permissible
level of countermeasures, which is defined in relation to proportionalit y to the injury suffered, taking
into account the gravity of the breach.82
4.62 Finally, we note that the terms of Article 7.9 of the SCM Agreement, which refer exclusively
to the "degree and nature of the adverse effects de termined to exist", do not suggest that there would
be any basis for increasing their level, in a subj ective sense, to specifically take into account a
superadded objective of inducing compliance. We are not empowered to "adjust" the level of
countermeasures beyond what these terms allow, in our assessment of the level of countermeasures to
be authorized. Such an adjustment would go beyond the stated correspondence between the
countermeasure and the degree and nature of th e adverse effects. The objective of inducing
compliance must be seen to arise from the ability of a Member to obtain an authorization, and not
from an exaggeration of its permitted amount.
D. ASSESSMENT OF BRAZIL'S PROPOSED COUNTERMEASURES
4.63 Brazil has proposed countermeasu res in the amount of US$1.037 billion in relation to the
marketing loan and countercyclical payments. This amount is based on certain assumptions which
Brazil argues should be adopted in their calculation, a number of which the United States disagrees
with. In addition to that, the United States disagrees with Brazil's actual calculations. We therefore
consider the underlying assumptions in Brazil's appr oach which are disputed by the United States,
before turning to the calculation of the proposed countermeasures.
1. Should the level of countermeasures be limited to the adverse effects suffered by Brazil?
4.64 Brazil's counterfactual simulation involves a calcu lation of the global impact of eliminating
marketing loans and countercyclical payments. Th e result of the simulation is the sum of (i) the
income losses on actual cotton production due to supp ressed world market prices and (ii) the value of
the cotton production foregone by otherwise competitiv e farmers in the rest of the world due to
suppressed world market prices. These income losses and the value of the cotton production foregone
were incurred not only by Brazilian farmers but also by other non-US producers.
4.65 The United States argues that because the findings in this case concern serious prejudice to
Brazil alone, it is necessary to separate the effects on Brazil in particular from the worldwide effects.83
The allowed countermeasures should be equal only to (i) the sum of the income losses on actual
Brazilian cotton production due to suppressed world market prices and (ii) the value of the cotton
production foregone by Brazilian farmers due to suppressed world market prices.
4.66 We must therefore consider whether the pr oposed countermeasures may legitimately include
a calculation of the effects of the "global impact" of eliminating the subsidies at issue, as argued by
Brazil, or whether they should be limited to the adverse impact of the subsidy on Brazil alone.
(a) Arguments of the parties
4.67 Brazil's request seeks to quantify the entirety of the adverse effects of the ML and CCP
subsidies on the world cotton market, on the assumption that this is the basis on which the finding of
"adverse effects" was made in the underlying proceedings.
4.68 In the view of the United States, the DSB' s recommendations and rulings were based on a
finding of "present" serious prejudice to the interests of Brazil within the meaning of Article 5(c) of

82 See http://untreaty.un.org/ilc/texts/instruments/english/commentaries/9_6_2001.pdf.
83 US written submission, para. 308.

the SCM Agreement and Brazil's inclusion of the alleged effects of the payments on the entire world
exceeds what is permissible. In the United States' view, the type of "adverse effects" relied on by
Brazil in the underlying proceedings in this case is "serious prejudice to the interests of another
Member", so that the only relevant effects are tho se on Brazil, and those are the adverse effects that
are relevant here. The United States explains that the panel looked at the "world price" in determining
whether there was price suppression as a result of the US measures, and agrees that price effects on
the world market would affect Brazil. But, the Unit ed States argues, in the final analysis the enquiry
focused on the existence of serious prejudice to the in terests of Brazil, and the use of a world price (to
establish price suppression) does not mean that the finding of serious prejudice concerned the entire
world. In the United States' view, a recalculation of the effects of the measures on Brazil alone leads
to a figure of US$30.4 million (or US$134.3 million, without corrections to Brazil's model).
84
4.69 Brazil responds that the countermeasures must be commensurate with the significant price
suppression determined to exist in the world market for cotton. 85 Brazil argues that in the underlying
rulings, both in the initial and compliance proceed ings, the Panels and the Appellate Body found
"adverse effects to the interests of Brazil in the form of significant price suppression in the world
market for cotton" 86, and that in this dispute, the adverse e ffects determinations relate to the very
existence of a suppressed world market. Brazil consid ers that the United States is reading Article 7.9
of the SCM Agreement out of the Agreement in effectively seekin g to equate the standard it contains
with the standard in Article 22.4 of the DSU, which provides for equivalence to the level of
nullification or impairment (suffered by the complain ing party). In Brazil's view, the legal standard
under Article 7.9 of the SCM Agreement is more flexible than the DSU and can provide for
countermeasures on a broader scale than equivalence with nullification or impairment.
4.70 The United States notes that Article 6.3 of the SCM Agreement defines four types of "subsidy
effects" that may constitute serious prejudice to the interests of a complaining Member. The
United States considers that Brazil's interpretation of these provisions would read each in isolation
from the governing provisions of Article 5 and from othe r elements of Article 6. In the United States'
view, "when Article 6.3 is interpre ted in context, it is evident that the effect on the complaining
Member is the concern for all types of subsidy effect described therein".87
(b) Analysis by the Arbitrator
4.71 Brazil analyses the findings of the original and compliance panels as confirmed by the
Appellate Body in relation to the "adverse effects de termined to exist", to support its argument that
these effects encompass price suppression on the world cotton market. Brazil highlights the fact that
these findings were based on Article 6.3(c) of the SCM Agreement, which relates to "price
suppression" on the market, and that the relevant ma rket in the panel's findings in this case was the
world market. Brazil draws attention to statements by the original and compliance panels that "the
effect of [the ML and CCP payments] is signifi cant price suppression on the world market" and that
the determination of the effect of the subsidies at issue was made in relatio n to the world market.
Brazil does not dispute that the serious prejudice find ing relates to the interest of Brazil but it argues
that such serious prejudice is precisely constituted by price suppression on the world market.
4.72 The United States, by contrast, draws attention to the fact that these rulings must be seen in
their proper context, and that, in particular, the various subparagra phs under Article 6.3 (including
subparagraph (c)), must be read in the context of Article 5, which refers to "adverse effects to the
interests of other Members" and of subparagraph (c ) of the same provision, which defines the notion

84 US written submission, para. 245.
85 Brazil's written submission, paras. 289-330.
87 US responses to questions from the Arbitrator, question 115, para. 96.

of "serious prejudice" with reference to "the inte rests of another Member". In this regard the
United States points out that the chapeau to Article 6.3 specifically refers to serious prejudice "in the
sense of paragraph (c) of Article 5".
4.73 In order to address this issue, we find it useful to consider the specific findings of "adverse
effects" at issue in this case as well as the broader legal context in which these findings arise, in order
to clarify what the "degree and nature of the a dverse effects determined to exist" are in the
circumstances of this case.
4.74 As we have noted above, Article 5 of the SCM Agreement identifies three types of "adverse
effects to the interests of other Members" arisi ng from subsidies, that Members should not cause.
These are (a) injury to the domestic industry of another Member, (b) nullification or impairment of
benefits accruing to other Members, and (c) "serious prejudice to the interests of another Member".
4.75 We note, at this stage of our analysis, that the expression "adverse effects" is defined with
reference to "the interests of other Members". We also note that the specific type of "adverse effect"
that is at issue in the circumstan ces of this case, "serious prejudice", is also defined specifically with
reference to the interest of "another Member". It is clear therefore that the notion of "adverse effects"
within the meaning of Article 5 and the notion of "serious prejudice" are both inherently and by
definition tied to the manner in which they affect th e interests of other WTO Members. In the case of
"serious prejudice", this is even defined more spec ifically in relation to the interests of "another
Member", rather than all Members.
4.76 Article 6 further elaborates on the circumstance s in which "serious prejudice" within the
meaning of Article 5(c), i.e. "serious prejudice to the interests of another Member", may arise. In this
case, the findings in the underlying proceedings are based on subparagraph (c) of Article 6.3, which
provides that "serious prejudice" may arise in any case where:
"[T]he effect of the subsidy is a significant price undercutting by the subsidized
product as compared with the price of a like product of another Member in the same
market or significant price suppression, price depression or lost sales in the same
market."
4.77 Specifically, the findings of the panel and the Appellate Body in this case were based on a
determination that the subsidies at issue caused "s ignificant price suppression" within the meaning of
this provision, on the world market for cotton.
4.78 Brazil considers that, since these findings relate to the existence of a "significant price
suppression" on the world market, the entirety of the effects of this price suppression on that market,
in other words the worldwide impact of the pri ce suppression, must be the basis for the award of
countermeasures in relation to these "adverse effects". In Brazil's view, this would reflect the "degree
and nature" of the findings of "adverse effects" in the circumstances of this case.
4.79 Brazil draws our attention in particular to the fact that the various subparagraphs under
Article 6.3 define differently in each case the circumstances in which "serious prejudice" may be
considered to arise. Brazil highlights the fact that subparagraph (c) of this provision, unlike
subparagraphs (a) and (b), does not expressly refer to the specific effect on another Member as the
basis for the existence of "serious prejudice".
88 The United States agrees that each of the provisions
of Article 6.3 "take a different approach, reflecting the particular type of serious prejudice to which it
pertains".89 In the United States' view, however, Articl e 6.3(c) "guides the fact-finder to the trade

88 See Brazil's oral statement, paras. 51 ff.
89 US responses to questions from the Arbitrator, question 115, para. 98.

relationship between the complaining Member and th e subsidizing Member, so that any decision will
be based on the effects of the subsidies on the comp laining Member. Those effects can be of price
undercutting of the non-subsidized product "in the same market" or of price suppression, price
depression, or "lost sales" in the same market" that is, the market in which the products of the
subsidizing Member and the complaining Member compete".90
4.80 We agree with the United States that, even if subparagraph (c) of Article 6.3 does not
expressly refer to the impact of the type of serious prejudice at issue "on the complaining Member",
nonetheless the essence of this type of adverse effect is that it causes serious prejudice "to the interests
of another Member" as defined in Article 5, item (c). In the circumstances of this case, that "other
Member" is Brazil.
4.81 An examination of the terms of the underlying fi ndings in this dispute also provides useful
guidance as to their nature. As is highlighted by Brazil, the underlying findings are based on a
determination that the subsidies at issue caused "significant price suppression" on the world upland
cotton market. Although a determination of the ex istence of "significant price suppression" on the
world market may not, as such, involve or require a specific evaluation of the impact of such price
suppression on Brazil, this does not mean that a consid eration of this impact was irrelevant to the
panel's ultimate finding that such price suppression constituted "serious prejudice to the interests of
Brazil". In fact, the original panel specifically explained why it considered that a price suppression on
the world market would inevitably affect Brazil:
"We also find that developments on the world upland cotton market price would
inevitably affect prices in other markets where Brazil and the United States may
compete, due to the nature of the world prices in question, and the relative proportion
of that market enjoyed by the United States and Brazil. All individual sales of upland
cotton by Brazil and the United States in any domestic market in which both were
present would occur against this backdrop."
91
4.82 The Appellate Body referred to th is determination, to confirm that "it was not necessary, in
these circumstances, for the Panel to proceed to a separate analysis of the prices of Brazilian upland
cotton in the world market". 92 Had the impact on Brazil of the price suppression at issue been
irrelevant to the determination, it would not even have been necessary to explain how price
suppression on the world market impacted on Brazil.
4.83 The original panel also considered in some detail the question of what may constitute "serious
prejudice" to the interests of another Member. In this context, the panel found that:
"[A]t the very least, given the subject-matter covered by the SCM Agreement –
government subsidies in respect of goods – th e effects-based situations identified in
the subparagraphs of Article 6.3, and the re ference in the chapeau of Article 6.3 to
serious prejudice 'in the sense of' Article 5(c), we believe that such 'serious prejudice'
may involve the effects of subsidies on th e complaining Member's trade in a given
product. That is, it addresses the volumes and prices and flows of such trade, which
may, by logical extension, affect a producing Member's domestic production of that
product. We, therefore, consider that a detrimental impact on a complaining
Member's production of, and/or trade in, th e product concerned may fall within the
concept of 'prejudice' in Article 5(c) of the SCM Agreement.

90 US responses to questions from the Arbitrator, question 115, para. 99.
91 Panel Report, para. 7.1313.
92 Appellate Body Report, para. 417.

Moreover, the prejudice must be 'serious'. In one of its ordinary meanings, 'serious'
means 'important' and 'not slight or neglig ible'. Thus, the prejudice in terms of the
effect on Brazil's production of, and/or trade in, upland cotton must be such as to
affect Brazil's production of cotton, to a degree that is 'important', not slight or
negligible, or meaningful.
We recall our conclusion that the price suppression is 'significant'. We note,
moreover, Brazil has submitted ev idence to substantiate its assertions that here is a
close relationship between movements of Brazilian prices and movements in the
A-index and that Brazilian producers have suffered from the suppressed price trends
in the Brazilian market and in Brazilian export markets, including in terms of
Brazilian producers having reduced production and investment."
93
4.84 These elements suggest to us that, even if the na ture of the adverse effects determined to exist
in this case is a "significant price suppression" on the world cotton market, the conclusion that such
price suppression constitutes serious prejudice "to the interests of Brazil" was not reached in
abstraction of the impact of this price suppression on Brazil. On the contrary, the panel specifically
explains how this price suppression affects Brazil as a producer and exporter of upland cotton.
4.85 This is further confirmed, in our view, by the terms of Article 7.1 of the SCM Agreement,
which sets out the basis upon which Members may initiate proceedings in relation to actionable
subsidies. This provision foresees that a Member may request consultations with another Member
whenever it has reason to believe that any subsidy re ferred to in Article 1, granted or maintained by
another Member, "results in injury to its domestic industry, nullification or impairment or serious
prejudice" (emphasis added). The terms of this provi sion suggest to us that the very basis for the
initiation of proceedings relating to actionable subsid ies is the fact that the complaining Member has
reason to believe that the measure concerned affects its own interests.
4.86 The original panel, in considering an argument by Brazil that other WTO Members had
suffered serious prejudice as a result of the US subsidies, made a comparable observation:
"The text of Article 7.2 of the SCM Agreement makes it clear that the dispute
settlement procedures set forth in Article 7 of the SCM Agreement may only be
invoked by a Member where that Member be lieves that it has itself suffered serious
prejudice as a result of the subsidization. Fr om this, the only logical inference is that
the serious prejudice under examination by a WTO panel is the serious prejudice
experienced by the complaining Member."94
4.87 The panel then finds further support for its conc lusion in the terms of Articles 5 and 6 of the
SCM Agreement. Further to its examination of these provisions, and in light also of the terms of
Article 10 of the DSU in relation to the interests of third parties in dispute settlement procedures, the
panel concluded that "in examini ng Brazil's allegations … that it has suffered serious prejudice to its
interests within the meaning of Article 5(c), we take full account of the interests of all Members", and
it indicates that it has taken into account serious prejudice allegations of other Members:
"[T]o the extent these constitute evidentiary su pport of the effect of the subsidy borne
by Brazil as a Member whose producers are involved in the production and trade in

93 Panel Report, paras. 7.1392-7.1394.
94 Panel Report, para. 7.1403.

upland cotton in the world market. However, we have not based our decision on any
alleged serious prejudice caused to them."95
4.88 These findings confirm us in our conclusion that, even if the "significant price suppression"
determined to exist was in relation to the world market, the finding in essence relates to the interests
of Brazil and reflects "serious prejudice" to the interests of Brazil specifically. As we have seen
above, this determination was in fact not entirely de tached from a consideration of the effects of this
price suppression on Brazil specifically. On the co ntrary, the panel took care to explain how the
existence of significant price suppression on the world market affected Brazil's production and trade
in upland cotton.
4.89 These considerations must, in our view, info rm and guide our understanding of what the
expression "degree and nature of the adverse effect s determined to exist" means in this case.
Specifically, we consider that it is the very nature of the findings at issue that they relate to the
adverse effects of the subsidies at issue on Brazil. This in turn implies that the scope of the "degree
and nature" of these adverse effects must be unders tood in this light. We therefore understand the
"degree and nature of the adverse effects", in the ci rcumstances of this case, to refer to the extent to
which Brazil is affected by the price suppression on the world cotton market caused by the ML and
CCPs that has been determined to exist in th e underlying proceedings. The provisions of the
SCM Agreement as we have interpreted them, and the finding s of the Panel and the Appellate Body in
the original proceedings, make it clear to the Arbitrator that these were the "adverse affects
determined to exist".
4.90 We find it important, however, to emphasize in this context that, contrary to what Brazil
argues, such an interpretation does not "render inu tile the implementation obligations for findings of
worldwide adverse effects".
96 The obligation of the United States in terms of implementation remains
to remove the adverse effects determined to exist (or withdraw the subsidy). This is a distinct
question from the question of the quantum of count ermeasures that Brazil is entitled to seek, as the
complaining Member whose interests are adversely a ffected by the existence of this significant price
suppression, such that these countermeasures would be "commensurate with the nature and degree of
the adverse effects (to the interests of Brazil) determined to exist" in this case.
4.91 The fact that the remedies available to Brazil must be commensurate with the degree and
nature of the adverse effects in relation to its own interests does not alter the scope of what the
United States might be required to do in order to re move such adverse effects. In particular, it does
not modify the fact that the source of the advers e effects determined to exist in this case is the
existence of "significant price suppression" on the world market, and that this is what the
United States must address in removing the adverse effects at issue. This is comparable, mutatis
mutandis, to the situation that arises in the case of a vi olation, for example, of Article XI of the
GATT 1994 through an import ban, in which the sc ope of the permissible countermeasures is a
function of the level of nullification or impairment of benefits accruing to the complaining Member,
but this does not modify in any way the nature of the implementation requirements that may arise
from the rulings for the Member concerned (for example, through the removal of the WTO-
inconsistent import ban).
4.92 In conclusion, in determining whether Brazi l's proposed countermeasures are "commensurate
with the degree and nature of the adverse effects dete rmined to exist", we must consider whether they
are commensurate with the impact on Brazil of the price suppression resulting from the granting of
ML and CCPs on the world cotton market.

95 Panel Report, para. 7.1415.

2. Should the level of countermeasures be adjusted to account for a threshold of
"significant" price suppression?
4.93 Brazil's counterfactual assumes a complete wit hdrawal of the ML and CCP subsidies. The
United States, however, considers that the counterm easures "should fit only that part of the subsidy
that is inconsistent, and, to the extent quantiti es are compared, the Arbitrator should compare the
proposed countermeasures with the part of th e subsidy causing the price suppression over the
"significant" threshold, not the effect of the entire subsidy."97
(a) Arguments of the parties
4.94 The United States contends that the Arbitrator should make a downward adjustment to the
measure of total effects in order to meet the legal standard under Article 7.10 of the SCM Agreement.
The United States acknowledges that the precise amount of the deduction is difficult to determine but
it believes this to be nonetheless critical.
4.95 The parties were requested to provide a quan titative threshold of significance. Brazil has
stated that "it would not consider any price suppression, however small, as significant as long as it is
greater than zero"
98 but did not propose a specific threshol d. The United States responded that it
cannot propose an exact threshold as to what dis tinguishes "significant" price suppression from price
suppression in this particular dispute.99
4.96 Instead, both parties have stressed the nature of the product, the world market for cotton and
the behaviour of the price itself. For Brazil, upland cotton is a homogeneous product whose sales are
price sensitive. 100 It is a basic and widely traded commod ity so that a relatively small decrease or
suppression of prices could be significant. 101 It also argues that there ar e continuing effects from past
marketing loans and countercyclical payments which are significant in and of themselves.102
4.97 The United States claims that the price of upl and cotton is highly variable, with frequent
swings of substantial degree. It claims that an analysis of cotton price variability over 1980 to 2003
shows that annual cotton price variability for the entir e period is in range of 18 to 20 per cent. It
argues that strong or frequent fluctuations in price would themselves tend to cut against a finding that
any alleged suppression is "significant", especially if the variability frequently brings the price of the
product to a level at which the alleged suppression (judged in light of that price) no longer exists.103
(b) Analysis by the Arbitrator
4.98 The question before us is whether the Arbitr ator should, in assessing the level of Brazil's
proposed countermeasures, aim to capture only th at portion of the price suppression on the world
cotton market resulting from the ML and CCPs that re nders it "significant", or whether the entirety of
this price suppression may be taken into account.
4.99 We find it useful to start our analysis of th is question with a reference to the underlying
findings, through which the existence of "significan t price suppression" under Article 6.3(c) of the
SCM Agreement was established.

97 US written submission, para. 298.
98 Brazil's responses to questions from the Arbitrator, question 38, para. 445.
99 US responses to questions from the Arbitrators, question 132, para. 159.
100 Brazil's comments on US responses to questions from the Arbitrator, question 122, para. 299.
101 Brazil's responses to questions from the Arbitrator, question 36, para. 404.
102 Brazil's responses to questions from the Arbitrator, question 36, para. 432.
103 US responses to questions from the Arbitrators, question 132, para. 160.

4.100 The original panel considered the meaning of the term "significant" in the expression
"significant price suppression" under Article 6.3(c) and determined that "it is the degree of price
suppression or depression itself that must be "signifi cant (i.e. important, notable or consequential)" 104
under this provision. The panel further consider ed how the "significance" of a price suppression
might be assessed, including in the context of the world cotton market:
"The 'significance' of any degree of pri ce suppression may vary from case to case,
depending upon the factual circumstances, and may not solely depend upon a given
level of numeric significance. Other consider ations, including the nature of the 'same
market' and the product under consideration may also enter into such an assessment,
as appropriate in a given case.
We cannot believe that what may be significant in a market for upland cotton would
necessarily also be applicable or relevant to a market for a very different product. We
consider that, for a basic and widely tr aded commodity, such as upland cotton, a
relatively small decrease or suppression of prices could be significant because, for
example, profit margins may ordinarily be narrow, product homogeneity means that
sales are price sensitive or b ecause of the sheer size of the market in terms of the
amount of revenue involved in large volumes traded on the markets experiencing the
price suppression."105
4.101 The panel then considered the relative magnitude of the United States production and exports,
the overall price trends in the world market and the mandatory nature of the subsidies in question and
well as the available evidence of the order of magn itude of the subsidy, to conclude that it was
"certainly not, by any means, looking at an insignificant or unimportant world price phenomenon".106
4.102 The panel therefore did not find it necessary to specifically quantify the degree of
"significance" of the price suppression at issue in order to determine that "significant price
suppression" existed. Nor did it suggest that its findi ng was limited to a certain "portion" of the price
suppression that had been determined to exist on th e world cotton market. Rather, it considered the
elements before it, and determined that the price suppression at issue, i.e. the price suppression caused
by the subsidies under consideration on the world cott on market, was "significant". In so doing, the
panel noted that the "significance" of any degree of price suppression "may not solely depend upon a
given level of numeric significance" and that "[o]th er considerations, including the nature of the
"same market" and the product unde r consideration, may also en ter into such an assessment"
107 and
that in the case of cotton, in light of the characte ristics of the product and the market, "a relatively
small decrease or suppression of prices could be significant".108
4.103 The compliance panel concurred with the orig inal panel's understanding of the term
"significant" in "significant price suppression" in Article 6.3(c) and specifically cites the panel's
conclusion in relation to the degree of price suppressi on that might be considered "significant" with
respect to upland cotton, as cited in paragraph 4.100 above.
109
4.104 In light of these elements, we do not consider that it is necessary, for the purposes of
assessing the impact of this "significant price s uppression", to exclude in the calculation of the
adverse effects a portion of the price increase said to be below an alleged threshold of "significance".

104 Panel Report, para. 7.1328.
105 Panel Report, paras. 7.1329-7.1330.
106 Panel Report, para. 7.1332.
107 Panel Report, para. 7.1329.
108 Panel Report, para. 7.1330.
109 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 10.50.

The threshold of "significance" is set in order to ascertain whether the price suppression at issue is
sufficiently "important, notable or consequential", as the original panel put it, to fall within the scope
of Article 6.3(c) and form the basis of a findi ng of "serious prejudice" under Article 6 of the
SCM Agreement. Once it is determined that the price suppression is significant, and therefore that it is
within the scope of the provision, then it is the entir ety of that existing "significant price suppression"
that is the basis for the determination of "serious prejudice".
4.105 To adjust the level of price suppression downw ards, for the purposes of estimating the level
of countermeasures that Brazil is entitled to, would m ean that we would not in fact take into account
the entirety of the situation that has given rise to th e findings, namely the fact that a certain degree of
price suppression exists on the world cotton market, that has been found to be "significant". It is not
for us to second-guess what alternative lower leve l of price suppression on the world cotton market
might have been found not to be "significant" in the ci rcumstances of this case. In fact, in light of the
original panel's determination that the "significance" of a certain price suppression may not "solely
depend upon a given level of numeric significance" , we cannot even assume that a purely quantitative
threshold would appropriately reflect such "signifi cance". Indeed, the United States itself, although it
considers such an adjustment to be "critical", d eclined to propose a specific quantitative threshold by
which "significance" might be accounted for.
4.106 The Arbitrator therefore concludes that it is not required, for the purposes of estimating the
effects of the significant price suppression determined to exist on the world cotton market, to adjust
downwards the degree of this price suppres sion for "significance" (or, more correctly,
"insignificance").
4.107 We also note that this is comparable, in concep tual terms, with the practice under the relevant
WTO agreements in relation to the imposition of safeguards, or countervailing duties, or under the
Anti-Dumping Agreement in relation to the imposition of anti-dumping duties reflecting the entirety of
the dumping margin, where such margin is more than de minimis.
110 In our view, this is conceptually
similar to the reasoning we are applying to the dete rmination of the "degree and nature of the adverse
effects determined to exist". Once the existe nce of "significant price suppression" has been
established, it is legitimate to take into account the entirety of the price suppression caused by the
measures at issue on the world cotton market in assessing its impact on Brazil. A de minimis , or
"insignificant", amount of that price suppression is not to be ignored in terms of the "remedy" which,
in our case, is the countermeasure.
3. Choice of reference period
4.108 Brazil quantifies the adverse effects of marke ting loans and countercyclical payments based
on a counterfactual, assessing how much higher wo rld market prices for cotton would have been
pursuant to a complete withdrawal of marketing loans and countercyclical payments in MY 2005.
The United States considers this period not to be re presentative in light of more recent evolutions on

110 For example, in a safeguards case, when setting the level of the duty sufficient to eliminate a serious
injury, the Member applying the duty would be entitled to impose a duty reflecting the entirety of the injury, and
would not be expected to impose a duty that would for example permit injury that might be material but falls
short of a "serious" level. Similarl y, when considering import volumes for the application of anti-dumping or
countervailing duties, it woul d not be expected that an "initial" amount of supp ly up to the negligibility
threshold would be exempted from application of a measure for a non-negligible supplier. Furthermore, under
the Anti-Dumping Agreement , a margin of dumping which is less than 2 per cent is said to be de minimis .
Dumping that is determined to be lower than this threshold will result in immediate termination of the
investigation. However, if the dumping margin is found to equal or exceed this threshold, and the investigating
authorities subsequently find that all other grounds for imposing an anti-dumping duty are present, the duty can
be set as high as the entirety of the dumping margin. There is no requirement to reduce the anti-dumping duty
by the amount of the de minimis threshold.

the market and proposes instead that a three-year period covering MY 2005-07 be used to calculate
the amount of countermeasures to which Brazil is entitled.
(a) Arguments of the parties
4.109 The United States argues that the task of the Arbitrator is to determine the amount of
countermeasures permitted based on the findings of th e compliance panel and that, in this case, the
Arbitrator will be making its dete rmination over three years after the end of the reasonable period. In
its view, it "makes sense that the Arbitrators use ac tual data of the period following the end of the
reasonable period to provide more information about the likely harm to Brazil".
4.110 Brazil objects to the argument that the Arbitrator should determine the amount of
countermeasures based on the findings of the compli ance panel. It maintains that allowing a non-
compliant Member to rely on its own failure to comply in order to limit the amount of
countermeasures is inconsistent with the Article 7.9 and 7.10 of the SCM Agreement and Article 22 of
the DSU. These provisions do not allow a non-complia nt Member to extend a reference period long
past the end of the implementation period to limit the scope of countermeasures.
4.111 The United States further contends that using a single year – MY 2005 – for an agricultural
product that has volatile prices is not representative of the potential effects in future to Brazil.
111 The
United States has presented data of the A-i ndex from MY 1971 through MY 2007 to illustrate
historical movements in world cotton prices. It argues that the A-index for MY 2007 is in line with
historical A-index values while the period MY 1999-MY 2002 represents a period in which the
A-index is extremely low from a historical perspective. Given that prices vary from year to year, the
United States advocates the averaging of three years to smooth out the ups and downs to provide a
middle ground instead of relying on any single year.
112
4.112 Brazil notes that the question before the Arbitr ator is whether the level of countermeasures
proposed by Brazil is commensurate with the degree and nature of the adverse effects at the end of the
period for implementation – and not whether the le vel of countermeasures is "representative of
potential effects going forward".113 It then challenges the United States' assertion that MY 2005 is not
representative of the "potential effects going forward to Brazil" and that the average of MY 2005 to
2007 is more representative. It provides data that shows prices, and hence in its view, effects in
MY 2005 that were close to the average of the nine-year period since 1999, the first year covered by
the findings of the original panel. As such, it finds MY 2005 to be representative of the per-unit
amount of marketing loans and countercyclical payments over the nine-year period and hence, of their
effects. In contrast, it says that prices in MY 2007 were abnormally high, and in fact, are the highest
of the decade. As a result, it maintains that ta king an average that includes MY 2007 prices is not
"representative", and understates the amount of the subsidy and the adverse effects caused.
114
4.113 Finally, Brazil argues that past arbitrators have used the approach that it is proposing in this
dispute, i.e. using the year straddling the end of the implementation period. It claims that past
arbitrations have stressed that compliance must be assessed at the time of expiry of the
implementation period. It further claims that arb itrators have used reference periods longer than one
year only in cases involving subsidies provided for an order of large capital goods to be delivered over
a number of years.

111 US written submission, para. 277.
112 US responses to questions from the Arbitrator, question 60, para. 153.
113 Brazil written submission, para. 374.
114 Brazil written submission, para. 376.

4.114 The United States observes that prior arbitrations do not suggest a narrow one-year analysis.
In terms of taking into account more recent data, it claims that arbitrators have taken into account
current conditions – including evaluation of changes to policies at issue. The United States notes that
arbitrators have also taken approaches that use multi-year time horizons, whether in projections of
several years for a subsidy or in the use of formulas.
115
(b) Analysis by the Arbitrator
4.115 Brazil has based its calculation of the amount of countermeasures that it seeks in relation to
the ML and CCPs on MY 2005, and justifies the choice of that period as the year "straddling" the end
of the implementation period. The United States argu es that this is not "representative", and that a
multi-year reference period should be used.
4.116 The question we must consider here is whether the specific period proposed by Brazil is such
that it would not lead to an estimation of the adverse effects at issue that would be "commensurate
with the degree and nature" of those adverse effects. We recall in this respect the fact that the burden
rests on the United States to demonstrate that Brazil's proposed countermeasures do not meet this
standard. In order to prevail in its argument, th e United States must therefore persuade us not only
that there may be alternatives to the choice of MY 2005 as the period of reference, but rather that the
use of MY 2005 as period of reference would l ead to countermeasures that would not be
"commensurate" within the meaning of Article 7.9. The United States has not convinced us that this
would be the case.
4.117 We recognize that price fluctuations on the world upland cotton market may affect the
calculation of the adverse effects of the ML and CCP subsidies at issue over time. Indeed, there may
be a number of economic or other factors that woul d affect the evolution over time of the impact of
the subsidies at issue, and we do not exclude th at there may have been different permissible
approaches to the choice of period of reference fo r the purposes of such calculations. In a situation
where a fixed annual amount of countermeasures is dete rmined, that will be applied in the future and
for an undetermined period of time, there is necessar ily an inherent uncertainty as to how closely the
said amount will represent the actual continued adver se effects of the measure over time. What we
must ensure, however, is that there is a legitima te basis for assuming that the chosen period of
reference may lead to a reasonable estimation of these effects.
4.118 In the circumstances of this case, we find th at the choice of MY 2005, which represents the
first moment at which the United States should have come into compliance with the recommendations
and rulings at issue by removing the adverse effect s of the subsidies or withdrawing them, is in
principle legitimate. We note that the end of th e implementation period has been chosen as period of
reference in arbitrations under Article 22.6 of the DSU previously.
116 We also find that the elements
before us do not persuade us th at this period would be "unrepresentative", as the United States
suggests. In fact, Brazil's analysis of cotton pr ices (the Adjusted World price, the A-index and
US farm price) shows that prices in MY 2005 were more representative, in the sense that they were
close to the average of the nine-year period since MY 1999, than prices over the three-year period
proposed by the United States. We concur with th e significance attached by Brazil to this nine-year
period since MY 1999 was the first year covered by the findings of the original panel .117 While the

115 US written submission, para. 278.
116 Decision by the Arbitrator, US – FSC (Article 22.6 – US), para. 2.15.
117 See Panel Report, para. 7.1416: "In conclusion, in light of all of these considerations, we find that
the effect of the mandatory, price contingent United States subsidies at issue – that is, marketing loan
programme payments, user marketing (Step 2) payments and MLA payments and CCP payments – is significant
price suppression in the same world market for upland cotton in the period MY 1999-2002 within the meaning
of Articles 6.3(c) and 5(c) of the SCM Agreement."

most recent market evolutions may suggest rising pri ces, we have little basis to assume that this most
recent trend represents a sustained medium or long- term trajectory of the market given that cotton
prices vary considerably from year to year, a pattern that both parties have attested to and
documented.
4.119 In light of these elements, we conclude that the United States has not demonstrated that the
reference period proposed by Brazil for the calculati on of its proposed countermeasures is inadequate,
and we accept the use of MY 2005 as period of reference for the calculations.
4. Calculations
(a) Introduction
4.120 Brazil calculates the amount of adverse e ffects on rest of the world producers from
US marketing loans and countercyclical payments to be US$3.335 billion, although it only requests
countermeasures equal to US$1.037 billion annually in line with its original request to the DSB. The
adverse effects are comprised of two parts. The fi rst is the income losses by rest of the world
producers on actual cotton productio n in MY 2005 due to suppressed world market prices ("sales
value effect") which Brazil calculates amounts to US$2.73 billion. The second is the value of the
cotton production foregone by otherwise competi tive producers in the rest of the world due to
suppressed world market prices ("reduced production effects") which Brazil calculates at
US$604.7 million.
4.121 The United States argues that Brazil's methodolo gy or approach to the calculations suffers
from serious defects so that it shoul d be rejected by the Arbitrator. It describes these defects as:
(i) the decision not to limit the calculations of adverse effect to only the effects of US programmes on
Brazil; (ii) the choices for key parameters (elast icities, coupling factor and indicator of price
expectations) in the model; (iii) Brazil's use of data for a single year (MY 2005), which the
United States argues is not representative of the fl uctuation of marketing loan and countercyclical
payments and their effects; and (iv) Brazil's failure to limit the proposed countermeasures to the
portion of the effects of the marketing loan and co unter-cyclical payments that resulted in the finding
of inconsistency with the SCM Agreement.
118
4.122 Employing the same economic simulation model submitted by Brazil but employing a
different set of parameters and reference period, it calculates the "total effects" of marketing loans and
countercyclical payments on Brazil to average no more US$30.4 million annually. The United States
confines its calculation only to the adverse effects on Brazil and excludes the adverse effects on other
countries. Finally, it argues that the allowable countermeasures will have to be lowered further
depending on the chosen threshold for "significant" price suppression. For the United States, only
price suppression that breaches this threshold of being significant can be authorized for
countermeasures.
4.123 Some of the issues raised by the United St ates which concern limiting the calculations of
adverse effect to only the effects of US programmes on Brazil, limiting the proposed countermeasures
to the portion of the effects of the marketing loan and counter-cyclical payments that result in the
finding of inconsistency with the SCM Agreement and the choice of the reference period have already
been considered and decided upon by the Arbitrator (see Section IV.D.1-3 above). The Arbitrator
now takes up the other remaining issues.

118 US written submission, para. 239.

(b) Brazil's methodology and model
4.124 Brazil's methodology entails simulating a counterfactual scenario involving the permanent
and anticipated removal of US cotton marketing lo ans and countercyclical payments. This policy
change moves the world market of cotton to a ne w equilibrium with a new world market price and
new supply and demand quantities. 119 Based on this counterfactual scenario, Brazil calculates the
percentage change in the world market price, cott on production in the United States and in the rest of
the world relative to the baseline scenario where these US cotton subsidies are in place. Brazil uses
the change in the world market price to establis h the amount of price suppression. According to
Brazil, the suppressed price in the world market for cotton in turn has two related negative
consequences for cotton farmers worldwide. First, actual world production is valued at a lower price
thereby resulting in income loss for farmers in the rest of the world. Second, the lower world price
reduces the incentive to produce more cotton in the rest of the world, and so leads to foregone
revenues from cotton production. 120 For Brazil, the sum of these two effects represents the adverse
effects of the US subsidies.
4.125 To conduct this counterfactual simulation, Br azil employs what it describes as a traditional
demand and supply log-linear displacement model th at calculates percentage changes from an initial
baseline equilibrium in which all US cotton subsidies are in place. 121 The model considers two
regions, the United States and the rest of the worl d. Brazil constructs s upply and demand functions
for cotton in the United States and the rest of the world. The world market for cotton is assumed to be
in initial equilibrium (at which the world market price for cotton equates world demand and supply
for that commodity) in which all US cotton subsidies are in place. 122 In characterizing its model,
Brazil observes that it had been considered by the compliance Panel and the Appellate Body, and both
relied on its results. 123 It further notes that the United States had even used the model for its
alternative calculations.124
(i) Arguments of the United States
4.126 The United States identifies what it claims are a number of problems with Brazil's model,
pointing to Brazil's choice of certain parameters such as United States and rest-of the-world demand
and supply elasticities; the coupling factor for coun ter-cyclical payments; and the indicator of price
expectations.125 While these are not the only problems th at the United States finds with Brazil's
methodology, they are the ones that it highlights and for which it provides alternatives that could be
used to calculate the amount of allowable countermeasures.126
4.127 In responding to Brazil's claim that the co mpliance panel had relied on the model, the
United States emphasizes that the compliance pane l only needed to determine whether the price
suppression indicated by the model was "significant". However, the nature of the question before the
Arbitrator makes the issues it has ra ised about the model more "sensitive" at this stage of the dispute.
It believes that the task of determining countermeasu res under the legal standard of Article 7.9 of the
SCM Agreement requires that the parameters in the model be correct.

125 US written submission, para. 251.
126 The United States has resubmitted 'Annex I: A Review of the Simulation Analysis Presented by
Dr. Sumner' which contains a more detailed critique of Br azil's model. The document was originally submitted
to the compliance panel.

(ii) Analysis by the Arbitrator
4.128 Brazil's calculation of adverse effects from US marketing loans and countercyclical payments
can be graphically represented by Figure 1. It represents the supply curve of a cotton producing
country in the rest of the world. With US subsidies in place, the world price is at OP and quantity
produced in the country at OQ. Without the US subsidies, the world price would be at the higher
level OP' and cotton producers in the country would have responded by producing more cotton,
represented here by OQ'.
Figure 1: Adverse Effects on Producers in the Rest of the World

4.129 The area A in Figure 1 is what Brazil terms the "sales value effect" while the sum of the
areas B and C is what it terms the "reduced production effects". The Arbitrator notes that the
United States has not disputed Brazil's decomposition of the adverse effects from the actionable
subsidies into this sales value and reduced productio n effects. An alternative way of characterizing
these effects can be provided using standard economic concepts. The sales value effect is the increase
in producer surplus that farmers in the rest of the world would have received based on their current
output of cotton had world prices been at the coun terfactual (no subsidies) level. The reduced
production effects are made up of two parts: the pr oducer surplus from the additional production QQ'
(area B) and the opportunity cost of the resources ne eded to produce the additional cotton (area C).
The Arbitrator notes that if one were only inter ested in measuring how US cotton subsidies have
reduced producer welfare in the rest of the world, then this would be represented by the loss in
producer surplus (sum of areas A and B). This is because those resources used to produce QQ' of
cotton would have found employment elsewhere an d consequently, there would have been no loss
associated with those resources to the rest of the world. However, the Arbitrator understands that
adverse effects may have a wider meaning than prod ucer surplus and that Brazil's economic analysis
of adverse effects is consistent with the language of Article 6.3(c) of the SCM Agreement, particularly
in its reference to "lost sales".
4.130 On the subject of the model proposed by Brazil, the Arbitrator determines that, for the reasons
provided below, Brazil's log-linear displacement model can be used to estimate the amount of
countermeasures that Brazil is entitled to for the fail ure of the United States to comply with the DSB
ruling to remove the adverse effects of its marketing loans and countercyclical payments (or withdraw
the subsidies).
4.131 First, the United States has stated that with th e corrections it proposes, Brazil's model while
far from perfect could be used to estimate what it terms the "total effects" from the removal of
Price
Quantity
Supply curve
A
C
B
A = Sales value
effect
B + C = Reduced
production effect
QQ ’
P
P’

marketing loans and countercyclical payments.127 It is understood of course that from these estimated
"total effects", the United States will require additio nal reductions so that they are commensurate with
the adverse effects and further that they are limited only to the adverse effects on Brazil.
4.132 Second, the United States has in fact employed the model, using its own set of parameters and
reference period, to calculate what the United Stat es believes is the amount of countermeasures Brazil
is entitled to. Further, the United States does not provide its own simulation model which could be
employed to calculate the amount of countermeasures.128
4.133 Finally, Brazil's model was submitted to the compliance panel which had used the simulations
of the model to support its finding of non-complian ce by the United States. While the Arbitrator
agrees with the United States that the model was on ly used by the compliance panel to determine
whether the price suppression caused by US cotton subsidies was "significant" and not to ascertain the
exact magnitude of allowable countermeasures, its use by the panel nevertheless provides the
Arbitrator with greater confidence than if the model were being submitted to it for the first time.
4.134 Needless to say, the model requires a set of parameters and inputs, such as the demand and
supply elasticities, the value of the coupling factor, and an indicator of expected market prices, in
order to be able to calculate the amount of adverse effects from US marketing loans and
countercyclical payments. The choices for these pa rameters and inputs are the subject of numerous
disagreements between the parties. The Arbitrator turns to each of these issues in turn.
(c) Elasticities used in the model
(i) Long-run vs. short-run analysis
4.135 Brazil contends that a short-run economic analysis is what is required in calculating the
amount of countermeasures given that a non-complia nt Member must impl ement adverse effects
findings within six months. In Brazil's view, a Member whose subsidies are determined to cause
adverse effects must, within the short period of six months, withdraw those s ubsidies or remove their
adverse effects. Consequently, a short-term assessment is required.
129
4.136 Brazil explains that its choice of values for the demand and supply elasticities reflects the
nature of the policy change that is being simulated. The policy scenario involves a large, anticipated,
permanent removal of marketing loans and countercy clical payments for cotton in MY 2005 holding
all other potential parameters constant.130 It explains that the elasticities chosen for this counterfactual
reflect the rational and expeditious reaction of US farmers to the policy change and the somewhat
muted initial reactions of farmers in the rest of the world.131
Arguments of the United States
4.137 The United States believes that the correct way to conduct the economic modelling of the
impact of the removal of marketing loans and count ercyclical payments is to use long-run elasticities
to allow for full adjustment to policy change. 132 It contends that the most appropriate method of
ensuring that non-compliance no longer affects decisi on-making by market participants is to utilize

127 US responses to questions from the Arbitrator, question 62, para. 159.
128 US responses to questions from the Arbitrator, question 62, para. 159.
132 US oral statement, para. 11.

long-run elasticities. In its view, long-run elasticities reflect a situation in which all actors fully adjust
to the policy change, thereby removing any influences of the non-compliance.133
4.138 It claims that the proper question is what th e price of upland cotton would be in the absence
of marketing loan and countercyclical payments, not how producers and purchasers react before they
have time to adjust to the lack of these payments. 134 It is because of the need for the modelling to
show what the counterfactual situation looks like that a short-term, reactive approach is not
appropriate. Thus, the number of months permitted for adjustment, per se, is not the relevant factor.
In its mind, what is critical is that the counte rfactual modelling shows full adjustment so that the
situation with marketing loan and countercyclical payments can be compared to the situation
without.135
4.139 The United States criticizes the choice of elasticities of Brazil, claiming that in spite of
Brazil's assertion that it is applying a short-run an alysis, the elasticities chosen are "some type of
hybrid of short run and long run."136 It believes that this choice of elasticities dramatically inflates the
effects of the US cotton subsidies.137 In its view Brazil's choice for the US supply elasticity suggests a
complete, long-run response to the change in subsi dy payments and shows up in the model as a large
change in US supply. By contrast, it believes other elements of the model – US demand elasticity and
rest-of-world supply and demand elasticities – are lower, showing less responsiveness, as would occur
in a short-run period before there is a full response to a change. Thus, in its view the magnitude of the
other responses represented by these other elasticities, which would mitigate the effect of the change
in US production on price, is lower. As an example, it notes that if US producers decrease
production, but others increase production, the price effect of the change in US production is less.138
4.140 The United States argues that if Brazil's counterfactual simulation assumes complete,
permanent removal of marketing loan and counter -cyclical payments, and adjustment of cotton
production to that change, this is consistent with a long-run scenario . In this case, the United States
proposes that all the values of the elasticities be taken from the UNCTAD-FAO Agricultural Trade
Policy Simulation Model (ATPSM). Employing the elasticities in that model and other assumptions
about the reference period, the coupling factor and pr ice expectations, it estimates the "total effects"
of marketing loans and countercyclical payments on Brazil to average no more than US$30.4 million
annually.
Arguments of Brazil

4.141 Brazil disputes the arguments of the United States that a long-run analysis is required. In its
view, the United States' argument for a long-term approach would bypass the requirement that
implementation take place within six months, implying that a non-compliant Member can take a long-
term approach to achieving compliance.
4.142 In addition, Brazil argues that the SCM Agreement (Article 7.9 and 7.10) requires that
countermeasures responding to a failure to implemen t be "commensurate with the degree and nature
of the adverse effects determined to exist". In its view, this means that countermeasures should be
calculated on the basis of the entirety of the adver se effects existing in MY 2005, which are the sum
of the effects of the subsidies that US cotton fa rmers anticipated receiving in MY 2005, and of

133 US written submission, para. 254.
134 US responses to questions from the Arbitrator, question 119, para. 109.
135 US responses to questions from the Arbitrator, question 119, para. 110.
136 US written submission, para. 255.
137 US written submission, para. 256.
138 US written submission, para. 256.

continuing effects in MY 2005 from subsidies received in previous years. 139 Consequently, it
contends that it is not permissible to consider so lely the change between (i) actual cotton prices and
quantities in the reference period and (ii) counte rfactual long-term cotton prices and quantities absent
solely the subsidies anticipated in the reference period.140
4.143 Furthermore, Brazil asserts that even if an assessment of the long-term effects of the subsidies
at issue is adopted, the use of long-run elasticities as proposed by the United States would be flawed
since market participants' full adjustments will take time. Under the short-term approach adopted by
Brazil, the amount of adverse effect s removed in year one is measured. At that point there remain,
however, some continuing effects that will only di ssipate from the market in subsequent years,
resulting in a new market equilibrium at some point in the future. Thus, implementing a long-term
approach requires summing up the adverse effects existing in each year of the dynamic adjustment
process until the new market equilibrium is achieve d. In other words, implementing a long-term
approach properly requires using Brazil's short- term adjustment as the starting point and adding
additional effects in subsequent years. In its view, the United States' approach only compares the
starting and end point in this dynamic adjustment process, and ignores large portions of the adverse
effects caused throughout the adjustment process.141
Analysis by the Arbitrator
4.144 The parties disagree on whether the counterfactual simulation requires a short-run or a long-
run analysis. In the context of the argumentation of the parties, the concepts of short-run and long-run
relate to the process of economic adjustment ar ising from the exogenous change in the economic
environment. The long-run essentially refers to a situation where all adjustments by producers,
consumers, and owners of factors of production to the given change have been completed and the
market has settled down to a (long-run) equilibrium. The short-run refers to a situation, which could
be one of (short-run) equilibrium, where the pro cess of adjustment by producers, consumers and
owners of factors of production has not been fully co mpleted. This less than complete adjustment in
the economy may be the result of certain rigidities in the market or simply that it takes time for
producers to re-allocate resources.
4.145 To make this discussion more concrete, we rela te these concepts to the specific matters under
consideration in this case. The exogenous change re ferred to in the previous paragraph would be the
elimination of marketing loans and countercyclical payments. Given that Brazil assumes a large
behavioural response by US cotton farmers to this policy change, the lack of complete adjustment
arises partly in the rest of the world, and partly in domestic US demand for cotton. Brazil has argued
that there may be incomplete price transmission of the policy change to foreign growers of cotton. 142
It has also suggested that foreign farmers lack the expertise or sophistication, have limited access to
information, and face other constraints that typi cally afflict farmers from developing and least
developed countries thus making immedi ate production responses more difficult. 143 Furthermore,
Brazil has claimed that there are continuing adverse e ffects from past subsidies that need to be taken
into account. It points out for example that lower cotton prices, which are the result of the actionable
subsidies, have resulted in lower investme nt levels by rest of the world producers.
144 L o we r t h a n
optimal investments result in relatively higher pr oduction costs, reducing present production levels.
As a result of these rigidities and continuing adver se effects, foreign growers of cotton will not be
able to immediately increase their plantings of cotton. Farmers in the rest of the world, who have the

139 Brazil's responses to questions from the Arbitrator, question 119, para. 245.
140 Brazil's responses to questions from the Arbitrator, question 119, para. 247.
144 Brazil's responses to questions from the Arbitrator, question 119, para. 263.

feasibility to shift to cotton, may not immediately ma ke the change if the in crease in cotton price is
not transmitted fully or if they do not believe the el imination of subsidies is permanent. Even if they
do begin to cultivate more cotton, past low levels of investments will mean low productivity.
4.146 The existence of such rigidities and continui ng effects means that the adverse effects of
marketing loans and countercyclical payments are correspondingly greater. Producers in the rest of
the world are not able to immediately and fully prof it from the increase in the world price of cotton or
from increased production of cotton despite the el imination of the subsidies. Using long-run
elasticities, which assumes that all adjustments have been completed (or that there are no adjustment
costs), will underestimate the adverse effects of the measures. The rationale for the application of a
short-run analysis, and consequently of short-run elasticities, is not because of the need to capture
each step of the adjustment pr ocess but because the incompleteness of adjustment implies greater
costs on producers in the rest of the world.
4.147 We believe that the United States' argument for a long-run analysis may be more appropriate
in cases where there are no adjustme nt costs. In this case it can fairly be said that these adjustment
factors are due in part to the existence of the subs idies themselves. The United States is required to
withdraw the subsidies or remove the adverse effect s within six months. It has done neither. Brazil
has established a plausible case that it will take time for consumers and producers to fully adjust to the
removal of marketing loans and countercyclical paym ents. As we have noted in our analysis, this
means that producers in the rest of the world would continue to experience the adverse effects of the
subsidies even after they have been removed. Since the calculated countermeasures must be
"commensurate with the degree and nature of the adve rse effects determined to exist", the Arbitrator
believes that the economic modelling must account for these rigidities. This makes a short-run
analysis, and the use of short-run elasticities, not inappropriate for the economic modelling.
(ii) Values of the elasticities
US supply elasticity

4.148 The elasticity of supply measures the responsiveness of production to a change in price. The
higher this elasticity, the greater the percentage in crease in cotton supply for any given change in the
world price of cotton.
4.149 Brazil's model uses a supply elasticity of 0.8. It justifies this choice as a reflection of the
anticipations of US cotton farmers, as well as the na ture of the expected short-term policy shock at
issue, which will be a persistent, large-scale reduc tion of cotton subsidi es while other non-cotton
subsidies remain in place. 145 Given that the counterfactual scenario at issue involves a large and
permanent loss of revenue to only US cotton farm ers, it believes that those farmers will necessarily
adjust faster and more significantly than farmers reacting to temporary and transient reductions in
revenue.146 It contends that this is unlike the policy simulations usually considered in computable
general equilibrium models which involve an ac ross-the-board removal of all farm subsidies. 147 In
Brazil's view, with US cotton farmers' revenues expected to decline dramatically following the
withdrawal of marketing loans and countercyclical payments, they will have strong and immediate
incentives to switch to alternative crops because there is nothing to gain (and much to lose) from
deferring a production reaction.148

4.150 The United States disagrees that a value of 0.8 for the US supply elasticity correctly reflects a
short-run analysis; rather such a value is in fact a long-run supply elasticity. In its view, Brazil's
characterization of the policy counterfactual as a large and permanent loss of revenue to
US producers, and the possibility of US producers taking the significant step of exiting cotton farming
altogether in response to the United States' withdrawal of subsidies, are events usually associated with
a long-run scenario.
149 It emphasizes that Brazil's assumption that US producers would be able to
fully adjust to the permanent change in US polic y within the terms of the model implies a long-run
perspective.
ROW supply elasticity
4.151 Brazil's model employs a value of 0.2 for the rest of the world supply elasticity. Brazil claims
that the rest of the world supply elasticity mu st necessarily be smaller in magnitude than the
US supply elasticity. This is because of the adap tation by rest of the world producers to a policy
shock that is: (i) indirect, (ii) relatively small co mpared to the revenue loss faced by US producers,
and (iii) in the opposite direction from that faced by US producers. It claims that transmissions of
world market price movements into local price changes in local currencies relevant for non-
US farmers can be slow and incomp lete due to barriers such as market institutions, centralized crop
marketing, government policies, limited info rmation, and high per-unit transport costs. 150 Further, it
contends that lagged price adjustments, the lack of expertise or sophistication, restricted access to
information, as well as other constraints affecting especially developing and least developed country
farmers make immediate production responses more difficult.151
4.152 While the United States acknowledges that price changes may not fully be transmitted in the
short-run, it believes that this is less the case in th e long-run and, that in any event, it does not mean
that producers in the rest of the world never fully ad just to policy change. It claims that in some
countries where farmers typically wo rk on small farms and additional la nd is available, such as India
and Pakistan, farmers will likely adjust to such changes in policy without delay.
4.153 It also disputes Brazil's claim that foreign su ppliers would be slow to respond because they
would be unable to distinguish whether the change in prices was a temporary market condition or a
change in US policy. The United States belie ves this argument lacks any foundation given the
continuous press coverage and major cotton pr oducing states' focus on the impacts of the
US programmes.
Demand elasticities
4.154 The elasticity of demand measures the responsiven ess of consumption to a change in price.
The higher this elasticity, the greater the percen tage increase in cotton demand for any given
percentage change in the world price of cotton.
4.155 Brazil's model employs a value of -0.2 for the US and ROW elasticities of demand for cotton.
Brazil claims that cotton demand is mainly determ ined by end consumers and that their demand is
relatively inelastic with respect to changes in co tton prices for a number of reasons. First, Brazil
claims that consumers have a preference for cotton over synthetic fabrics. Second, it asserts that the
cost of raw cotton only makes up a small share of the final price of textile products. Thus, it
concludes that consumers worldwid e respond little to changes in the price of raw cotton, since the
impact of such changes on the relative price of reta il textile products is limited. As for demand from

149 US written submission, para. 258.

cotton mills, it claims that this is characterized by inelastic demand, not least because mill technology
favours the use of particular fibres.
4.156 Brazil contends that the values of the elasticitie s are conservative relative to recent studies in
agricultural economics and consistent with the em pirical and econometric literature. Comparing the
chosen values with other studies or models, it maintain s that they are equal to the weighted average of
the demand elasticities in the Iowa State CARD inte rnational cotton model, twice the magnitude of
the demand elasticity parameter used by Goreux, and four times the magnitude of the demand
elasticity parameter used by ICAC in their studies.
4.157 The United States disputes Brazil's claim that cotton demand is mainly determined by final
consumers. It argues that actual demand for cotton is at the mill, where the cost of cotton accounts for
nearly 70 per cent of mill production costs. Additiona lly, it asserts that it is the mills that decide the
mix of fibres in producing yarn and therefore the mix is affected by relative prices of available fibres.
4.158 The United States objects to Brazil's choice of US and ROW demand elasticities as being near
the lower bound of that found in the literature on studies looking at impact of the removal of
US cotton programmes. It judges the premise of ve ry inelastic demand as being doubtful even in the
short-run. And in the long-run, it argues that cotton mills will adjust their use of cotton even more. In
the light of the type of significant shock that Brazi l posits in its counterfact ual, the United States
believes such adjustment would be expected. And it points to the changes that the global financial
crisis and economic slowdown have caused with the demand for cotton demand declining
significantly.
4.159 It also contends that if a short-run analysis is to be employed, cotton stocks must be accounted
for. It claims Brazil's model does not account fo r stocks and one method to incorporate stocks is
through adjusting the demand elasticity.152
Analysis by the Arbitrator
4.160 Brazil has proposed a set of elasticities to conduct its counterfactual analysis (see Table 1).
Although the United States has argued for the appropr iateness of a long-run analysis and the use of
long-run elasticities, it has also proposed an alternativ e set of values of short-run elasticities based on
the FAPRI model.
Table 1: Values of short-run elasticities proposed for simulating the removal
of marketing loans and countercyclical payments

Parameter Brazil United States
US cotton supply elasticity 0.80 0.21
ROW cotton supply elasticity 0.20 0.33
US demand elasticity -0.20 -0.82
ROW demand elasticity -0.20 -0.39

4.161 In the Arbitrator's view, Brazil needs to show th at there is support to be found in the research
literature for the values of the US and ROW el asticities that it has proposed to employ in the
simulations. The Arbitrator had requested both parti es to review this literature for estimates of cotton

152 US comments on Brazil's responses to questions from the Arbitrator, question 121, para. 156.

demand and supply elasticities and both parties have provided their reviews to the Arbitrator. 153 The
Arbitrator has assembled part of this information in Tables 2A-D which show the values of the short-
run elasticities from the economic literature. In their response to the Arbitrator, the parties sometimes
did not indicate whether the elasticity was short-r un or not. What appears in Tables 2A-D are only
those values explicitly described as short-run by the parties.
Table 2A: Survey of values of short-run US supply elasticities

Author Value of Elasticity US Region Supply Response
0.18 Delta Acreage
0.11 Southeastern Acreage
FAPRI
0.237 South Plains Acreage
0.586 Southeast and Delta Acreage response Lin
2.282 South Plains Acreage response
0.9 Southeast and Delta Acreage response Adams
0.797 South Plains Acreage response
Meyer 0 US (National) Area harvested
0.18 Delta Acreage response
0.16 Southeast Acreage response
0.31 Southwest Irrigated Acreage response
0.37 Southwest Dryland Acreage response
Pan, Mohanty et al
0.42 West Acreage response
CARD (Babcock) 0.21 US (National) -

Table 2B: Survey of values of short-run ROW supply elasticities

Author Value of Elasticity Region Supply Response
Meyer 0.01 Rest of world Area harvested
0.1 Rest of world Acreage response Pan, Mohanty et al
0.54 Rest of world Acreage response
Orden, Salam, Dewina,
Nazli and Minot 0.3 Pakistan -
Babcock et al 0.2 Rest of world -
Fang and Babcock 0.2 Rest of world -
FAPRI 0.33 Rest of world -

153 Brazil's responses to questions from the Arbitrator, question 5, paras 15-83 and US responses to
questions from the Arbitrator, question 5, paras. 22-30.

Table 2C: Survey of values of short-run US demand elasticities

Author Value of Elasticity Demand by
Meyer -0.256 Mills
Babcock et al -0.82 -
FAPRI -0.82 -

Table 2D: Survey of values of short-run ROW demand elasticities

Author Value of Elasticity Demand by
Babcock et al -0.2 -
Fang and Babcock -0.2 -
FAPRI -0.39 -
Sources: Brazil's responses to questions from the Arbitrator, question 5, paras. 15-83 and US responses to the
questions from the Arbitrator, question 5, paras. 22-30.

4.162 Tables 2A-D provide support for Brazil's proposed elasticity values, although the Arbitrator is
of the view that this is not by any means overwhe lming. The US supply elasticity adopted by Brazil
is in the upper end of the distribution. There is far less literature on cotton demand elasticities and the
estimates shown in Tables 2A-D tend to take the competing values claimed by the parties.
• US Supply Elasticity: The lowest estimate is provided by Meyer with a value of zero.
The largest values are from the studies by Ad ams (0.8 to 0.9) and by Lin (0.59 and
2.28) which provide support for Brazil's choice. The FAPRI, Pan, Mohanty et al and
Babcock et al studies have elasticities that, averaged at the national level, will range
between 0.2 and 0.25.

• ROW Supply Elasticity: The elasticities range from near zero (Meyer) to 0.54 (Pan,
Mohanty, et al). Two studies (Babcock et al and Fang and Babcock) use Brazil's
value of 0.2.

• US Demand Elasticity: Three studies are reported in Table 2C with only the Meyer
study providing support for Brazil's proposed value of -0.2. However, we note that
this estimate is of mill demand, which was the subject of much of the US criticism
against Brazil's proposed value.

• ROW Demand Elasticity: Only three studies are reported in Table 2D and two of
them (Babcock et al and Fang and Babcock) use identical values as Brazil.

4.163 On the basis of the Arbitrator's determination th at a short-run analysis is appropriate for the
economic modelling and the finding, based on the review of the literature provided by the parties, that
econometric estimates and other modellers have em ployed the elasticity values proposed by Brazil,
the Arbitrator determines that the values proposed by Brazil are available and not unsuitable to be
used in the economic modelling.
(d) Coupling factor
4.164 Brazil's model assigns to each cotton subsidy programme a "coupling factor" which indicates
the degree of production incentive that a particular programme has on US cotton farmers relative to
revenue from the market. Unlike marketing loan s ubsidies, which are based on current production,

countercyclical payments are paid on the basis of a farm's historical base area and historical
programme yield. This suggests that payments under the programme will give less of a production
incentive than marketing loans. While Brazil uses a coupling factor of one for marketing loans, it
employs a coupling factor of 0.4 for countercyclical payments.
(i) Arguments of the United States
4.165 The United States disagrees with Brazil's choice of 0.4 for the coupling factor. The
United States proposes to follow what it states is "the FAPRI approach of modelling these payments
with a coupling factor of 0.25."154
4.166 The United States disputes the claims made by Brazil that countercyclical payments allow
US cotton farmers to take on greater business risk and that such payments provide US cotton farmers
additional income that can be used to get commerc ial credit for further productive investments. The
United States claims that Brazil's claim would ap ply to any additional income that these farmers
received, whether it be income support not tied to production or off-farm income.
4.167 The United States disagrees with Brazil's claims that farmers expect that payment acres would
be updated in the next farm bill resulting in them pl anting cotton now to ensure larger acreage for the
next farm bill. It argues that the original panel st ated that there was no evidence before it regarding
farmers' expectations relating to base updating, a nd the Appellate Body agreed with the panel's
determination not to find such expectations. It also notes that the compliance panel had the
understanding that the issue of base acreage updating w as not before it. Further, it claims that with
the enactment on 18 June 2008 (eff ective 22 May 2008) of the "2008 Farm Bill", farmers would have
no basis for an expectation of cotton base updating today.
4.168 The United States contends that data on planting show that farmers holding cotton base acres
widely plant crops other than cotton and as such ar e inconsistent with Brazil's argument that legal
restrictions on land use under the FSRI Act of 2002 undermine farmers' flexibility to switch to
alternative crops. It also points to the shift in the production on farms holding cotton base acres.
When faced with relative prices that favoured the planting of another crop, when agronomic
conditions are favourable, it states that US cotton producers have responded in a significant way.
4.169 The United States has referred to three new studies on the production effects of
countercyclical payments published since the comp liance panel proceedings. It acknowledges that as
was the case with the studies submitted during the compliance panel proceedings, none of the new
papers deal directly with the impact of counter cyclical payments for cotton on production. The
United States argues that studies nevertheless show that countercyclical paym ents have a relatively
small production impact. 155 It adds that as with many studies about decoupled payments, where
authors find positive production effects, such effects are small, difficult to quantify, and subject to
many qualifiers.156 Table 3 summarizes the United States' analysis of these studies.

154 US written submission, para. 274.
155 US responses to questions from the Arbitrator, question 6, para. 31.
156 US responses to questions from the Arbitrator, question 6, para. 38.

Table 3: US analysis of studies about countercyclical payments

Study US Analysis
Bhaskar and Beghin study This is a survey of research on decoupled payments, including
countercyclical payments. The United States then cites the
conclusions from several studies reviewed in this paper that
specifically examined countercyclical payments. It states that the
paper by Anton and Le Mouel shows a small risk reducing effect
from countercyclical payments. It claims that the paper by Makki,
Johnson and Somwaru shows larger production effects but this is
because of certain assumptions, especially about base updating,
which have not materialized thus throwing doubt on the conclusions.
It contends that the paper by Beckman and Wailes suggests very
high production effects for rice but the United States argues that
there are significant problems with the estimations for
countercyclical payments that call into question the validity of these
results.
Anderson, Coble and Miller study The United States quot es the abstract of the paper which states that:
"This research evaluates whether the introduction of countercyclical
payments creates an incentive for program crop producers to hedge
the expected government payment using futures and/or options.
Results indicate that some level of countercyclical payment hedging
is optimal for risk-averse decision makers. However, optimal hedge
ratios depend on planting time expectations of marketing year
average price as well as on what cr op, if any, has been planted on
countercyclical payment base acres. These results suggest that the
ability to hedge may make these payments more decoupled but also
illustrate the distortion of producer behaviour induced by farm
programs."
Coble, Miller and Hudson study This study reports analysis of the subjective expectations of
producers for base updating and an analysis of the effect these
expectations have on producer willingness to accept a buyout of the
right to update. The United States quotes one passage from the
study which it believes has some bearing on this subject:
"Interestingly, more producers think countercyclical payment rates
will decline than believe marketing loan rates will decline. As a
reviewer noted, producers may percei ve the loan program with its
link to production to be a more essential program than a program
decoupled from production, and ther efore believe it less likely to be
eliminated."

4.170 The United States has also reviewed the Beckman and Wailes study analysed by Brazil. The
United States claims that countercy clical payments for rice have b een erratic and variable, and in
some years zero.157 Since Brazil dismisses some studies offered by the United States that use data for
commodities such as corn and wheat (the study by Anton and Le Mouel), stating that they are not
relevant because these products have not regular ly received countercyclical payments, then the
United States argues that the Beckman and Wailes study should be similarly dismissed.

157 US responses to questions from the Arbitrator, question 130, para. 150.

(ii) Arguments of Brazil
4.171 In response to the criticisms of the United States, Brazil provides an analysis of how
countercyclical payments can increase production. It contends that countercyclical payments increase
farmers' wealth, reducing risk aversi on and increasing the planting of cotton. 158 It believes that the
presence of countercyclical payments allows credit-constrained farmers to finance investments in
land, equipment, and in the purchase of fa rm inputs, making production more efficient.
159 It claims
that farmers may be willing to produce more output since countercyclical payments, which vary with
the market price, reduce revenue risk. 160 It professes that countercyclical payments contribute to
covering fixed costs, allowing marginal farmers to avoid exiting cotton production.161
4.172 The possibility that base yields and base acres, which determine the amount of CCP subsidies,
would be updated in the 2008 Farm Bill is another factor cited by Brazil as supporting the choice of a
coupling factor of 0.4. It argues that if farmer s believe that future payments are based on current
production, because of the possibility of updating base acres, they may increase the current production
of those crops for which they expect to receive future payments. 162 Brazil admits that this updating
did not materialize with the 2008 Farm Bill but it claims that this is beside the point as what matters
for current production is whether farmers expected base updating to occur.
163
4.173 Brazil has also responded to the review of the literature on the production effects of
countercyclical payments provided by the United States. 164 Table 4 summarizes its analysis of the
studies.
Table 4: Brazil's analysis of studies about countercyclical payments

Study Brazil's Analysis
Beckman and Wailes study Brazil claims that the authors find significant production-enhancing
effects of countercyclical payments for rice, which is the only crop
other than cotton which has recei ved significant countercyclical
payments. It states that two models were run with the second model
finding that "as [per hundredweight] counter-cyclical payments
increase a dollar for the year, ar ea harvested increases 956.29
thousand acres." It characterizes th is result as significant since this
acreage represents almost one thir d of US rice production. The
implied coupling factor in this study is greater than 1.0.
Anton and Le Mouel study This study suggests that risk-reducing effects of countercyclical
payments for sorghum, corn and wh eat are small. However, Brazil
argues that all three of thes e crops have received little or no
countercyclical payments prior to the date of the study (year 2004).
Thus in its view, the results of this study are not relevant to the issue
of the cotton CCP coupling factor.

163 Brazil's written submission, paras. 416-417.
164 Statement by Professor Daniel Sumner concerning adverse effects under Article 7.9 of the
SCM Agreement, Exhibit Bra-803, paras. 27-32.

Study Brazil's Analysis
Makki, Johnson and Somwaru study The study analyses the effects of countercyclical payments on
income variability for Minnesota farms. Brazil states that Minnesota
grows primarily corn and wheat, but no cotton. Brazil suggests that
the results of the study indicate th at farmers may increase acreage of
crops with higher CCP ra tes, especially if base updating is allowed,
as it was under the 2002 FSRI Act.
Coble, Miller and Hudson study Brazil describes the study as indicating that cotton farmers
anticipated a significant chance of an update of the CCP subsidy
base acres and yields and, based on that anticipation, in fact,
increased their plantings and production.
Anderson, Coble and Miller study Brazil concludes that the study finds a strong incentive to plant the
cotton base crop implying significant supply effects from the CCP
subsidy.

4.174 Based on this analysis, Brazil concludes that contrary to the United States response to the
Arbitrator's questions, the economic studies cite d by the United States lend support to a coupling
factor of 0.4 for cotton. 165 Furthermore, Brazil asserts that the weight of the economic literature
continues to confirm significant supply effects from countercyclical payments for cotton.166
(iii) Analysis by the Arbitrator
4.175 The Arbitrator understands that there is no di spute between Brazil and the United States that
countercyclical payments can have a production effect . There are a number of possible ways that the
payments can affect production. Since countercyclical payments vary inversely with the market price
of cotton, they have the effect of stabilizing reve nues and reducing the risk to cotton farmers. The
payments can alleviate credit constraints enabling mo re purchases of inputs. The availability of the
payments would have allowed farm ers to cover fixed costs and may have allowed more farmers to
continue with cotton farming. To the extent that farmers anticipated the possibility of updating base
acres, it would have provided an incentive to in crease plantings. These have been described in
Brazil's recapitulation of previous decisions made by the original panel, the compliance panel and the
Appellate Body.
4.176 The fact that the United States proposes to use a coupling factor of 0.25 and not zero attests to
its view that the payments have a production effe ct. Where the parties disagree is how large the
production effects of the payments are. But even here , it does not appear that they are too far apart.
The United States believes that a dollar of countercy clical payment to US cotton producers generates
a production incentive equivalent to an increase in the market price by 25 cents while Brazil believes
it generates a production incentive equivalent to a 40 cent rise in the market price of cotton.
4.177 The Arbitrator notes that unlike the demand and su pply elasticities that are also the subject of
disagreement between the parties, there is hardly any econometric literature that estimates the value of
the "coupling" factor for countercyclical cotton payments. The Arbitrators did ask the parties to
review any new economic research on the production effects of countercyclical payments that had
appeared since the compliance pane l. Both Brazil and the United States have done so. These do not
directly provide estimates of the coupling factor for cotton, but in examining empirically how much

165 Statement by Professor Daniel Sumner concerning adverse effects under Article 7.9 of the
166 Statement by Professor Daniel Sumner concerning adverse effects under Article 7.9 of the

the production effects of these payments are, they have an important bearing on the question before
the Arbitrator.
4.178 The Arbitrator does not necessarily disagree w ith the assessment of the United States that
these studies do not allow a conclusive assessment to be made about the exact magnitude of the
coupling factor.167 The studies have been done for different crops, using different data sources, and
different methods and assumptions.168 For every study that finds a la rge production effect, one is able
to offer another study that finds a negligible eff ect. For one crop where one finds a given production
effect, whether small or large, it is always possi ble to provide some mitigating circumstance why the
results can or cannot be applied to cotton. But ther e is certainly a theoretical presumption, shared by
both Brazil and the United States, that the payments affect production decisions. Furthermore, and as
Brazil has pointed out, the review of the economic literature suggest that countercyclical payments not
only have production effects but, under certain ci rcumstances, can have substantial production
effects.
169 Accordingly, the Arbitrator determines th at a value of 0.4 for the coupling factor as
proposed by Brazil is within the range found in the relevant literature and is not inappropriate.
(e) Price expectations
4.179 As both Brazil and the United States have expl ained, cotton farmers typically make their
planting decisions around late winter and early sp ring (Brazil claims it is in February while the
United States claims that it is in April). But mo st cotton is marketed in December so how much
cotton farmers will plant depends on what they believe cotton prices will be in December. The
simulation model employed by Brazil therefore requires some indicator of farmers' expectations about
the market price. Brazil uses the one-year lag of farm gate prices as its indicator of farmers' market
price expectations. It claims that this approach is standard procedure in the modelling literature.
170
4.180 Since marketing loans and countercyclical payments vary with cotton prices, farmer's
expectations of market prices also trigger expecta tions how much of these subsidies they will receive.
In Brazil's model, the expected revenue per unit of cotton then is made up of the expected market
price and what Brazil terms the expected "effective per-unit revenue received from government
subsidies".
171 As Brazil describes it, this second term is not simply the per-unit revenue from
government subsidies to US cotton farmers but reflects the degree to which these subsidies provide an
incentive for production relative to th e incentive created by market prices. 172 F i n a l l y , B r a z i l
calculates the effective per-unit revenue received from government subsidies as the product of the
per-unit government support from all subsidies and the overall coupling factor, the weighted average
of all production incentives yielded by all subsidies.173
(i) Arguments of the United States
4.181 The United States argues that Brazil provides no evidence that farmers make their planting
decisions based on last year's market prices. The United States believes that the futures price provides
for a better measure of price expectations than the previous year's market price. In its view, the
futures price incorporates the latest information av ailable and is the result of market participants'
views. It contends that the use of futures pri ces employ data from a real-world market in which

167 US responses to questions from the Arbitrator, question 130, para. 152.
168 US responses to questions from the Arbitrator, question 130, para. 150.
169 Brazil's comments on US responses to questions from the Arbitrator, question 130, para. 357.
170 Brazil's Methodology Paper, para. 112 and footnote 131.

economic actors, such as farmers and merchants, come together and engage in market price
discovery.174
4.182 For the relevant value of the futures price, the United States used the average for January-
March futures for December delivery. To derive the expected annual farm price, it also deducted
5 cents from this average. The United States explai ns that this deduction is necessary to adjust the
futures price to the particular quality of a grower 's cotton and to include costs for delivery to the
grower's geographic location. While the futures ma rket is the best barometer of the value of the
cotton, that price corresponds to a particular quality and location. 175 It claims that data from 2001
through 2007 show that the basis, defined as New York December futures minus average farm price,
for the months of October-December average between 4 and 5 cents consistently regardless of the
period to generate the average.176
(ii) Arguments of Brazil
4.183 Brazil has indicated that it has no strong genera l preference for using the lagged price or the
futures price in the simulation. It acknowledges th at both futures market prices and lagged prices are
prone to similar errors as predictors for prices a nd subsidy revenues in the upcoming marketing year.
In some years and in times of rapid and significant market changes, it states that past prices may be a
poor reflection of prices for the following season. In that case, it believes that futures market prices
might be a more appropriate indicator for measuring farmers' price and subsidy expectations. It points
out that for MY 2005, choosing between the two does not result in any substantial difference in price
effects simulated by its model. Thus it recognizes that there is no substantive difference in results
between using futures market prices or lagged prices as the basis for price expectations.177
4.184 However, it disputes the manner in which the Un ited States has made adjustments to futures
prices, which involves deducting a 5 cents basis from the futures market price to derive the expected
season average US farm price. Brazil argues that the root mean square error of a simple regression of
the futures market price is – as it must be – lower th an the root mean square error of an additive basis
approach to using the futures market price. Thus, a priori, it believes there is a strong reason to prefer
the regression approach. 178 Furthermore, it claims that there ar e flaws in the US calculations leading
to the 5 cent basis. If only the adju stment for quality and location were relevant, it contends that this
would involve calculating the basis between (i) the average December quote of the December contract
and (ii) the December price received by farmers. But Brazil points out that the United States has
included data from October and November which it argues distorts the calculation. Using an
alternative set of publicly available data, and a different time period than that selected by the
United States, it arrives at a basis of 7.5 cents.179
4.185 In Brazil's view, the result of the 5 cent deduc tion made by the United States to the futures
price is to introduce an upward bias in the expect ed market price and a significant understating of the
subsidy payments. 180 Also, Brazil claims that the alternative simulation performed by the
United States using Brazil's model and u tilizing future prices was improperly done. 181 Together, it

174 US written submission, para. 275.
175 US responses to questions from the Arbitrator, question 131, para. 154.
176 US responses to questions from the Arbitrator, question 131, para. 155.
177 Statement by Professor Daniel Sumner concerning adverse effects under Article 7.9 of the
178 Brazil's comments on US responses to questions from the Arbitrator, question 131, para. 368.
179 Brazil's comments on US responses to questions from the Arbitrator, question 131, para. 372.
180 Statement by Professor Daniel Sumner concerning adverse effects under Article 7.9 of the
181 Statement by Professor Daniel Sumner concerning adverse effects under Article 7.9 of the

contends that these biases would lead to a signi ficant decline in the calculated amount of price
suppression.182
(iii) Analysis by the Arbitrator
4.186 Both parties have acknowledged that there are various indicators and methods that can be
used to estimate farmers' market price expectations, including futures prices and lagged prices. Brazil
has in fact even stated that it has no strong general preference for using the lagged price or the futures
price in the simulation.
4.187 The Arbitrator requested the parties to provide calculations of the root mean square error
(RMSE) of forecasts using either the lagged price or the futures price. They were also requested to
provide the data used in the calculations. The root mean square error is a statistic that is often used to
judge how well a particular indicator performs in forecasting some variable. 183 The lower the RMSE,
the better the indicator is as a tool for forecasting the variable of interest. Brazil provided data
covering the period from 1960 to 2005 but data on Fe bruary futures for D ecember deliveries are
available only from 1975 onwards. The United States submitted data from 1985 to 2007 using
average January to March futures prices for December deliveries.
4.188 The results of the calculations of the root m ean square error of the forecasts are shown in
Table 5. The parties have used two types of indicator s. One is simply the variable itself (lagged farm
price or futures price). The second is the fitted value of the variable based on a regression of the farm
price on either the lagged price or the futures pri ce. To make the results comparable, two periods
have been chosen corresponding to the futures pr ice data submitted by the parties: 1975-2005 and
1985-2007. The data and calculations are shown in Annex 1.
4.189 The table shows that farmers will obtain better forecasts (in terms of lower RMSE) if they use
the fitted value of the futures price, whether Febr uary futures or the average of January to March
futures prices. In general, the root mean square e rror of the fitted futures price is lower than that of
the fitted lagged price, although the difference is not particularly large.
4.190 Furthermore, the lagged price is not observed by farmers when they make their planting
decisions in February-April.
184 The cotton marketing year starts from 1 August of the calendar year
and ends on 31 July of the following year. So to ta ke an example, the 2008 marketing year covers the
period 1 August 2008 to 31 July 2009. The lagg ed price will be the average cotton price of
1 August 2007 to 31 July 2008. Thus, when farmer s begin planting in February-April 2008, they will
not have yet observed the lagged price. The lagged price actually contains information that extends
several months beyond the period when farmers make their planting decisions. In contrast, the futures
price is known to farmers when they make their planting decisions in February-April.

182 Statement by Professor Daniel Sumner concerning adverse effects under Article 7.9 of the
183 The root mean square error (RMSE) is defined as: () kTppRMSE
T
i
e
ttt −−= ∑
=
−
1
2
1 . Here
tp is the price of cotton at time t and e
tt p1− is the forecast of the cotton price, with the expectations formed one
period before at t-1. T is the total number of marketing years and k is the number of regressors, including the
constant term.
184 US responses to questions from the Arbitrator, question 61, para. 155.

Table 5: Root measure square error (RMSE) of various indicators of cotton price expectations

Indicator of expectations RMSE
Period: 1975-2005
Lagged farm price 10.58
February futures 11.64
Regression on lagged farm price 9.16
Regression on February futures 8.81
Period: 1985-2007
Lagged farm price 10.46
Jan-March futures 11.08
Regression on lagged farm price 9.52
Regression on Jan-March futures 9.21
Sources: Exhibit Bra-770; US responses to questions from the Arbitrator, question 7, para. 39.

4.191 Given that the root mean square error of the fitte d futures price is lower than that of the fitted
lagged price, and that when farmers make their pl anting decision in February-April they would have
observed the futures price but not the lagged price (t he price of the previous marketing year), the
Arbitrator resolves that the futures price better represents farmers' expectation of the price of cotton.
4.192 In implementing this change in the calculations , the Arbitrator has utilized Brazil's Annex I
submission to the compliance panel. 185 This contains the results of Brazil's regression approach to
determining the expected price as well as the price contingent payments (Step 2, marketing loans and
countercyclical payments). The results of the Arb itrator's own analysis of various indicators of
market price expectations strongly support the regression-based approach, since it produces the lowest
root mean square error. Deducting a constant basis from the futures prices will not change the
conclusion. As Brazil has observed, the root mean square error of a simple regression of the futures
market price will be lower than the root mean square error of an additive basis approach to using the
futures market price. The Arbitrator has also used the updated data provided by Brazil in
Worksheet 6 of Exhibit Bra-704. In so doing, the Ar bitrator has imposed the constraint that expected
CCP payments should not be higher than 13.73 cents per pound.186
(f) Conclusions
4.193 On the basis of these determinations, and previous findings made in Section IV.D.3 of this
Decision about the reference period (MY 2005), the Ar bitrator has rerun Brazil's model. Expected
prices as well as subsidy payments were based on regressions on futures prices. For MY 2005, the
Arbitrator calculates that the world price w ould have been higher by 9.38 per cent but for
US marketing loans and countercyclical payments. The adverse effects on the rest of the world from
US marketing loans and countercyclical payments in MY 2005 amounted to US$2.905 billion. This
is comprised of sales value effects of US $2.384 billion and reduced production effects of
US$521.5 million.

185 Annex I, Brazil's first written submission to the Panel, :
Recourse by Brazil to Article 21.5 of the DSU.
186 Countercyclical payments are pa id whenever the effective price of the commodity falls below the
target price, which is fixed by the FSRI Act of 2002 at 72.4 cents per pound for upland cotton. The effective
price for cotton is the sum of the direct payment rate (6.67 cents per pound), plus the higher of the national
average farm price for the marketing year or the loan rate (52 cents per pound). More precisely,
CCPCotton = 72.4 – (6.67 + Max (national average farm price, 52)). Thus countercyclical payments for cotton
cannot exceed 13.73 cents per pound. This maximum is triggered whenever the national average farm price
falls below 52 cents per pound. See also footnote 12 of Statement by Professor Daniel Sumner concerning
adverse effects under Article 7.9 of the SCM Agreement.

4.194 In Section IV.D.2 above, the Arbitrator furt her determined that once the existence of
"significant price suppression" has been established, it is legitimate to take into account the entirety of
the price suppression caused by th e measures at issue on the world cotton market in assessing its
impact on Brazil. Accordingly, the level of count ermeasures should not be limited to those adverse
effects that render the subsidy actionable under the SCM Agreement. Thus, the amount of
US$2.905 billion which was determined to be the amount of adverse effects to the rest of the world
from US marketing loans and countercyclical payments need not be revised downwards.
4.195 However, the Arbitrator has also determined that this amount needs to be apportioned to
Brazil (Section IV.D.1). Brazil's share of cotton production in the rest of the world was 5.1 per cent
in MY 2005. 187 After making this apportionment, the Arbitrator therefore finds that the amount of
countermeasures that are commensurate with the degr ee and nature of the adverse effects determined
to exist is US$147,314,091 (US$147.3 million) . The detailed calculations and data appear in
Annex 2.188
V. BRAZIL'S REQUEST TO APPLY COUNTERMEASURES UNDER THE
TRIPS AGREEMENT AND THE GATS
5.1 In its request to the DSB, Brazil requests au thorization to suspend concessions or other
obligations in the annual amount of US$1.037 billion with respect to cer tain actionable subsidies. In
its view, given the amount, it is neither practicab le nor effective for Brazil to suspend concessions
only on imports of US goods and the circumstances are serious enough to justify the suspension of
concession or obligations under other covered agreem ents. Brazil therefore proposed to suspend
obligations under GATT 1994, and also unde r the GATS and the TRIPS Agreement under
Article 22.3(c) of the DSU.189
5.2 The United States challenges this request, arguing that Brazil had not followed the procedures
and principles of Article 22.3 of the DSU. The United States argues that given the size and diversity
of the Brazilian economy, Brazil cannot justify and demonstrate its claim that applying
countermeasures with respect to goods is not practicable or effective. 190 In these proceedings,
however, Brazil argued that the provisions of Artic le 22.3 of the DSU do not apply, and that its
request must be considered on the basis of Article 7.9 of the SCM Agreement only.
5.3 In light of the parties' disagreement as to the applicable legal standard for this part of our
assessment, we must first consider whether the principles and procedures of Article 22.3 of the DSU
apply, before we can proceed with an assessment of Brazil's request on the basis of the applicable
legal standard.

187 The market share is calculated from data in Exhibit US-68, Worksheet "Production".
188 Annex 2 is based on Exhibit Bra-704. Worksheets 6 and 7 of Annex 2 have been substantially
revised as futures prices (or regression s thereof) are used as the basis for expectations of the market price and
subsidy payments. They are derived from Exhibit Bra-17 (Annex I), which was originally submitted to the
compliance panel.
189 WT/DS267/26.
190 US written submission, paras. 318-319.

A. DO THE PRINCIPLES AND PROCEDURES OF ARTICLE 22.3 OF THE DSU APPLY TO BRAZIL'S
REQUEST?
1. Arguments of the parties191
5.4 Brazil argues in its Methodology Paper that th e countermeasures proposed by Brazil, which
include the suspension of concessions or other obliga tions not only with respect to trade in goods but
also under TRIPS and GATS, are "appropriate" and "c ommensurate with the degree and nature of the
adverse effects determined to exist", within the meaning of Articles 4.10 and 7.9 of the
SCM Agreement. Brazil argues that the countermeasures it proposes, both in their quantitative and in
their qualitative aspects, must be assessed solely ag ainst the requirements of Articles 4.10 and 7.9 of
the SCM Agreement.192 Brazil considers that these are the only standards against which the
countermeasures must be assessed.193
5.5 Brazil also argues that the United States, as th e party objecting to the proposed requests for
countermeasures bears the burden of proving that th e type of the countermeasures proposed by Brazil
is such as to render them not "appropriate" in the meaning of Article 4.10 of the SCM Agreement.
Likewise, with respect to the actionable subsidies, Brazil argues that the United States has the burden
of proving that the type of the countermeasures pr oposed by Brazil is such as to render them not
"commensurate with the degree and nature of the a dverse effects determined to exist" as required by
Article 7.9 of the SCM Agreement. Brazil argues that the United States failed to discharge its burden
since it merely asserts that DSU Article 22.3 applies to the SCM Agreement. In Brazil's view,
Articles 4.10 and 7.9 of the SCM Agreement provide for countermeasures that are different from those
available under the DSU.194
5.6 Brazil argues that Articles 4.10 and 7.9 of the SCM Agreement provide for "countermeasures"
and such countermeasures can well encompass the suspension of concessions or obligations under
sectors or agreements other that in which a violation was found. 195 Citing Article 49 of the Draft
Articles on Responsibility of States for Internationally Wrongful Acts , Brazil argues that the purpose
of a "countermeasure" as stated in that article is to induce the offending state to comply with its
obligations. Therefore, Brazil advocates that there is nothing in public international law to support the
notion that a countermeasure has to be taken in the same area or under the same agreement in which a
violation is found.196 Brazil is of the view that Articles 4.10 and 7.9 are "special or additional rules"
within the meaning of Article 1.2 of the DSU, a nd that they address both the level and the type of
countermeasures that may be imposed by the original complaining Member in sharp contrast to
Article 22.4 and 22.3 of the DSU.
197 Brazil contends that the Arb itrator should apply the standards
under the SCM Agreement, not the principles and procedures under Article 22.3 of the DSU. 198 The
mandate of the Arbitrator is solely to determ ine whether countermeasures are "appropriate" or
"commensurate".199

191 In this section, the arguments of the parties are reflected as they were presented by the parties in
their submissions, i.e. with reference both to the actio nable subsidies addressed in this Decision and to the
prohibited subsidies addressed in the separate Decision in WT/DS267/ARB/1. In the subsequent assessment by
the Arbitrator in section 2 below, only the arguments relating to the actionable subsidies at issue in these
proceedings are addressed.
194 Brazil's written submission, paras. 452-453.
196 Brazil's written submission, paras. 458-459.
197 Brazil's written submission, paras. 464-465.

5.7 With respect to the issue whether SCM Agreement and Article 22.3 of the DSU can be read as
complementing each other, Brazil argues that "if a special or additional rule or procedure does not
provide additional requirements that are to be met together with the corresponding provisions of the
DSU – so as to effectively complement them without negatively affecti ng their legal integrity – the
two sets of provisions cannot be applied together." Brazil continues to argue that if they cannot be
applied together it is because there is a differe nce between them. In such case, Brazil argues the
special or additional rule or procedure must prevail over the corresponding DSU provisions.200
5.8 Brazil considers that Article 22.3 of the DS U establishes a legal standard based on the
consideration by the Member concerned of the practicability and effectiveness of suspension of
concessions and sets out a number of elements that have to be considered, whereas Articles 4.10
and 7.9 of the SCM Agreement contain no restrictions on the type of countermeasures that may be
taken. Articles 4.10 and 7.9 of the SCM Agreement grant to the Member concerned a margin of
appreciation that is broader than the one reflecte d in the requirements of Article 22.3 of the DSU.
They cannot be applied together.
201
5.9 The United States argues that DSU discip lines concerning suspension of concessions,
including Article 22.3, apply to the SCM Agreement.202 In its view, the fact that the SCM Agreement
does not provide for rules relating to cross-sector suspension of concessions independent of DSU
Article 22.3, when special rules for other i ssues were carved out, suggests the disciplines on
cross-sector suspension of concessions remain securely tied to the existing DSU rules and
procedures.203
5.10 The United States also argues that Brazil itself explicitly invoked Article 22.3 of the DSU in
its request for countermeasures for prohibited subsidi es and in its request for actionable subsidies.
Therefore, in the United States' view, Brazil has act ually conceded that its requests are subject to
Article 22.3 of the DSU. The United States also argues that the fact that Article 22.3(g) cross-
references the agreements to which it applies, including the SCM Agreement, also indicates that
Article 22.3 of the DSU applies to requests for countermeasures under the SCM Agreement.204
5.11 The United States argues that given the general ru le for suspension of concessions within the
same sector under the DSU and the absence of any rule to the contrary in Articles 4.10 and 7.9 of the
SCM Agreement, there is no conflict in applying both the SCM Agreement and Article 22.3 of the
DSU. Thus, the better interpretation – and one that allows Articles 4.10 and 7.9 of the
SCM Agreement to be applied in a complementary fashi on with Article 22.3 of the DSU – is that
Articles 4.10 and 7.9 deal with the amount of count ermeasures, while Article 22.3 of the DSU sets
forth rules for determining when countermeasures can be applied on a cross-sector basis. To the
extent there is conflict between them, it is in re gard to the assessment of quantity, or the amount, of
the suspension of concessions. With regard to "t ype" or "form", the United States argues that the
silence of the SCM Agreement as to cross-agreement or cross-sec tor countermeasures mean that there
is no "difference" in the meaning of Article 1.2 of the DSU that would require ignoring the carefully
articulated, hierarchical test under Article 22.3.205

200 Brazil's responses to questions from the Arbitrator, question 40, para. 460.
201 Brazil's responses to questions from the Arbitrator, question 40, paras. 461-462.
202 US written submission, para. 320.
203 US written submission, para. 323.
204 US oral statement, para. 67.
205 US responses to questions from the Arbitrator, question 67, para. 185.

2. Assessment by the Arbitrator
5.12 The question before us relates to the definiti on of our mandate, as well as to the substantive
legal standard that is applicable to the imposition of cross-retaliation under the SCM Agreement. Both
aspects are closely related, in that the nature an d scope of our mandate is logically tied to the
applicable substantive requirements, the application of which we must review.
5.13 The parties essentially disagree as to the extent to which the provisions of Article 22.3 of the
DSU, which set out specific principles and procedur es for the authorization of cross-retaliation in
dispute settlement proceedings under the DSU, ar e applicable in the context of proceedings
concerning actionable subsidies under the SCM Agreement, which contains specific provisions
relating to countermeasures.
5.14 As a starting point, we need to consider the terms of the relevant provisions of the
SCM Agreement and of the DSU. We recall that Article 7.9 of the SCM Agreement specifically
addresses the question of the coun termeasures that may be authorized in relation to actionable
subsidies, and Article 7.10 addresses the mandate of the arbitrator in relation to such countermeasures,
in the event that an arbitration is requested unde r Article 22.6 of the DSU in relation to actionable
subsidies. Article 7.9 requires countermeasure s in relation to actionable subsidies to be
"commensurate with the degree and nature of the adverse effects determined to exist". Article 7.10, in
turn, provides that, in the event that a party to the dispute requests arbitration under paragraph 6 of
Article 22 of the DSU, the arbitrator shall dete rmine whether the countermeasures are "commensurate
with the degree and nature of the adverse effects determined to exist".
5.15 Article 22.6 of the DSU, in turn, provides that:
"When the situation described in paragraph 2 occurs, the DSB, upon request, shall
grant authorization to suspend concessions or other obligations within 30 days of the
expiry of the reasonable period of time unl ess the DSB decides by consensus to reject
the request. However, if the member con cerned objects to the level of suspension
proposed, or claims that the principles and procedures set forth in paragraph 3 have
not been followed where a complaining part y has requested authorization to suspend
concessions or other obligations pursuant to pa ragraph 3(b) or (c), the matter shall be
referred to arbitration."
5.16 Paragraphs 9 and 10 of Article 7 of the SCM Agreement constitute "special or additional
rules" under Appendix 2 of the DSU. In accordance w ith Article 1.2 of the DSU, "to the extent that
there is a difference between the rules and pro cedures of this understanding and the special or
additional rules and procedures set forth in Appendix 2, the special or additional rules and procedures
in Appendix 2 shall prevail".
5.17 The Appellate Body has clarified the circumstances in which such a "difference" would exist:
"[I]t is only where the provisions of the DS U and the special or additional rules and
procedures of a covered agreement cannot be read as complementing each other that
the special or additional provisions are to prevail. A special or additional provision
should only be found to prevail over a provision of the DSU in a situation where
adherence to the one provision will lead to a violation of the other provision, that is,
in the case of a conflict between them. An interpreter must, therefore, identify an
inconsistency or a difference between a provision of the DSU and a special or

additional provision of a covered agreement before concluding that the latter prevails
and that the provision of the DSU does not apply."206
5.18 The question before us in this case is whethe r Article 22.3 of the DS U and Article 7.9 and
7.10 of the SCM Agreement can be read as complementing each other, or whether adherence to the
principles and procedures contained in Article 22.3 of the DSU would lead to a violation of
Article 7.9 or 7.10 of the SCM Agreement, such that there is a conflict between the two provisions. In
other words, we must clarify whether the special or additional rules of Article 7.9 and 7.10 of the
SCM Agreement constitute the entirety of the applicable rules relating to the type and level of
countermeasures that may be authorized in relation to actionable subsidies, or whether the principles
and procedures of Article 22.3 of the DSU and these provisions may be read as complementing each
other in defining the rules applicab le to the suspension of concessions or other obligations in relation
to actionable subsidies.
5.19 We first note that paragraphs 9 and 10 of Ar ticle 7, and more generally the provisions of
Article 7 of the SCM Agreement concerning "remedies", are closely tied to the terms and procedures
of the DSU itself. Indeed, the arbitration that is addressed in Article 7.10, which defines the mandate
of the arbitrator with reference to the terms of Article 7.9, is defined as an arbitration requested "under
paragraph 6 of Article 22 of the DSU". It is clear fro m the use of this cross-reference, that the arbitral
proceedings at issue, even though they are in relation to actionable subsidies under the
SCM Agreement, are initiated under Article 22.6 of the DSU. The legal basis for such proceedings is
therefore Article 22.6 of the DSU, as well as Article 7.10 of the SCM Agreement.
5.20 Under the terms of Article 22.6 of the DSU, the Member concerned may challenge two
distinct aspects of a request for authorization to suspend concessions or other obligations. The
Member concerned may object to "the level of su spension proposed", or it may "claim that the
principles and procedures set forth in paragraph 3 (of Article 22) have not been followed" where a
complaining party has requested authorization to su spend concessions or other obligations pursuant to
paragraph 3(b) or (c). If either of these two clai ms is made, then "the matter shall be referred to
arbitration". The reference to an arbitration requ ested "under paragraph 6 of Article 22 of the DSU"
in Article 7.10 of the SCM Agreement, therefore, on its face, refers to the existence of (i) an objection
to the "level of suspension proposed" and/or ( ii) a claim that the principles and procedures of
Article 22.3 of the DSU have not been followed, which are to be referred to arbitration.
5.21 In the case of an arbitration carried out under th e DSU alone, the mandate of the arbitrator is
further defined in Article 22.7, which provides in its first sentence that "the arbitrator acting pursuant
to paragraph 6 shall not examine the nature of th e concessions or other obligations to be suspended
but shall determine whether the leve l of such suspension is equivalent to the level of nullification or
impairment". This is in line with the terms of Article 22.4, which provides that the level of the
suspension shall be "equivalent to the level of nulli fication or impairment". This is comparable, in
structure, to the terms of Article 7.10 of the SCM Agreement, which provides that the arbitrator "shall
determine whether the countermeasures are commensur ate with the degree and nature of the adverse
effects determined to exist", in line with the term s of Article 7.9, which provides that the DSB shall
grant authorization to take countermeasures "commens urate with the degree and nature of the adverse
effects determined to exist".
5.22 The provisions of Article 22.7 of the DSU and Article 7.10 of the SCM Agreement
 differ, in
that Article 22.7 of the DSU further articulates that , if the matter referred to the arbitrator includes a
claim that the principles and procedures have not b een followed, the arbitrator shall examine that
claim, whereas Article 7.10 of the SCM Agreement contains no exact equivalent. The question
therefore arises as to how the mandate of the arbitr ator should be understood in a situation where a

206 Appellate Body Report, Guatemala – Cement I, para. 65.

claim that the principles and procedures of Article 22.3 of the DSU have not been followed is referred
to arbitration in accordance with Article 22.6 of the DSU, in relation to actionable subsidies.
5.23 In order to give useful meaning to all the terms of the treaty, including those of Article 22.3 of
the DSU and the reference to Article 22.6 of the DSU in Article 7.10 of the SCM Agreement, we must
a priori read the terms of that provision as envisaging that the principles and procedures of
Article 22.3 of the DSU apply, including in cases re lating to actionable subsidies, and that a claim
may be made in relation to these principles and pro cedures. In accordance with the principle that the
special or additional rules listed in Appendix 2 of the DSU would only prevail in the event of a
"difference" (i.e. if it were not possible to apply bo th simultaneously), it is only in the event that we
determine that there is a conflict or incompatib ility between such a reading and the terms of
Article 7.10 of the SCM Agreement, that we should conclude otherwise.
5.24 It appears to us that such a conflict or inco mpatibility would arise between the application of
the principles and procedures in Article 22.3 of the DSU and the terms of Article 7.9 and 7.10 of the
SCM Agreement only if the terms "countermeasures commensur ate with the degree and nature of the
adverse effects determined to exist" in these pr ovisions are interpreted to define not only the
permissible level of countermeasures in the case of actionable subsidies, but also the type of
countermeasures that may be authorized, so that th e principles and procedures of Article 22.3 of the
DSU would be inoperative in cases relating to actionable subsidies.
5.25 We are not persuaded that this is the case. As was discussed in detail in Section IV.C above it
is undisputed that the expression "countermeasures co mmensurate with the degree and nature of the
adverse effects determined to exist" defines the permissible level of countermeasures in relation to
actionable subsidies. In our view, it does not do mo re than that. The notion of "commensurateness"
clearly connotes a certain correspondence" in the le vel or measurement of the countermeasures. By
contrast, it is not clear that these terms provide any guidance as to the type of countermeasures that
may be authorized.
5.26 In light of the level of detail in which the matt er of cross-sectoral retaliation is addressed in
the DSU, one would have expected the drafters of the SCM Agreement to provide express guidance to
this effect, if they had intended to address diffe rently the question of the type of permissible
countermeasures, as well as their level. In fact, th is would have been especially necessary in light of
the fact that Article 22.6 of the DSU, which is expressly referred to in Article 7.10 of the
SCM Agreement, foresees that a challenge to proposed susp ension of concessions or other obligations
may be based either on the level of suspension proposed, or on a claim "that the principles or
procedures of paragraph 3 (of Article 22 of the DSU) have not been followed".
5.27 While the expression "the level of proposed suspension" does not in itself prejudge the
standard upon which such "level" might be review ed, and thus allows th is standard to differ
depending on the type of measure at issue, the reference to the "principles and procedures" of
Article 22.3 of the DSU leaves no doubt as to the relevant legal standard. This part of the reference to
Article 22.6 of the DSU in Article 7.10 of the SCM Agreement would have to be read out of the
provision in order to conclude that the principl es and procedures of Article 22.3 of the DSU do not
apply in the context of proceedings relating to actiona ble subsidies. In light of our analysis above, we
see no basis to do so. We also note that, as treaty inte rpreters, we are required to "read all applicable
provisions of a treaty in a way that gives meaning to all of them, harmoniously". 207 The only manner
in which we can give full meaning to all the term s of the treaty harmoniously in this context is to
understand the terms of Article 7.9 and 7.10 of the SCM Agreement as meaning that the mandate of
the arbitrator as defined in Article 7.10 of the SCM Agreement relates to the determination of the level

207 See for example Appellate Body Report, Canada – Dairy , para. 133, and Appellate Body Report,
US – Upland Cotton, para. 549.

of countermeasures, while the terms of the arbitr ator's mandate in relation to a claim that the
procedures and principles of Article 22.3 of the DSU have not been followed is contained in
Article 22.6 of the DSU.
5.28 This interpretation is also consistent, in our view, with the context in which these provisions
arise. The various paragraphs under Article 7 of the SCM Agreement may not be read in isolation
from the DSU. Rather, we understand the terms of Article 7 of the SCM Agreement as providing
specific additional rules on specifi c aspects of dispute settlement proceedings relating to actionable
subsidies, which replace the equivalent rules of the DSU only to the extent that they differ from and
are incompatible with such rules.
5.29 In Article 7.10 of the SCM Agreement, it was not necessary for the drafters to clarify that, in
relation to a claim that the principles and proce dures of Article 22.3 have not been followed, the
arbitrator would review that claim, since the terms of Article 22.7 of the DSU, which generally define
the terms under which an arbitration under Article 22.6 is to be carried out, already address this point.
Only to the extent that the mandate of the arbitrator differed from that set forth in Article 22.7 of the
DSU, was it necessary to explicitly define it in Article 7.10 of the SCM Agreement, in order to ensure
that the mandate of the arbitrator in relation to the proposed level of countermeasures would be
consistent with the manner in which the permissible level of countermeasures is defined in Article 7.9
of the SCM Agreement for actionable subsidies. Indeed, Article 22.7 of the DSU sets out a number of
other aspects relating to arbitration proceedings pur suant to Article 22.6 of the DSU, which are not
replicated in Article 7.10 of the SCM Agreement, but which nonetheless are clearly relevant and
applicable to such proceedings. In particular, the last two sentences of Article 22.7 provide that:
"The parties shall accept the arbitrator's decision as final and the parties concerned
shall not seek a second arbitration. The DS B shall be informed promptly of the
decision of the arbitrator and shall, upon request, grant authorization to suspend
concessions or other obligations where the re quest is consistent with the decision of
the arbitrator, unless the DSB decides by consensus to reject the request."
These important provisions are clearly relevant to arbitral proceedings in relation to actionable
subsidies under the SCM Agreement.

5.30 Finally, we consider that our interpretation is faithful also to the object and purpose of dispute
settlement proceedings in the WTO and to their integrated nature. Th e DSU provides the common
framework under which dispute settlement proceedings are initiated in the WTO, and brings together
all the covered Agreements. This is the overall framework in which the question of the possibility of
seeking suspension of obligations under another sector , or another covered Agreement than that under
which the violation has been found, arises, and this is logically addressed in the context of the DSU.
5.31 We are mindful that we must give full meaning to all the terms of the treaty, including the
special or additional rules identified in Appendix 2, and that such special or additional rules may
legitimately prevail over any relevant DSU rules and procedures. However, we are not persuaded that
there is a conflict, such that the principles a nd procedures of Article 22.3 of the DSU would be
inapplicable in the case of disputes relating to actionable subsidies under the SCM Agreement.
5.32 In light of all the above, we conclude that th e principles and procedures of Article 22.3 of the
DSU apply to the claim before us and that we must review the United States' claim that these
principles and procedures have not been followed by Brazil.

B. MANDATE OF THE ARBITRATOR AND BURDEN OF PROOF
5.33 Having determined that the principles and pro cedures of Article 22.3 of the DSU apply to
Brazil's request and that we are required to revi ew the United States' claim that Brazil has not
followed these principles and procedures, we need to clarify further what our mandate is, in relation to
this claim, and what burden of proof applies to it.
1. Main arguments of the parties
5.34 The United States considers that the drafter' s intention was that suspending concessions
across sectors and agreements was the exception rather than the rule. In the United States' view,
Article 22.3 establishes a hierarchy of suspension: Members must first try to suspend concessions
within the same sector, and if that is not practicab le or effective, can then request permission to
suspend in a different sector. This distincti on is important in the GATS and TRIPS Agreements
where there are multiple sectors, but does not apply with respect to goods. The bar for suspending
concessions under other agreements is higher still. The United States adds that not only does the
suspension within the agreement have to be neither practicable nor effective, but the violation must be
serious enough to warrant cross-agreement suspension.208
5.35 The United States further considers that the discip lines of Article 22.3 are an integral part of
the dispute resolution process a nd the rebalancing of concessions. The United States cites the
statement of the arbitrator on EC – Bananas III (US) (Article 22.6 – EC) , that "the basic rationale of
these disciplines is to ensure that the suspension of concessions or other obligations across sectors or
across agreements (beyond those sectors or agreem ents under which a panel or the Appellate Body
has found violations) remains the exception and do es not become the rule". The United States
therefore considers it necessary for the Arbitrat or to determine whether Brazil has objectively
followed these procedures. The United States also cont ends that Brazil is entitled to a certain margin
of appreciation in making this de termination, but the Arbitrator also has an oblig ation to judge
whether Brazil has objectively reviewed the facts and has reached a plausible conclusion.209
5.36 The United States argues that for a party to request cross-agreement suspension of
concessions, it must find that:
(a) it is not practicable or effective to susp end concessions or other obligations with
respect to other sectors under the same agreement; and
(b) that the circumstances are serious enough to warrant cross-agreement suspension of
concessions.
5.37 It considers that, when analysing these requirement s, the party must take into account: (i) the
trade in the sector or under the agreement under which the panel or Appellate Body has found a
violation or other nullification or impairment, and the importance of such tr ade to that party, and
(ii) the broader economic elements related to the nullification or impairment and the broader
economic consequences of the suspension of concessions or other obligations. The complaining party
must further explain how it has reached the c onclusion that cross-agreement suspension of
concessions is warranted.210
5.38 Brazil notes the arbitrator's "plausib ility" standard as enunciated in the US – Gambling
(Article 22.6 – US) arbitration. This standard calls for an objective assessment of the facts and a

208 US written submission, para. 325.
209 US written submission, para. 326.
210 US written submission, para. 327.

plausible conclusion on the issue of whether it is "pr acticable or effective" to seek countermeasures in
the same sector and on whether th e circumstances are serious enough. 211 Brazil considers, however,
that the Arbitrator should be limited to examining wh ether Brazil has in fact considered the principles
set forth in Article 22.3 of the DSU, not whether Brazil's considerations are plausible. 212 Brazil notes
the United States position, in the DSB meeting on the adoption of the EC – Bananas III (US)
(Article 22.6 – EC) arbitration report, that arbitrators are not supposed to "second guess" the
conclusions reached by the Member who considers that it is not practicable or effective to suspend
concessions or other obligations under the same agre ement, and that the circumstances are serious
enough within the meaning of Article 22.3.213
5.39 Brazil also argues that the United States bears the burden of proving that Brazil has not
followed the principles laid out in Article 22.3, sp ecifically, (i) that it is both "practicable" and
"effective" for Brazil to suspend concessions only in the goods sector, or (ii) that the circumstances
are not "serious enough" to justify applying coun termeasures under another covered agreement. With
respect to Article 22.3(d), Brazil argues that the United States has to prove that in selecting
countermeasures, Brazil did not take into account the elements indicated in items (d)(i) and (ii).214
2. Approach of the Arbitrator
5.40 Article 22.3 sets out certain principles and pro cedures to be followed by a complaining party
seeking to suspend concessions, as to the sector(s) an d/or covered agreement in which the suspension
can take place, which the United States claims that Brazil did not follow.
5.41 We recall our earlier determination that these principles and procedures apply to Brazil's
request, and that Article 22.7 of the DSU provides th e basis for our mandate to review this claim.
Article 22.7 provides that "if the matter referred to arbitration includes a claim that the principles and
procedures set forth in paragraph 3 have not been fo llowed, the arbitrator shall examine that claim"
and that "[i]n the event the arbitrator determines that those principles and procedures have not been
followed, the complaining party shall apply them consistent with paragraph 3".
5.42 We are therefore required to examine the United States' claim that Brazil has not followed the
principles and procedures of Article 22.3 of the DSU.
5.43 As a general principle, Article 22.3(a) of th e DSU provides that suspension of concessions or
other obligations should first be sought in the same sector as that in which a violation was found.
Article 22.3 provides in relevant part that:
"In considering what concessions or other obligations to suspend, the complaining
party shall apply the following principles and procedures:
(a) the general principle is that the complaining party should
first seek to suspend concessions or other obligations with
respect to the same sector(s) as that in which the panel or
Appellate Body has found a violation or other nullification or
impairment."

5.44 Subparagraphs (b) and (c) of Article 22.3 furthe r specify the principles and procedures to be
followed by a complaining party wishing to seek su spension in another sector, or another agreement,
than that in which a violation was found:
"(b) if that party considers that it is not practicable or effective for it to suspend
concessions or other obligations with respect to the same sector(s), it may
seek to suspend concessions or other obligations in other sectors under the
same agreement;
(c) if that party considers that it is not practicable or effective to suspend
concessions or other obligations with respect to other sectors under the same
agreement, and that the circumstances are serious enough, it may seek to
suspend concessions or other obligations under another covered agreement."
5.45 In addition, subparagraph (d) of Article 22.3 provides that:
"(d) in applying the above principles, that party shall take into account:
(i) the trade in the sector or under the agreement under which
the panel or the Appellate Body has found a violation or
other nullification or impairment, and the importance of such
trade to that party;
(ii) the broader economic elements related to the nullification or
impairment and the broader ec onomic consequences of the
suspension of concessions or other obligations."
5.46 Two prior arbitrators have considered the mandate of the arbitrator set out in Article 22.7 of
the DSU with respect to the principles and procedures set forth in Article 22.3, and we find it useful to
refer to their findings in clarifying the terms of our own mandate.
5.47 The arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC) , in determining the scope
of its authority to review the principles and procedures relating to requests for suspension of
concessions or other obligations under subparagraphs (b) and/or (c), cons idered that "the fact that the
powers of arbitrators under subparagraphs (b)-(c) ar e explicitly provided for in Article 22.6 implies
a fortiori that the authority of Arbitrators includes th e power to review whether the principles and
procedures set forth in these subparagraphs have be en followed by the Member seeking authorization
for suspension".
215
5.48 The arbitrator also considered the terms of Ar ticle 22.3, including the fact that a certain
margin of appreciation is left to the complaining part y in arriving at conclusions in respect of certain
factual elements (i.e. "if that party considers" in subparagraphs (b) and (c)) as well as the fact that the
party concerned is required to apply th e principles of Article 22.3 (i.e. " shall apply the following
principles and procedures" in the introductory clause of Article 22.3). On the basis of that textual
analysis, the arbitrator determined that:
"[T]he margin of review by the Arbitrat ors implies the authority to broadly judge
whether the complaining party in ques tion has considered the necessary facts
objectively and whether, on the basis of these facts, it could plausibly arrive at the
conclusion that it was not practicable or eff ective to seek suspen sion within the same

215 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC), para. 50.

sector under the same agreements, or only under another agreement provided that the
circumstances were serious enough."216
5.49 The arbitrator in that dispute also considered more broadly the terms of Article 22.3 and noted
that "these provisions imply a sequence of steps towards WTO-consistent suspension of concessions
or other obligations which respects both a margin of appreciation for the complaining party as well as
a margin of review by Arbitrators, if a request for suspension under Article 22.2 is challenged under
Article 22.6".217
5.50 Like the arbitrator on US – Gambling (Article 22.6 – US), we agree with these determinations.
We agree that the principles and procedures set fort h in Article 22.3 of the DSU, which require the
complaining party to make certain determinati ons, imply "a margin of appreciation" for the
complaining party in making these determinations. At the same time, Article 22.3 sets out specific
principles and procedures that the complaining party must follow, and we understand the role of the
arbitrator acting pursuant to Article 22.7 of the DSU to involve a review of whether those principles
and procedures have been followed. It would not be sufficient for a complaining party to have
considered those principles and procedures solely fro m the viewpoint of being able to say that it did
so. The consideration must be a substantive a nd reasoned one, and a claim to be entitled to impose
countermeasures outside the relevant sector, and then outside the relevant agreement, must arise from
that consideration.
5.51 We also agree with the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC) that this
mandate includes a determination of "whether the complaining party in question has considered the
necessary facts objectively" and also "whether, on the b asis of these facts, it could plausibly arrive at
the conclusion that it was not practicable or effec tive to seek suspension within the same sector under
the same agreements, or only unde r another agreement provided that the circumstances were serious
enough".
5.52 In addition, should we determine that Brazil has not followed these procedures or principles,
we believe it to be both necessary and appropriate fo r us to articulate how the analysis could properly
take place to the extent necessary to ensure that Brazil is in a position to apply these procedures and
principles "consistent with paragr aph 3" and present a request "cons istent with the decision of the
arbitrator" in a subsequent phase of these disput e settlement proceedings, as foreseen in Article 22.7
of the DSU.
5.53 We note in this respect that Article 22.7 provides in relevant part that:
"[I]f the matter referred to arbitration includes a claim that the principles and
procedures set forth in paragraph 3 have not been followed, the arbitrator shall
examine that claim. In the event the arbitrator determines that those principles and
procedures have not been followed, the complaining party shall apply them consistent
with paragraph 3. The parties shall accept the arbitrator's decision as final and the
parties concerned shall not seek a second arbitration. The DSB shall be informed
promptly of the decision of the arbitrator and shall upon request, grant authorization
to suspend concessions or other obligations where the request is consistent with the
decision of the arbitrator, unless the DSB decides by consensus to reject the request."
(emphasis added)
5.54 This approach is consistent with the objectiv e of prompt and positive settlement of disputes.
This approach is also consistent with the prac tice of arbitrators acting under Article 4.10 of the

216 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC), para. 52.
217 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC), para. 55.

SCM Agreement and/or Article 22.6 of the DSU, of proceeding with a calculation of the permissible
level of countermeasures in the event that they find the proposed countermeasures not to be in
accordance with the applicable legal standard.218
5.55 In terms of burden of proof, we consider that it is for the United States, as the party
challenging Brazil's determinations , to demonstrate that Brazil has not followed the principles and
procedures of Article 22.3 of the DSU. At the same time, it is essential that Brazil provides us with
explanations on how it made this dete rmination, in order for us to be in a position to review it, and to
determine whether Brazil has, in making its de terminations, "considered the necessary facts
objectively" and whether it could plausibly reach the conclusions that it did.
5.56 The United States also asks the Arbitrator to indicate in its decision, if necessary, the
maximum amount up to which Brazi l would be permitted to impose cross-agreement suspension of
concessions.219 The United States requests the Arbitrator to issue separate awards, one in relation to
the prohibited subsidies and one concerning actionabl e subsidies so that, in case the United States
brings one subsidy into compliance with the DSB recommendations and rulings before it is able to
comply with the other, the separate awards provide a legal basis to ensure that countermeasures are
still consistent with the legal standards of the SCM Agreement and the DSU in that situation.220
5.57 We first recall that two separate decisions are being issued, one in relation to the prohibited
subsidies221 and one concerning actionable subsidies (this Decision), as the United States requests.222
5.58 We agree that, to the extent that we might determine that Brazil may impose part of the
proposed countermeasures in another sector or agre ement, we would need to indicate clearly the
amount of countermeasures in respect of which it would be entitled to suspend concessions or other
obligations in such other sector or agreement.
5.59 We do not consider it necessary, however, to determine in this Decision what our conclusion
might have been, in the event that the United States s hould, at some future point in time, comply with
the DSB's recommendations and rulings in rela tion to the measures covered by the other
proceedings.223 This is a hypothetical matter on which it would not be appropriate for us to speculate.
Rather, we base our assessment on the situation as it ex ists at the time of our determination, which
includes the fact that the United States has not comp lied with two separate asp ects of the underlying
recommendations and rulings in this dispute and that this gives rise to an entitlement for Brazil to take
countermeasures in relation to both aspects.
5.60 At the same time, we recall that our determinations in these proceedings relate only to Brazil's
request in relation to the actionable subsidies at issue. Our determinations on Brazil's request for
cross-retaliation take into account the factual ci rcumstances arising from the separate proceedings
relating to the prohibited subsidies also ruled on in the underlying proceedings, but no entitlement
arises from this Decision for Brazil to take countermeasures in relation to such subsidies.

218 See for example Decision by the Arbitrators, EC – Hormones (US) (Article 22.6 – EC), para. 12.
219 US responses to questions from the Arbitrator, question 134, para. 165.
220 US comments on Brazil's responses to questions from the Arbitrator, question 134, para. 171.
221 See WT/DS267/ARB/1.
222 See Section I.C above, at paras. 1.27-1.31.
223 See WT/DS267/ARB/1.

C. BRAZIL'S DETERMINATION THAT IT IS NOT PRACTICABLE OR EFFECTIVE TO TAKE
COUNTERMEASURES WHOLLY IN TRADE IN GOODS
1. The principles and procedures of Article 22.3 of the DSU
5.61 Article 22.3 of the DSU, as we have observed earlier, foresees certain "procedures and
principles" to be followed by the complaining pa rty, in order to seek to suspend concessions in
another sector or another agreement than that in which the violation was found.
5.62 As observed by the arbitrator on US – Gambling (Article 22.6 – US):
" '[T]hese provisions imply a sequence of steps towards WTO-consistent suspension
of concessions or other obligations'. 224 In other words, as Antigua has expressed it,
Article 22.3 of the DSU provides a 'hierarchy' of remedies that a complaining party
must follow in determining in which sector s or under which agreements suspension
of concessions or other obligations can be sought, namely (1) seek to suspend in the
same sector in the same agreement, (2) seek to suspend within the same agreement
and (3) seek to suspend under another agreement."225
5.63 In this case, the initial violation was found in relation to trade in goods, and this is the "sector"
(as defined in subparagraph (g) of Article 22.3) in which Brazil woul d normally be expected to apply
countermeasures under subparagraph (a). Subparagr aph (b) affords the possibility of seeking to
suspend concessions or other obligations "in othe r sectors under the same agreement". For the
purposes of this provision, all the agreements on tr ade in goods contained in Annex 1A of the WTO
Agreement "taken as a whole" are considered to be an "agreement", and a sector is defined, with
respect to goods, as "all goods".
5.64 Therefore, recourse to subparagraph (b) would in principle allow Brazil to seek to suspend
concessions or other obligations in all goods, under the Agreements on trade in goods. Brazil seeks to
apply countermeasures under the TRIPS and GATS Agre ement. This would constitute suspension of
concession or other obligations "under another agreem ent" within the meaning of subparagraph (c) of
Article 22.3.
5.65 Accordingly, Brazil will have followed the principles and procedures of Article 22.3 if it has
determined, in accordance with the terms of subparagraph (c), that:
(a) "it is not practicable or effective" to seek suspension under the same agreement (i.e.
under the agreements on trade in goods); and
(b) "the circumstances were serious enough".
5.66 In addition, in applying these principles, Braz il is required to have taken into account the
factors identified in subparagraph (d) of Article 22.3.
5.67 As we have determined above , our mandate is to review whether, in making these
determinations, Brazil has considered the necessar y facts objectively and whether, on the basis of
these facts, it could plausibly arrive at the conclusi on that it was not practicable or effective to seek
suspension under the same agreement and that the circumstances were serious enough. In order to
conduct this assessment, we must first clarify the te rms of these requirements, as well as the role of
the elements referred to in subparagraph (d).

224 (original footnote) Decision by the arbitrators, EC – Bananas III, (request by Ecuador), para. 55.
225 Decision by the Arbitrator, US – Gambling (Article 22.6 – US), para. 4.19.

5.68 At the outset, we note that the two requirements within subparagraph (c) are cumulative,
i.e. the complaining Member must consider that "it is not practicable or effective" to seek suspension
of concessions or other obligati ons under the same agreement and that "the circumstances are serious
enough". The additional requireme nt, under subparagraph (d), to take into account certain
considerations, further qualifies the manner in whic h the principles contained in subparagraph (c) are
to be applied.
(a) First requirement under subparagra ph (c): a determination that it is "not practicable or
effective" to suspend concessions or other oblig ations with respect to other sectors under the
same agreement
5.69 In order to seek to suspend concessions or ot her obligations under another agreement, the
complaining party must in the first instance consider that it is "not practicable or effective" to seek
suspension under the same agreement. Brazil c onsiders that it does not need to meet both the
"practicable" and "effective" criteria, and that it is sufficient to satisfy one of the two conditions.226
5.70 We agree that the wording of the provision imp lies that the complaining party may consider
either that it is "not practicable" or that it is "not effective" to seek suspension under the same
agreement, and that it need not conclude that same-agreement suspension is both "not practicable" and
"not effective", in order to reach the conclusion that it is "not practicable or effective".227
(i) "practicable"
5.71 In Brazil's view, the standard of "practicability " under Article 22.3 refers to the availability
for application in practice of the suspen sion of concessions only in the goods sector. 228 In Brazil's
view, "practicability" refers to whether susp ension in the same sector or agreement is available for
application in practice, as well as suited for being used in a particular case . If it is not a real option
or it is not suited to be used in the circumstances, it will be not practicable. 229 This is how the
arbitrators on EC – Bananas III and US – Gambling understood this term, and we agree with this
determination.
5.72 As Brazil describes it, and as the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 –
EC) put it, a consideration of whether suspension in a given sector or agreement is "practicable"
relates primarily to whether it is actually "available in practice" to the complaining party. We find the
example used by the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC) helpful in
clarifying the types of considerations that may be pertinent in such a determination:
"To give an obvious example, suspension of commitments in service sub-sectors or in
respect of modes of service supply which a particular complaining party has not
bound in its GATS schedule is not available for application in practice and thus
cannot be considered as practicable."230
5.73 There may be a range of situations in wh ich the suspension of concessions or other
obligations in relation to a certain sector or agreemen t is not "available in practice". In our view, the
essence of a consideration of "practicability" of susp ension is that it relates to its actual availability
and feasibility. The impracticability could be either a legal one, as postulated in the example given in

226 Brazil's responses to questions from the Arbitrator, question 8, para. 127.
227 See Decisions by the Arbitrator, US – Gambling (Article 22.6 – US) , para. 4.29 and EC – Bananas
229 Brazil's responses to questions from the Arbitrator, question 8, para. 126.
230 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC), para. 71.

EC – Bananas III (Ecuador ) (Article 22.6 – EC) , or a factual one, such as might arise if the
countermeasure exceeds the total amount of the trade available to be countered.
(ii) "effective"
5.74 Citing the EC – Bananas III (Ecuador) (Article 22.6 – EC) arbitrator, Brazil argues that the
"effectiveness" standard encourages the offending st ate to comply with WTO obligations, in other
words, to induce compliance 231 and allows the party seeking suspensi on to ensure that the impact of
that suspension is strong and has the desired result, namely to induce compliance. Brazil considers
that "the countermeasures that are best tailored to provide such a response are those that can maximize
the likelihood of compliance".232
5.75 In the United States' view, the likelihood of compliance is not a factor that the DSU provides
in assessing the appropriate level or nature of the countermeasure. 233 The United States considers that
the DSU authorizes rebalancing of trade concessions in case a Member does not comply with its trade
obligations. While the ultimate political goal of the DSU is to promote compliance, the legal
standards for assessing countermeasures are the effects of nullification and impairment and these are
two separate issues in the United States' view.
234
5.76 The United States considers that the word "eff ective" means that a Member should not be
prevented from imposing countermeasures of the intende d weight as a result of the limitation of those
countermeasures to the same sector/agreement. The in tended "weight" is what is authorized based on
the applicable standard, including where special or additional rules apply. Thus, a Member should be
able to take the "appropriate" amount of countermeasures with respect to prohibited subsidies and, for
subsidies causing adverse effects, a Member should be able to take countermeasures commensurate
with those effects.235
5.77 Dictionary definitions of the term "effective" include "producing a decided, decisive, or
desired effect"236 and "powerful in effect; producin g a notable effect; effectual". 237 The arbitrator on
EC – Bananas III (Ecuador) (Article 22.6 – EC) relied on comparable definitions to conclude that
"the thrust of this criterion empowers the party seeki ng suspension to ensure th at the impact of that
suspension is strong and has the desired result, name ly to induce compliance with DSB rulings within
a reasonable period of time". 238 That arbitrator further elaborat ed on the types of circumstances in
which a complaining party might consider that su spension in a given sector or agreement would not
be "effective":
"One may ask whether this objective [of i nducing compliance] may ever be achieved
in a situation where a great imbalance in terms of trade volume and economic power
exists between the complaining party seek ing suspension and the other party which
has failed to bring WTO-inconsistent meas ures into compliance with WTO law. In
such a case, and in situations where the complaining party is highly dependent on
imports from the other party, it may happen that the suspension of certain concessions
or certain other obligations entails mo re harmful effects for the party seeking
suspension than for the other party. 29 In these circumstances, a consideration by the

231 Brazil's written submission, para. 511. EC – Bananas III (Ecuador) (Article 22.6 – EC), para. 72.
233 US written submission, para. 337.
234 US written submission, paras. 339 and 341.
235 US responses to questions from the Arbitrator, question 137, para. 177.
236 In Merriam-Webster Online Dictionary . Retrieved 4 June 2009, from http://www.merriam-
webster.com/dictionary/effective.
237 Oxford English Dictionary, at www.oed.com.
238 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC), para. 72.

complaining party in which sector or under which agreement suspension may be
expected to be least harmful to itsel f would seem sufficient for us to find a
consideration by the complaining party of th e effectiveness criterion to be consistent
with the requirement to follow the principles and procedures set forth in
Article 22.3."239
(original footnote) 29 Of course, suspension of concessions or other obligations is always
likely to be harmful to a certain, limited extent also for the complaining party requesting
authorization by the DSB.
5.78 We do not share the view of the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC)
that a consideration by the comp laining party of the sector or ag reement in which suspension would
be "least harmful" to itself would necessarily be pertin ent. As we read the terms of subparagraphs (b)
and (c), a consideration of the "effectiveness" cr iterion under these provisions involves an assessment
of the effectiveness – or lack thereof – of suspension in the same sector or under the same agreement ,
rather than an assessment of the relative effectiven ess of such suspension, as compared to suspension
in another sector or agreement. In other words, the procedures and principles under Article 22.3 do
not entitle a complaining party to freely choose the most effective sector or agreement under which to
seek suspension. Rather, it entitles the complaining pa rty to move out of the same sector or same
agreement, where it considers that suspension in that sector or agreement is not "practicable or
effective".
5.79 We agree with the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC), however,
that the question of whether "the suspension of certa in concessions or certain other obligations entails
more harmful effects for the party seeking suspension than for the other party" would be pertinent to a
consideration of the "effectiveness" of the said suspension. Indeed, as the arbitrator on EC – Bananas
III (Ecuador) (Article 22.6 – EC) notes, there may be situations in which, for example, the
complaining party is heavily dependent on imports from the other party, to such an extent that it may
cause more harm to itself than it would to the other party, if it were to suspend concessions or other
obligations in relation to these imports. In such a situation, where the complaining party would cause
itself disproportionate harm, such that it would in fact be unable to use the authorization, there would
be a basis for concluding that such suspension would not be "effective".
5.80 It may well be that the suspension of concessions or other obligations "i s always likely to be
harmful to a certain, limited extent also for the co mplaining party" applying it. However, this does
not, in our view, imply that a consideration of su ch harm may not be relevant for the purposes of
assessing the "effectiveness" of suspension in a gi ven sector or agreement. In foreseeing that the
complaining party may consider that same-sector or same-agreement suspension is "not practicable or
effective", the drafters of the DSU have preci sely acknowledged and recognized the possibility of
circumstances in which suspension of certain obligations would not be effective, and they have sought
to allow the complaining party the possibility of ensuring that it nonetheless has at its disposal an
effective remedy in such circumstances, i.e. a re medy that may produce its intended effects. This
includes, in our view, situations in which the harm that may arise from same-sector or same-
agreement suspension would be so significant for the complaining party as to deter it from having
recourse to it.
5.81 This is consistent with the objective of inducin g compliance, in that this provision seeks to
ensure that the complaining party will be in a po sition to actually have recourse to the authorized
remedy, and thus enable it to contribute to induci ng compliance, as is its legitimate purpose. At the
same time, we agree with the United States that the "likelihood of compliance", as such, is not at issue

239 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC), para. 73.

in this determination. Rather, what is at issue is the ability of the complaining party to make effective
use of the awarded countermeasures in order to induce such compliance.
(b) The second element under subparagraph (c): a de termination that "the circumstances are
serious enough"
5.82 As noted by the arbitrator on US – Gambling (Article 22.6 – US) , the text of Article 22.3(c)
provides no specific guidance on how the terms "the circumstances are serious enough" are to be
understood. The elements of subparagraph (d) do, however, provide useful guidance in this respect.
5.83 We therefore consider that the trade at issue, and its importance to the complaining party, as
well as the broader economic elemen ts relating to the nullification or impairment and the economic
consequences of the suspension, may all be re levant in assessing whether the "circumstances are
serious enough" in a given case.
5.84 At the same time, we consider that these terms inherently imply a degree of flexibility in
assessing what "circumstances" may be pertinent in a given case, so that these may not be the only
relevant considerations in such an assessment. We agree, in this respect, with the following
determinations of the arbitrator on US – Gambling (Article 22.6 – US):
"We also consider, more generally, that this aspect of the determination, which relates
to "circumstances", is of necessity an as sessment to be made on a case-by-case basis,
and that the circumstances that are relevant may vary from case to case. We note
however, that these circumstances should be serious "enough", which suggests that it
is only when the circumstances reach a certain degree or level of importance, that
they can be considered to be serious enough."
240
(c) The elements under subparagraph (d) of Article 22.3
5.85 Subparagraph (d) of Article 22.3 directs the complaining party to take into account two
specific considerations, in applying the principles under the previous subparagraphs:
(a) the trade in the sector or under the agreem ent under which the panel or the Appellate
Body has found a violation or other nullifi cation or impairment , and the importance
of such trade to [the complaining] party; and
(b) the broader economic elements related to the nullificati on or impairment and the
broader economic consequences of the suspension of concessions or other
obligations.
5.86 The first element, the "trade in the sector or under the agreement under which the panel or the
Appellate Body has found a violation" is to be understood with reference to the definitions of the
terms "sector" and "agreement" contained in subparagr aph (g) of Article 22.3. As the arbitrator on
US – Gambling (Article 22.6 – US) observed:
"[I]n order to determine whether suspension is practicable or effective in a certain
sector, it is appropriate to take into account all the trade in that sector and its
importance to the complaining party. This also appears to us consistent with the

240 Decision by the Arbitrator, US – Gambling (Article 22.6 – US), para. 4.108.

purpose of this provision, which is to provi de certain objective parameters to guide
the conduct of such determination."241
5.87 In the circumstances of this case, this means that what is to be taken into account is "the
trade" in all goods under the trade in goods agreem ent, that is, trade in goods generally, and its
importance to Brazil.
5.88 The second consideration required to be taken into account is the "broader economic elements
related to the nullification or impairment" and the "broader economic consequences of the suspension.
We agree with the determinations of the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 –
EC), as endorsed also by the arbitrator on US – Gambling (Article 22.6 – US), that:
"The fact that the former criterion relates to 'nullification or impairment' indicates in
our view that this factor primarily concer ns 'broader economic elements' relating to
the Member suffering such nullification or impairment, i.e. in this case Ecuador.
We believe, however, that the fact that the latter criterion relates to the suspension of
concessions or other obligations is not necessarily an indication that "broader
economic consequences" relate exclusively to the party which was found not to be in
compliance with WTO law, i.e. in this case the European Communities. As noted
above, the suspension of concessions may not on ly affect the party retaliated against,
it may also entail, at least to some extent, adverse effects for the complaining party
seeking suspension, especially where a great imbalance in terms of trade volumes and
economic power exists betw een the two parties such as in this case where the
differences between Ecuador and the European Communities in regard to the size of
their economies and the level of socio-economic development are substantial."242
5.89 Accordingly, the "broader economic elements related to the nullification or impairment" to be
taken into account in this case are those relating to the nullification or impairment arising for Brazil
from the subsidies at issue, while the broader economic consequences of the suspension may include a
consideration of the economic consequences of the suspension both for Brazil and for the
United States.
5.90 The terms of subparagraph (d), which require these elements to be taken into account in
applying the principles of subparagraph (c), make it clear that an assessment of whether same-sector
or same-agreement suspension is "not practicable or effective" and of whether "the circumstances are
serious enough" may legitimately, and indeed should, take into consideration not only the trade to
which the suspension would apply, but also the economic consequences arising from the suspension.
5.91 With these considerations in mind, we now turn to consider whether a plausible determination
that it is not practicable or effective to suspend ob ligations in trade in goods alone could be made in
this case, and that the circumstances are serious enough, so that an authorization to suspend
concessions or other obligations also under the TRIPS Agreement and the GATS could be given.
2. Factual assumptions
5.92 As we have found above, our mandate requires us to consider whether Brazil has followed the
procedures and principles of Article 22.3 of the DSU, in determining that it is not practicable or

241 Decision by the Arbitrator, US – Gambling (Article 22.6 – US), para. 4.34.
242 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC), paras. 85-86. See also
Decision by the Arbitrator, US – Gambling (Article 22.6 – US), para. 4.35.

effective to suspend concessions in trade in goods and in the agreements of Annex 1A and that the
circumstances are serious enough.
5.93 In making its determinations, Brazil assumed that the countermeasures would be in the
amount that it had requested, namely, a total of US$1.037 billion in relation to the actionable
subsidies at issue in these proceedings (ML a nd CCPs). We have determined, however, that
countermeasures in an amount of US$147.3 millio n annually would be "c ommensurate with the
degree and nature of the adverse effects determined to exist" in this case.
5.94 In addition, our determination in these proceed ings takes place against the background of
another arbitration proceeding c oncerning prohibited subsidies, in which Brazil had requested
countermeasures in the amount of US$1.294 billi on annually for the GSM 102 programme and
US$350 million for the Step 2 programme. The arbitrat or in those proceedings has determined that
countermeasures in the amount of US$147.4 million 243 would be "appropriate" within the meaning of
Article 4.10 of the SCM Agreement.244
5.95 These circumstances raise two questions for our consideration. First, we must consider
whether, for the purposes of our assessment, we mu st take into account the cumulated amount of
countermeasures resulting from both proceedings or only the amount arising from this Decision.
Secondly, we must consider what are the implications of the fact that Brazil has assumed, in making
its determination, an amount of countermeasures si gnificantly in excess of the amount that has been
determined to be permissible.
(a) Whether it is appropriate to consider the cu mulated amount of countermeasures arising from
both proceedings
5.96 Although the arbitral proceedings relating to the prohibited and actionable subsidies
respectively were conducted in parallel, they relate to different aspects of the DSB's findings in this
dispute and are legally distinct. In both cases, Br azil has requested an authorization to apply the
proposed countermeasures in the form of suspen sion of obligations under the GATS and the TRIPS
Agreement, as well as under trade in goods. The ques tion therefore arises as to the extent to which
the Arbitrator in these proceedings must take into ac count the determinations of the arbitrator in the
other proceedings, in assessing whether Brazil h as followed the principles and procedures of
Article 22.3 of the DSU.
5.97 Brazil considers that the amount of counterm easures on prohibited subsidies and the amount
of countermeasures for actionable subsidies should be cumulated in considering whether suspension
of concessions or obligations in the goods sector is practicable or effective. Brazil observes that the
total amount of countermeasures is part of the objective reality in which the Member operates and in
which it undertakes its consideration of the prac ticability or effectiveness of the countermeasures
under Article 22.3 of the DSU.
245
5.98 The United States argues that, since the Arbitrator should issue two separate reports to reflect
the two separate arbitration proceedings, sep arate assessments of Brazil's requests for
countermeasures under the GATS and the TRIPS Agreement would be needed. 246 However, the
United States also considers that the Arbitrator in each proceeding may consider the circumstances of
the other proceeding. Consequently, the Arbitrator in one proceeding may take account of

243 We note that this is not a fixed amount, so it may vary over time. However, at this stage of our
analysis, we find it appropriate to rely on the amount that has been calculated in relation to FY 2006.
244 See WT/DS267/ARB/1, para. 4.278.
245 Brazil's responses to questions from the Arbitrator, question 9, para. 133.
246 US responses to questions from the Arbitrator, question 9, para. 47.

countermeasures awarded in the other proceeding in determining if the total of the countermeasures in
the two proceedings together would justify suspending concessions under another sector or
agreement.247
5.99 We first take note of the parties' agreement th at, even in the context of separate assessments
under the two proceedings, the Arbitrator in each pr oceeding would be entitled, in the circumstances
of this case, to take account of the amount of countermeasures awarded in the other proceedings.
5.100 The determinations arising from this Decision are only in relation to the countermeasures
concerning the subsidies covered by these proceedi ngs, namely Brazil's proposals in relation to the
marketing loan and countercyclical payments. At the same time, we agree that it is appropriate for us
to take into account the amount of countermeasur es to which Brazil is entitled to under the other
proceedings. As Brazil has expressed it, the amou nt of countermeasures determined in the other
proceedings is "part of the objective reality in wh ich the Member operates". We assume that both
amounts would be applicable at the same time a nd that the two amounts of countermeasures would
potentially be applied cumulatively by Brazil. This circumstance may have an impact on an
assessment of whether it is "practicable or effective" to seek countermeasures in the same sector or the
same agreement and whether "the circumstances are serious enough". As observed above, the parties
agree that we can adopt a cumulative approach in this case.248
5.101 We will therefore take into account the cumula ted level of countermeasures arising from both
decisions, which amounts to US$294.7 million annually, in reviewing whether Brazil has followed the
principles and procedures of Article 22.3 of the DS U in determining that it is not practicable or
effective to seek to suspend concessions or other ob ligations in trade in go ods alone and that the
circumstances are serious enough.
(b) Implications of the difference between the le vel of countermeasures requested by Brazil and
the level determined to be permissible
5.102 The amount of the countermeasure is a central aspect, possibly the most critically important
aspect, of the consideration required to be undert aken by a complaining Member in following the
principles and procedures of Article 22.3 of the DSU.
5.103 In these proceedings, Brazil has assumed, in applying the procedures and principles of
Article 22.3, that it would be entitled to a to tal amount of countermeasures in the amount of
US$2.681 billion (US$1.644 billion in relation to the prohibited subsidies plus US$1.037 billion in
relation to the actionable subsidies). However, as we have determined a bove, the cumulated amount
of countermeasures to which Brazil is entitled to is US$294.7 million.
5.104 In this case, the amount of countermeasures that we have determined to be permissible is
significantly lower than the amount assumed by Brazil in its request, and this fact alone compels a
finding that the complaining party has not followed the principles and procedures of Article 22.3. We
must therefore find that in adopting the assumption of a total of US$2.681 billion of countermeasures
as the central "fact" underlying its consideration of Article 22.3, it did not properly consider, or cannot
be taken to have properly considered, "the necessar y facts objectively". Consequently, it cannot have
properly applied the princi ples and procedures of Article 22.3 on the basis of these facts. Therefore
our finding must be that Brazil has not followed the principles and procedures as laid out in that
Article.

247 US responses to questions from the Arbitrator, question 9, para. 48.
248 See para. 5.99.

5.105 It is not possible to go "back in time" for Braz il to rectify its request for the purposes of these
proceedings, taking into account our determina tion relating to the permissible amount of
countermeasures.249 However, Brazil will have the right to present a request for countermeasures to
the DSB at the level determined in this Decision. Thus it would be both unreasonable and
uninstructive to say nothing more about the way in which the principles and procedures should be
applied to the lower countermeasure calculated by the Arbitrator.
5.106 We recall in this context our determination in paragraph 5.52 above that, should we determine
that Brazil has not followed these procedures or pr inciples, we should articulate how the analysis
could properly take place to the extent necessary to en sure that Brazil is in a position to apply these
procedures and principles "consistent with paragra ph 3" and present a request "consistent with the
decision of the arbitrator" in a subsequent phase of these dispute settlement proceedings, as foreseen
in Article 22.7 of the DSU.
5.107 In light of these considerations, and notwithst anding our determination that Brazil has not
followed the principles and procedures of Article 22.3 because it based its determination on an
amount of countermeasures which is significantly in excess of the amount we have authorized, we
thus now proceed to describe how, in our view, Artic le 22.3 should be applied in the context of a
countermeasure in the amount of US$294.7 million.
5.108 In conducting this analysis, we will take into consideration the elements and arguments that
have been presented to us by Brazil and the Unite d States in these proceedings. We recognize that
Brazil applied these arguments to a significantly larg er amount of countermeasures. What we aim to
determine in our examination of this issue, is whether the considerations that Brazil has brought
forward to explain why it considered that it is not practicable or effective to suspend concessions or
other obligations solely in trade in goods to th e level that it assumed it w as entitled to, would justify
the same conclusion when applied to the level of co untermeasures that we have determined would be
"commensurate with the degree and nature of the adverse effects determined to exist".
3. Whether it is practicable or effective for Brazil to suspend concessions in trade in goods
5.109 Although Brazil considers that the countermeasures must be assessed exclusively against the
requirements of Article 7.9 of the SCM Agreement, Brazil claims that it h as, in any event, followed
the principles and procedures of Article 22.3 of the DSU. Specifically, Brazil considers that it is not
practicable or effective to suspend concessions or other obligations exclusively under trade in goods,
and that the circumstances are serious enough to justify suspension of concessions or other obligations
under TRIPS and GATS.
250 Brazil also argues that it considered the elements under Article 22.3(d) of
the DSU.251
5.110 The United States argues that the text of the DSU does not explicitly define what
countermeasures are "practicable or effective", but th e negotiators were clear in their intention that
this be a high bar. Brazil does not reach this bar. In the United States' view, Brazil advances a claim
for cross-agreement and sector suspension of con cessions that is contrary to the Article 22.3
disciplines.252 The United States therefore requests the Arbitr ator to reject Brazil's request to suspend

249 This is not to say that a Member could not base its consideration on a range of possible
countermeasure amounts, in order to come before an arbitrator in Article 22.6 proceedings and validly say that it
did use a range of assumed facts, and arrived at the same or different outcomes in relation to cross-retaliation.
In these proceedings that did not happen.
252 US written submission, para. 329.

concessions with respect to TRIPS and GATS for the reason that Brazil does not meet the
requirements of Article 22.3.253
(a) Main arguments of the parties
5.111 Brazil states that it does not consider it adequa te to suspend concessions "by creating barriers
to Brazilian imports of US goods and thereby imposing additional costs on the Brazilian economy in
general."254
5.112 The United States considers that this claim runs head long into the thoughtful and purposeful
design of the DSU system. According to the United States, the treaty negotiators specifically created
a system where Members had to first resort to suspension of concessions within the relevant
agreement. Suspension of concessions with respec t to goods always entails creating barriers to
another Member's goods and thereb y imposing additional costs on the sanctioning state's economy.
The United States argues that the negotiators of the DSU were well aware that suspension of
concessions with respect to goods would be pain ful for both the sanctioned government and the
sanctioning government.255 In the United States' view, if the me re fact of additional costs on Brazil's
domestic economy were sufficient for suspension of c oncessions in the same sector to be not practical
or effective, it could be argued th at any and all violations with re spect to goods would warrant cross-
agreement suspension of concessions. The United Stat es argues that this approach is not compatible
with the fact that designers of the DSU chose to impose disciplines on suspension of concessions.256
5.113 The United States considers that it can demonstrate that Brazil can effectively and practicably
suspend concessions with respect to goods, and that any request by Brazil to suspend concessions
across sectors or across agreements is not a reas onable and objective assessment of the conditions
established by Article 22.3.257 The United States points out that Brazil imports a sufficient amount of
goods from the United States to provide practicab le and effective suspension of concessions.
Between 2005-2007, Brazil importe d between US$15.3 billion to US$24.6 billion annually in
US goods.258 In consumer goods, excluding food a nd automotive goods, Brazil imported between
US$1.125 billion and US$1.676 billion annually in the same time period. Including food and
automotive goods in the consumer goods categor y, the level of imports jumps to between
US$1.826 billion and US$2.717 billion annually.
5.114 According to the United States, the level of bilateral trade between the United States and
Brazil is thus sufficient to provide for suspensi on of concessions with respect to goods alone.
Moreover, given Brazil's large and diverse ec onomy and the actual level of nullification and
impairment incurred by the US policies at issu e, suspension in consumer goods alone should be
effective and practicable. 259 In the United States' view, the ec onomic size and the diversity of the
economy makes it possible for Brazil to suspend con cessions in the goods sector without resort to
exceptional cross-sector countermeasures. 260 In the past, Brazil has proposed suspension of
concessions in the amount of US$3.36 billion only in the goods sector in the Canada – Aircraft
Credits and Guarantees (Article 22.6 – Canada) dispute. In the United States' view, it is difficult to
understand why it was practicable and effective to suspend concessions in the goods sector in that

253 US written submission, para. 342.
255 US written submission, para. 329.
256 US written submission, para. 330.
257 US written submission , para. 335.
258 Exhibit US-62, US-ITC Export Data to Brazil.
259 US written submission, para. 336. The Arbitrator takes note that these US arguments are made in
the context of Brazil's requested amount of countermeasures, i.e., US$1.644 billion, for prohibited subsidies and
US$1.037 billion for actionable subsidies respectively.
260 US responses to questions from the Arbitrator, question 135, paras. 168-170.

dispute while Brazil considers it is not practicable or effective to suspend concessions in the goods
sector in this case.261
5.115 Citing the EC – Bananas III (Ecuador) (Article 22.6 – EC) arbitration, the United States
argues that if a developing country, even one with a relatively small and undiversified economy such
as Ecuador, has sufficient bilateral trade in consumer goods to impose suspension of concessions, then
it must do so. Only where the government lacks the capacity to suspend concessions in the same
agreement does the DSU permit the cross agreement suspension of concessions.262
5.116 Brazil explains that it would not be feasible or reasonable to apply countermeasures on capital
goods, intermediate goods and other essential inputs to the Brazilian economy, which it says comprise
95 per cent of Brazil's imports from the United States . The costs involved in switching suppliers are
normally prohibitive for capital goods and intermediate goods. In addition to prices, decisions on the
purchase of capital or intermediate goods are conditioned by several factors that severely constrain the
ability of producers to switch suppliers. These f actors include: (i) long-term contracts cannot be
terminated easily or without heavy pecuniary penalties; (ii) capital goods in particular are tailor-made
to respond to the specific needs of the producer and are ordered many months or even years in
advance; (iii) in most industries, inputs must have the exact technical specifications that match the
requirements of the machinery in place. These specifications will be di fferent depending on the
brand, origin, age etc. of the machinery that equips assembly lines. As a result, theoretically similar
products are not substitutable; (iv) intellectual property protection and intra-company trade determine
purchase decisions and curb the ability of producers to change suppliers.
263
5.117 Moreover, Brazil says that its imports of c onsumer goods from the United States amount to
US$1.27 billion. Of that amount, almost US$1.1 b illion, or 86 per cent, correspond to medical and
educational supplies, food, automotive goods and arms, sectors where, according to Brazil, any
raising of barriers would entail serious and unreasonable costs to the Brazilian economy.264 In Brazil's
view, the profile of Brazilian imports of consum er goods from the United States leaves very little
room of manoeuvre for Brazil to adopt countermeasures that target such goods.265
5.118 However, Brazil also considers that of the US$1.27 billion of annual imports of consumer
goods from the United States (in 2007), approximately US$28.5 million, or 2.2 per cent, can be
considered as luxury goods, in relation to which, arguably, the imposition of countermeasures would
not be disproportionately costly to Brazil. In Brazil's view, these luxury goods are consumed by a
very small share of Brazil's population and an increa se in the costs of their importation is likely to
generate limited impacts on the Brazilian economy in general.266
5.119 The United States observes that Brazil has failed to explain why, given the availability of
alternative sources of supply, the suspension of co ncessions in the goods sector is not practicable or
effective. Rather, the United States argues, Braz il simply takes a broad category of goods out of
consideration based on mere assertion. 267 The United States considers that the goods sector is "all
goods", and that while it may be appropriate to ex amine the negative impact on particular goods that
are necessities, where goods are not necessities or wh ere alternative sources of supply are available,

261 US oral statement, para. 71.
262 US written submission, para. 333.
263 Brazil's responses to questions from the Arbitrator, question 140, para. 334.
264 Brazil's responses to questions from the Arbitrator, question 140, para. 336.
267 US responses to questions from the Arbitrator, question 135, para. 171.

there is no basis to assert that suspension of concessions for those goods is not practicable or
effective.268
5.120 Brazil considers that the United States bears th e burden of proving that it is practicable and
effective for Brazil to change suppliers when ta king countermeasures in the goods sector alone, and
that merely identifying that alternative sources of supply exist for some products is not sufficient. 269
In this regard, Brazil considers that the United St ates failed to demonstrate that countermeasures in
the goods sector alone is "practicable" and "effective".270
5.121 Brazil considers that the crucial question is not whether alternative sources of supply exist,
but whether it would be feasible and sensible for Braz il, in practice, to force its economic agents to
switch to other suppliers. Such analysis would ha ve to take into account, among other factors, the
US share in Brazil's total imports; the price levels of alternative suppliers; technical specifications and
product differentiation; intellectual property and in tra-company trade restrictions; and the economic,
welfare and inflationary costs resulting from the disruption of production and supply chains. 271 Brazil
considers that the burden is on the United States to explain why and how the US imports can be
replaced by imports from other sources, so that it is practicable for Brazil to take countermeasures
only in the goods sector.272
5.122 The United States comments that Brazil focuses on an even narrower scope of products than
the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC) did. In that dispute, the arbitrator
looked at the category of consumer goods because the suspension of concessions on these goods could
not cause any direct adverse effects on Ecuador's domestic manufacturing and processing industries.
The United States says that there is no reason to ex clude such end use products as "books" and "food"
(which Brazil indicates as necessity commodities) fr om the products for applying countermeasures.
Also, the United States considers that the potential co st of changing suppliers is not unusual, but an
expected result of suspension of concessions. The United States' main point is that Brazil is not
constrained to the narrow range of choices of goods as it suggests given that it is one of the world's
largest economies and it has many sources of supply.273
5.123 Brazil further argues that within the very lim ited scope of consumer goods that Brazil has to
target, the costs and welfare-reducing effects resulting from the adoption of countermeasures
exclusively in that sector would render such an a lternative not practicable. In Brazil's view, the
additional costs generated by these measures would a dd to inflationary pressures – at a time when
increasing prices have pointed to a worrying inflationary scenario – and would limit access of
Brazilian consumers to these impor ted goods, negatively affecting Brazil's economy and the welfare
of its population.
274
5.124 Furthermore, in Brazil's view, any measures that are contrary to the objectives of a developing
country to ensure steady and sustainable development; to pursue high growth rates; to fight poverty;
and to promote the increased welfare of its popul ation within a stable macroeconomic environment
will necessarily be costly and impracticable by definition. 275 Brazil also contends that the
significantly unbalanced nature of the trade relati ons between Brazil and the United States, and the
considerable economic differences between the tw o countries, render the suspension of concessions

268 US responses to questions from the Arbitrator, question 135, para. 166.
269 Brazil's responses to questions from the Arbitrator, question 140, para. 337.
270 Brazil's responses to questions from the Arbitrator, question 140, para. 349.
271 Brazil's responses to questions from the Arbitrator, question 140, para. 337.
272 Brazil's comments on US responses to questions 135 from the Arbitrator, Paras 394..
273 US comments on Brazil's responses to questions from the Arbitrator, question 140, paras. 179-181.
274 Brazil's written submission, paras. 517-519.

and other obligations under trade in goods alone ne ither practicable nor effective as a response to the
United States' failure to comply with its obligations.276
5.125 In Brazil's view, countermeasures that are simply most likely to add to those costs and effects
are not practicable, as the Brazilian Government does not consider that they could be employed in
practice.277
5.126 Brazil also considers that countermeasures restri cted solely to trade in goods may not have
sufficient political influence to press for the United St ates' withdrawal of the billions in US dollars
annually paid subsidies or to remove their adverse effects. Therefore, such countermeasures are not
"effective" for the purpose of encouraging compliance.278
5.127 Brazil submits that, at the very least, it "could plausibly arrive at the conclusion that it was not
practicable or effective for it to suspend con cessions and other obligations" in respect of the
importation of goods alone.279 Brazil reiterates that, besides being authorized to take countermeasures
under trade in goods, it needs to have the option to suspend concessions or other obligations under
TRIPS and GATS. In this regard, Brazil is seeking to take countermeasures that "produce the greatest
likelihood of compliance with minimal damage to its own economy", as commented by the United
States itself in a DSB meeting adopting the arbitration report in EC – Bananas III (Ecuador)
(Article 22.6 – EC).280
(b) Analysis by the Arbitrator
5.128 We recall our determination above that Braz il cannot be taken to have applied a proper
consideration of the principles and procedures of Article 22.3, because the amount of the
countermeasure it assumed was much greater than the countermeasure determined by the Arbitrator.
Nonetheless we have proceeded further, to give gui dance whether, on the basis of the level of the
countermeasures authorized under this Decision, and in the circumstances of the trade between the
two Members involved, an objective and plausible conclusion could be reached that it is "not
practicable or effective" to seek suspension in tr ade in goods alone and that "the circumstances are
serious enough".
5.129 We also recall that, as we have explained in our preliminary observations above, we will take
into account in our review of Brazil's determinati ons the amount of countermeasures that we have
determined that Brazil is entitled to, in relation to the ML and CCPs (US$147.3 million), as well as
the amount of countermeasures determined to be "app ropriate" in the separate proceedings relating to
the prohibited subsidies at issue in the underlying dispute (US$147.4 million). The total amount of
countermeasures in relation to which we cons ider Brazil's determinations is therefore
US$294.7 million.
(i) Initial observations
5.130 Brazil observes at the outset that it would not be adequate to suspend concessions "by
creating barriers to Brazilian imports of US goods and thereby imposing additional costs on the
Brazilian economy in general". The United States responds that suspension of concessions with
respect to goods always entails creating barrier s to another Member's goods and thereby imposing
additional costs on the sanctioning state's economy, and that the DSU negotiators were "well aware

280 Brazil's written submission, para. 527; WT/DSB/M/78, paras. 44-45.

that suspension of concessions with respect to goods would be painful for both the sanctioned
government and the sanctioning government". If the me re fact of additional cost on Brazil's domestic
economy were sufficient for suspensi on of concessions in the same sector not to be practical or
effective, the United States observes, then it could be argued that "any and all violations with respect
to goods would warrant cross-retaliation".
5.131 We agree with the United States that "the mere fact of additional cost on Brazil's domestic
economy" would not be sufficient, in and of itself, to conclude that suspension of concessions or other
obligations is "not practicable or effective" within the meaning of Article 22.3 of the DSU. To the
extent that the imposition of a barrier to trade on certain imports inherently generates economic costs
on the Member imposing them, the suspension of co ncessions on trade in goods may always have the
potential to cause some harm to the economy of th e Member imposing the barriers. To assume that
this inherently would justify recourse to cross-re taliation would amount to reading out of Article 22.3
the principle contained in subparagraph (a). Rather , subparagraphs (b) and (c ) of Article 22.3 set out
the specific circumstances in wh ich a complaining Member may be entitled to seek to suspend
concessions in another sector or another agreement, whatever the sector in which the violation was
found.
5.132 At the same time, as we have observed in our analysis of the terms "not practicable or
effective" above, it is quite possible that the pot ential costs associated with the suspension of
concessions or other obligations in a given sector or under a certain agreement would precisely be of
such an extent and magnitude that such suspension is "not practicable or effective". The fact that
subparagraph (d) requires a consideration of the "b roader economic consequences of the suspension"
further confirms, in our view, that it is appropriate and legitimate for the complaining party to take
into account the potential costs that may be associated with the suspension, and not simply the legal
feasibility of that suspension, in a determination of whether it is "practicable or effective".
5.133 In short, a consideration of the economic costs associated with the suspension is legitimate,
but it is not just any economic costs associated with the suspension of concessions or other obligations
in a given sector or agreement that would justify a conclusion that such suspension would be "not
practicable or effective". Rather, the costs at issue would have to be of such extent and magnitude as
to render the suspension "not practicable or effective".
5.134 In these proceedings, Brazil has provided general explanations as to the profile of its trade
with the United States, which in its view affect its ability to suspend concessi ons or other obligations
in trade in goods, as well as specific explanations wh y it considers that it would not be practicable or
effective to seek to suspend obligations with respect to certain categories of imports of goods from the
United States, so that the range of imports that it can actually target is very limited. Finally, Brazil
also argues that, even within the range of produc ts that it could target, suspension would not be
"practicable or effective", for various reasons. We consider these three aspects in turn.
(ii) Overall profile of US imports of goods to Brazil
5.135 Brazil argues that there is a great imbalance of trade between Brazil and the United States,
and that its imports account for only a small sh are 1.7 per cent (or US$18.7 billion) of total
US exports (US$1.16 trillion) Hence an increase in tariffs imposed on this trade would not
sufficiently affect the United States and therefore w ould be an ineffective response to the continued
violation of its obligations in this dispute.281
5.136 In Brazil's view, it would be much easier for the United States to redirect 1.7 per cent of its
exports to other destinations than for Brazil to fi nd suitable alternative sources for its imports. Brazil

281 Brazil written submission, para. 514.

is much more dependent on imports from the Un ited States. Brazil indicates that among the top
20 products in the list of Brazil's imports from th e United States, the United States accounts for more
than 50 per cent of total Brazilian imports in 12 cases, and greater than 90 per cent of Brazilian
imports in five of these products. 282 Brazil also presented an exhibit showing that out of the
30 HS chapters in value of imports that represen ts 96 per cent of total Brazil's imports from the
United States in 2007, the US share was above 10 pe r cent in 26 cases. This share was higher than
20 per cent in 20 cases and above 30 per cent in eight cases.283
5.137 The United States responds that the difference be tween the percentage of US imports into
Brazil and the percentage of Brazil's imports into th e United States is not the question. The question
is whether, within trade from the Un ited States that does occur, it would be practicable or effective to
impose countermeasures in goods. The United Stat es considers that Brazil, in fashioning its
countermeasures, could take into account the difficu lty of finding substitute goods from other sources
(e.g., focusing on luxury goods to the extent possibl e, where increased costs would have little impact,
and then exploring other goods wher e substitute goods are available). 284 Given the size and diversity
of the Brazilian economy, and the availability of goods from other countries or from Brazil itself,
Brazil has many tools at its disposal to apply countermeasures within the goods sector.285
5.138 The United States further observes that Brazil is an important market for the United States,
which exported between US$15.3 a nd US$24.6 billion annually to Br azil between 2005 and 2007. If
Brazil suspends concessions in the goods sector, it would deprive the United States of access to the
important Brazilian market. At a time of economic ch allenges, loss of this large market would lead to
a serious economic cost.286
5.139 We take note of the fact that the total annua l value of trade in goods from the United States
represents more than 15 per cent of Brazilian impor ts overall, and that this represents less than
2 per cent of total US exports of goods. We are no t persuaded, however, that this "imbalance" that
Brazil describes in its trade in goods from the Unite d States would in itself be a sufficient basis to
conclude that a suspension of c oncessions or other obligations in re lation to such goods would be "an
ineffective response", as Brazil argues. In order to arrive at the conclusion that suspension in a given
sector or agreement is not "practicable or effectiv e", a more detailed consideration of the possibilities
for suspension of concessions or obligations within the range of imports that could potentially be
targeted is appropriate, especially where the total level of imports is not insignificant and greatly
exceeds the level of permissible countermeasures to which the complaining party is entitled.
5.140 We note that the total value of Brazil's impor ts of goods from the United States, as estimated
by Brazil, is US$18.7 billion. The United States estimates these imports at between US$15.3 and
US$24.6 billion annually. Brazil's estimation of th e value of its total imports of goods from the
United States is therefore within the range cited by the United States.
5.141 These figures suggest that, in principle, Braz il has at its disposal a total value of
US$18.7 billion of US exports that could potentially be subjected to suspension of concessions or
other obligations. The question we must now c onsider is whether Brazil could plausibly have
considered that, from those imports, it is not practic able or effective to suspend concessions or other
obligations under the agreements on trade in goods alone, to a level of US$294.7 million. We are
aware that Brazil, in making its determination, w as assuming that it would be entitled to a total level
of suspension significantly in excess of this figure an d we have already outlined why it is that we are

284 US responses to questions from the Arbitrator, question 68, paras. 202-203.
285 US responses to questions from the Arbitrator, question 68, para. 206.
286 US oral statement, para. 69.

reviewing the application of the principles and pr ocedure of Article 22.3 despite that supervening
obstacle to Brazil's claim in the circumstances of this case (i.e. that it did not actually undertake the
consideration that it would have had to have done in order to argue its position before the Arbitrator).
5.142 We recall our determination above that whether suspension in a given sector or agreement is
"practicable" essentially relates to whether it is availa ble or feasible in practice. This question is in
part answered by a consideration of the total leve l of trade, to which suspension of concessions or
other obligations could be applied. To the extent th at the total level of imports from the United States
exceeds the total value of imports to which suspen sion could apply, such suspension is at least
available in principle. We also recall our determin ation that whether suspension in a given sector or
agreement is "effective" relates more directly to the question of whether the complaining party could
effectively make use of the authorization, and that this may in particular depend on the extent to
which that party would cause itself significant harm in suspending concessions on the imports
concerned, to such an extent that the suspension would not be effective.
5.143 Bearing in mind these general considerations, we now consider Brazil's arguments to the
effect that it only has, in fact, limited scope to seek suspension in relation to its imports of goods from
the United States.
(iii) Detailed profile of US imports to Brazil and ava ilability of suspension in relation to various
categories of imports
5.144 Among its US$18.7 billion of annual imports from the United States, Brazil indicates that
95 per cent is composed of imports of intermed iate goods, capital goods, and other essential inputs
into Brazil's economy. Brazil argues that the costs involved in switching suppliers are normally
prohibitive for capital goods and intermediate goods. Brazil further argues that, of the
US$1.27 billion of annual imports of consumer goods from the United States, almost US$1.1 billion,
or 86 per cent, correspond to medical and educa tional supplies, food, automotive goods and arms,
sectors where any raising of barriers would enta il serious and unreasonable costs to the Brazilian
economy.287 We consider in turn Brazil's determinatio n relating to capital, intermediate and other
input goods, and its determination in relation to consumer goods.
Capital goods, intermediate goods and other goods constituting inputs into Brazil's economy
5.145 Brazil observes that in addition to prices, decisi ons on the purchase of capital or intermediate
goods are conditioned by several factors that sever ely constrain the ability of producers to switch
suppliers, including long-term cont racts that cannot be terminated easily or without heavy pecuniary
penalties, the fact that capital goods in particular are tailor-made to respond to the specific needs of
the producer and are ordered many months or even year s in advance, the fact that in most industries,
inputs must have the exact technical specifications that match the requirements of the machinery in
place, as well as the fact that intellectual prope rty protection and intra-company trade determine
purchase decisions and curb the ability of producers to change suppliers.288
5.146 The United States does not specifically comment on Brazil's assessment that suspension of
concessions in relation to capital, intermediate or other input goods would not be practicable or
effective. The United States generally considers, however, that Brazil takes a broad category of goods
out of consideration based on mere assertion, and th at "while it may be appropriate to examine the
negative impact on particular goods that are ne cessities, where goods are not necessities or where
alternative sources of supply are available, there is no basis to assert that suspension of concessions
for those goods is not practicable or effective".

287 Brazil's responses to questions from the Arbitrator, question 140, para. 336.
288 Brazil's responses to questions from the Arbitrator, question 140, para. 334.

5.147 We note that the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC) considered a
comparable argument in relation to "primary goods and investment goods". In approaching this
question, the arbitrator made the following assumption:
"[W]e presume that the suspension of c oncessions on imports by Ecuador from the
European Communities of those types of goods and the imposition of additional
tariffs would increase the cost of domestic production in the absence of alternative
sources of supply at a similar price".289
5.148 The arbitrator in that dispute then cons idered whether the European Communities had
provided sufficient information and evidence to dem onstrate that alternative sources of supply existed
for these products at a similar price. It ultimatel y concluded that the European Communities had not
succeeded in rebutting Ecuador's argument that switching to other than EC sources of supply would
involve transitional costs of adjusting to those sources of supply, which Ecuador considered were
relatively significant for it as a developing country.
5.149 We first note, as the arbitrator on EC – Bananas III (Ecuador) (Article 22.6 – EC) did in
relation to "primary goods and investment goods", that suspension of concessions in relation to
capital, intermediate or other input goods, which constitute direct inputs into domestic production, has
the potential to be damaging to economic operato rs domestically. We also note the arguments
presented by Brazil to explain why, in relation to such goods specifically, it may be especially
difficult to have recourse to alternative suppliers without significantly upsetting the supply chain.
5.150 We see merit in this argument particularly in relation to capital and intermediate goods,
although we consider it may have less force in re lation to primary goods which are more homogenous
in character. It could be expected that a signi ficant proportion of imports of goods constituting inputs
for manufacturing or processing are in the form of such primary goods, for which alternative sources
of supply may be more readily available than for certain other more differentiated products.
290
5.151 However, the United States has not specifically addressed this question or attempted to rebut
Brazil's arguments by identifying such imports. Although the United States has presented a number
of examples of products in relation to which Brazil could, in the view of the United States, easily find
alternative suppliers, none of these examples appear to relate to capital, inte rmediate or input goods
(except arguably computers, discussed below). 291 We also note the acknowledgement, by the United
States, that it could be appropriate to consider the negative impact of suspension of concessions in
relation to goods that are "necessities".
5.152 There remains a question of definition of the scope of capital goods, as far as computers are
concerned. Brazil considers that computers, in relation to which the United States argues that Brazil
has the opportunity to import from other sources than the United States, are capital goods, in relation
to which it would be harmful to retaliate. The United States has not specifically responded to this
assertion. The United States has also not indicated what level of imports computers represent.292

289 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC), para. 91.
290 We note, in this context, that with respect to agricultural goods specifica lly, Brazil's experts state
that: "Agricultural goods are largely undifferentiated, relatively homogeneous and therefore highly fungible."
(Annex 1 to Brazil's written submission (the "Sumner-Sundaram Statement", para. 8).
291 See US oral statement, para. 70. The United Stat es identifies the followi ng product categories as
examples of goods for which alterna tive sources of supply can be found easily: passenger cars, antibiotics,
computers, salmon. See also Brazil's responses to questions from the Arbitrator, question 140, para. 344.
292 We note in this respect that Exhibit US-109, presented by the United States for the purposes of
illustrating the US share of imports to Brazil in various product categories, was contested by Brazil, who stated
that this table was in fact erroneous and represented th e share of that HS chapter in Brazil's imports from the

5.153 In light of the elements presented to us, a nd in the absence of any sufficiently specific
argument of the United States to the effect that suspension in relation to capital goods, intermediate
goods or other inputs into the Brazilian economy would be practicable or effective, we accept, for the
purposes of our determination, Brazil's position that it would not be practicable or effective to seek to
suspend concessions or other obligat ions in relation to imports of capital, intermediate and other
essential inputs into Brazil's economy.
Consumer goods
5.154 Brazil further argues that, of the US$1.27 billi on of annual imports of consumer goods from
the United States, almost US$1.1 billion, or 86 per cent, correspond to medical and educational
supplies, food, automotive goods and arms, sectors wh ere any raising of barriers would entail serious
and unreasonable costs to the Brazilian economy.
293
5.155 The United States provides different figures for Brazilian imports of consumer goods from the
United States. It states that, including food a nd automotive goods in the consumer goods category,
Brazil imported between US$1.826 billion and US$2.717 billion annually from the United States
between 2005-2007.294 Excluding food and automotive goods, the United States estimates that Brazil
imported between US$1.125 billion and US$1.676 billi on in consumer goods annually in the same
time period. In the United States' view, given Brazi l's large and diverse economy and the actual level
of nullification and impairment incurred by the US policies at issue, suspension in consumer goods
alone should be effective and practicable.295
5.156 Neither party provides an explanation for th e significant differences in values that they
present concerning Brazil's imports of consumer goods from the United States. Apart from the fact
that Brazil uses import data and the United States relies on export data, the most likely explanation for
the difference is that the parties do not have the same definition of consumer goods. However, it is
not possible to confirm this since the United States has provided only an aggregate figure and does not
provide a listing of the individual tariffs lines (as Br azil does) of what it cons iders to be consumer
goods.
296
5.157 In light of these elements, and given that th e United States has not explained why Brazil's
classification of consumer goods would be incorrect and provides no detailed list of its own, the
Arbitrator assumes, for the purposes of its analysis, that Brazil's figures in respect of consumer goods
(as found in Exhibit Bra-754) reflect an adequate classification of such goods (see Table 3). At the
same time, we take note of the fact that there is a very significant difference between the two sets of
figures presented, and that Brazil's total figure for imports of consumer goods from the United States
is more than 50 per cent lower than those presente d by the United States, for the same categories of
products.

United States, rather than the US share in Brazil's total imports. See Brazil's oral statement, paras. 122-123. The
United States did not present alternative figures.
293 Brazil's responses to questions from the Arbitrator, question 140, para. 336.
294 US written submission, para. 336 and Exhibit US-62.
295 US written submission, para 336.
296 The only specific product category, the classification of which the parties have discussed, is
"computers". In response to an argument that Brazil has alternative sources of supply for computers, Brazil has
responded that computers are "capital goods", in relation to which it would not be appropriate to suspend
obligations. It is therefore possible that the United States classifies computers as "consumer goods", while
Brazil has classified them as "capital goods". However, we are not in a position to determine what impact this
difference in classification has, in the absence of fu rther information on the level of Brazilian imports of
computers from the United States.

5.158 This means that, in principle, assuming that Braz il's figures are accurate, it has at its disposal
a total value of at least US$1.127 billion worth of US imports of consumer goods to which suspension
of concessions or other obligations could in principle be applied.
5.159 We also note at the outset the followi ng observations of the arbitrator on EC – Bananas III
(Ecuador) (Article 22.6 – EC):
"Suspension of concessions with respect to consumer goods cannot cause any direct
adverse effects on Ecuador's domestic manufacturing and processing industries. Thus
Ecuador's main argument with respec t to investment goods and primary goods
referred to above cannot apply with respect to consumer goods. It is also true that
resulting price increases resulting from the suspension of concessions on consumer
goods could cause welfare losses to end-c onsumers in the country suspending
concessions."297
5.160 Similarly, in these proceedings, it cannot be assu med that the types of economic costs that we
have accepted would be likely to arise as a result of a suspension affecting capital goods, intermediate
goods and other goods constituting inputs into Brazi l's economy would be e qually relevant to
consumer products. While some welfare costs to end-consumers might arise in the event that the
suspension leads to price increases, this would only o ccur if no alternative substitute is available at a
comparable price.
5.161 In light of the fact that the value of Br azil's annual imports of consumer goods from the
United States (at least US$1.273 billion) significan tly exceeds the total level of countermeasures that
it is entitled to take (US$294.7 million), it would th erefore in principle be possible for Brazil to
suspend concessions or other obligations entirely in relation to imports of consumer goods from the
United States.
5.162 However, Brazil suggests that, out of the US $1.273 billion of consumer goods that it imports
from the United States, a total of only US$182.8 million would potentially be available for suspension
of concessions or other obligations, once the sectors where raising of barriers would entail "serious
and unreasonable costs to the Brazilian economy" are deducted.
Table 3: Total Consumer Goods imports from the United States

(in US$millions) 2007
Total Consumer Goods Imports from the United States 1,273.1 (=)
Tag* Description
Medical Medicines and other medical or safety products 909.5 (-)
Food Food Products 88.7 (-)
Books Books, teaching material and related products 28.9 (-)
Arms Arms and ammunition 0.6 (-)
Autos Automobiles and related goods 62.6 (-)
Total minus selected groups of products 182.8 (=)
Source: Exhibit Bra-754

5.163 The United States considers, however, that Braz il has simply taken broad categories of goods
out of consideration based on mere assertion, and that, while it may be appropriate to examine the
negative impact on particular goods that are ne cessities, where goods are not necessities or where
alternative sources of supply are available, there is no basis to assert that suspension of concessions

297 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC), para. 100.

for those goods is not practicable or effective. The United States observes that Brazil's economy is
sufficiently diversified, that it could easily turn to other sources of supply, and that the key question is
whether alternative sources of supply exist.
5.164 Brazil considers that the crucial question is not whether alternative sources of supply exist,
but whether it would be "feasible and sensible for Braz il, in practice, to force its economic agents to
switch to other suppliers". Brazil identifies a number of considerations that would be relevant to such
an assessment: "the US share in Brazil's total im ports; the price levels of alternative suppliers;
technical specifications and product differentiati on; intellectual property and intra-company trade
restrictions; and the economic, welfare and inflat ionary costs resulting from the disruption of
production and supply chains".298
5.165 We agree that the question of whether suspensi on of concessions or other obligations is
"practicable or effective" is not strictly limited to whether alternative sources of supply exist, but
involves a broader consideration of whether it would be feasible, in practice, for Brazil to require its
economic agents to switch to other operators, taking into account the ra nge of factors that may have a
bearing on this question.
5.166 Bearing this general observation in mind, we now consider Brazil's arguments to the effect
that suspension of concessions or other obligati ons on imports of medica l and food products, books,
arms and automobiles would entail "serious and un reasonable costs". In doing so, we recall that
Brazil accepts that in relation to "other" cons umer goods, the costs of suspension would not be
excessive. This represents an amount of US$182.8 million of imports of consumer goods from the
United States, in relation to which it is undisputed th at it would be practicable or effective to suspend
concessions or other obligations. The margin betw een this figure and the amount of authorized
countermeasures is small, in relative terms.
5.167 The first category of consumer goods for which Br azil considers that the costs of suspension
concessions would be "serious and unreasonable" is " medicines and other medical or safety
products." This category, according to Brazil, represents a value of US$909.5 million in annual
imports (2007).299 The United States observes that medical sterilizers exported by Brazil exceed the
imported amount from the United States in 2007 (US$4.6 million in imports, US$1.5 million in
exports). The United States further notes that both China and Korea exported about twice as much
antibiotics into Brazil as the United States in 20 08, by value, and that China and Korea both
substantially increased their share of exports to Brazil from the prior year (19.4 per cent to 33 per cent
for China and 13 per cent to 31 per cent for South Korea). Brazil responds that a "big share" of
purchases of antibiotics is made by the Ministry of Health after arduous price negotiations and
following the rules of public procurement. Theref ore, Brazil argues, finding other suppliers is not
easy, and there are sometimes no alternatives at all. Moreover, Brazil argues, increasing the costs of
health care provision will affect the welfare of the people.
5.168 We see merit in Brazil's argument with respect to the specificities of the market and
purchasing practices for certain pharmaceutical produc ts, which may make it difficult to freely switch
suppliers with respect to such products. We also note that, even within a given category of medicines,
such as "antibiotics", products are not necessarily freely interchangeable. Brazil has not provided
exact indications, however, as to what proportion of its imports of "medicines and other medical or
safety products" is subject to such purchasing practi ces or requirements, such that would allow us to

298 Brazil's responses to questions from the Arbitrator, question 140, para. 337.
299 See Exhibit Bra-754, reproduced above as Table 3.

ascertain what proportion of such imports would be a dversely affected in the event of a suspension of
concessions in this sector.300
5.169 Brazil also excludes imports in the "food" and "books" categories from the range of consumer
products that could be considered for suspension of concessions. The United States considers that
there is no reason to exclude such end use pr oducts from the range of products to which
countermeasures could be applied.
5.170 With respect to food products, where US imports represent a total value of US$88.7 million,
the United States notes for example that US$1.8 million of sugarless chewing gum is imported. The
United States also indicates that under the "food" category, US$10.071 million of pears and quinces
were imported from the United States in 2007, but imports from Argentina jumped from
US$73 million in 2007 to US$98 million in 2008. Brazil argues that more Brazilians have sufficient
income today to buy food items than before and that such social and economic development should be
preserved at all costs. However, Brazil accepts that certain items classified as food, could be
considered luxury products, though the amount and value of such products is rather limited.
5.171 Brazil therefore essentially argu es that, except for a limited range of foods that can be
considered as luxury products, food products as a whole should not be targeted because "more
Brazilians have sufficient income" than in the p ast to buy food and this should be preserved.
Naturally, if the suspension of concessions or othe r obligations were to deprive consumers of the
opportunity to purchase food, it could legitimately be concluded that such suspension would not be
"practicable or effective". However, this would only be the case if there was no opportunity to source
the same or substitutable goods from other domestic or imported sources. Brazil has not explained,
however, why this would be the case with respect to the entire category of food products.
301
5.172 With respect to books, for which it estimates the total value of imports from the United States
at US$28.9 million, Brazil observes that increased ta riffs would be highly detrimental to the policy
goal of increased access to education and the improvement of education standards. Also,
Article 150 VI (d) of the Federal Constitution exempts printed publications from import taxes, so that
it is not practicable to take countermeasure on books . We note that books, almost by definition, are
totally differentiated products, such that it may not be possible to assume that one title could easily be
substituted for another. However, we also note that many books have a primarily entertainment rather
than educational purpose.
5.173 Brazil also considers that the automotive sector (for which imports from the United States
amount to US$62.6 million annually) should not be targeted. The United States observes that it
accounts for less than 2 per cent of imports to Br azil of passenger cars in 2007-2008, and that auto
parts, similarly, range from about 6 to about 8 per cent. Brazil responds that many limitations,
including intra-company restrictions, apply to auto parts, making it virtually impossible or extremely
costly for this industry to change suppliers. With respect to passenger cars, the main characteristic of

300 We observe that even within this sub-category of consumer go ods, there are items where the
US share of imports is less than 20 per cent. If one adds up the value of these imports of medical goods, where
the US share was below 20 per cent in 2007, the total amounted to US$193.7 million. The import share is not
the only relevant consideration in evaluating the ease of sourcing alternative supplies, as domestic producers
may also be potential suppliers. However, neither party has given us information on the US share of the market
including domestic products.
301 We note that Brazil's imports of food from the United States in 2007 accounted for only 10 per cent
of its entire imports of food. Adding up the value of those food imports where the US share was below
20 per cent in 2007 gives an amount of US$33.2 million. As noted above, the impot share is not the only
relevant consideration in evaluating the ease of sourcing alternative supplies, as domestic producers may also be
potential suppliers. However, neither party has given us information on the US share of the market including
domestic products.

trade in this sector, Brazil argues, is intra-comp any trade. Countermeasures on cars of "General
Motor do Brasil", and "Ford do Brasil", for exampl e, are unlikely to be well received by these
subsidiaries and will affect their operations in Br azil. Moreover, imports of vehicles from the
United States rely on long-established networks of authorized retailers and maintenance services,
which make it virtually impossible for importers to easily switch suppliers. In addition, Brazil
observes, car sales in Brazil fell more than 40 pe r cent in December 2008, and given the present crisis
affecting the car industry worldwide, the Brazilia n Government has adopted several measures to
improve the car market conditions including reduc ing the rates of federal tax on industrialized
products. Brazil considers that it is therefore not viable to adopt measures that will distort the car
market and prevent consumers from reaping the bene fits of such incentives. Finally, Brazil notes that
it wishes to maintain the conditions of competiti on and prices prevailing in Brazilian car market. 302
We note that the US share of Brazil's imports in the automotive sector is only 2 per cent, which
suggests that only limited competitive pressure could be exerted through such imports. However, we
see merit in Brazil's arguments relating to the struct ure of trade in the automotive sector being such
that a suspension could be harmful to Brazilian subs idiaries importing the cars. We also agree that
auto parts from different manufacturers are not necessar ily substitutable for each other. In light of
these elements and in the absence of specific ar guments from the United States disputing Brazil's
description of the situation on the automotive market in Brazil, we accept Brazil's position that
suspension in this sector would entail "serious and unreasonable costs".
5.174 In the arms category (annual value of imports from the United States estimated at
US$0.6 million), the United States observes that Braz il has not indicated the extent to which these
imported goods are to be used by the police, military , or others in the public service. In response,
Brazil indicated that "a very high percentage" of imports are to be used by the police or military and
the level of imports of these products is very low as shown by Exhibit Bra-754. 303 This very general
indication, however, expressed only in terms of "a very high percentage" does not allow us to
ascertain exactly what amount of imports would fall into this category. The total annual value of
imports from the United States is in any event very small.
5.175 The United States also observes that exports of computers from China to Brazil continue to
outpace those from the United States, at 36.7 per cent in 2008 compared to 18.5 per cent. Brazil
considers, however, that computers are in the category of "capital goods", and that it would be
unreasonable and very costly to impose additi onal hurdles on the importation of information
technology products, as increased costs of informat ion technology products would have widespread
effects on the whole economic structure and would have a direct negative impact on the welfare of
Brazil's population.
304 Since the United States has not sufficiently rebutted Brazil's classification of
consumer goods, we do not consider the treatment of computers under this category.
Conclusion
5.176 Overall, in light of the above, we are not convi nced that Brazil could plausibly conclude that
suspension of concessions or other obligations woul d entail "serious and unreasonable costs" in the
entirety of these various sectors. At best, Brazil ha s plausibly explained why suspension in relation to
some imports within these categories of consumer goods might not be practicable or effective.
5.177 We are therefore not convinced that Brazil c ould plausibly determine, on the basis of the
elements presented to us in these proceedings, that it is not practicable or effective to seek to suspend
concessions or other obligations in relation to the entirety of the broad range of consumer products

302 Brazil's responses to questions from the Arbitrator, question 140, paras. 345-347.
303 Brazil's comments on US responses to questions from the Arbitrator, question 135, paras. 395-397.
304 Brazil's responses to questions from the Arbitrator, question 140, paras. 342-344.

that it proposes to exclude from consideration, in particular in the areas where the US share of imports
is relatively small.
5.178 In light of the elements presented to us as discussed above, we can accept Brazil's
determinations, on the whole, in re lation to books and the automotive sector. However, in relation to
the categories of medical products, food and arms, we are not persuaded that Brazil could plausibly
determine, on the basis of the elements that it has presented to us alone, that suspension would entail
"serious and unreasonable costs" in relation to the entire range of products in these sectors.
5.179 We find it useful, in this context, to consider the extent to which it may be expected that
Brazil would in fact have alternative sources of supply at its disposal for these remaining product
categories, as a further indication of whether Brazil could plausibly determine that it is not practicable
or effective to suspend concessions or other obligations on such imports.
5.180 We recognize that within the broad categori es of "medicines" and "food", certain products
may not be readily substitutable. In particular, we recognize that some medicines, including those
that are subject to proprietary rights, may need to be sourced from a specific supplier. We also recall
our determination above that we see merit in Braz il's argument that certain medicines, such as
antibiotics, are sourced through public procurement in such a manner that a change in supplier may be
impracticable. We also note, however, that medical products and food, as a whole and taken together,
represent the vast majority of Brazil's consumer goods imports from the United States and that they
both contain a very broad range of products. Th e category "[m]edicines and other medical or safety
products" thus include, for example, items such as "[t]ooth brushes, incl. dental-plate brushes". 305 In
these circumstances, we find that the US share of imports in these product categories as a whole may
provide a useful indicator of the likelihood of other sources of supply being available, and thus of the
level of substitutability on the market, for these product categories.
5.181 While there is no exact mathematical precision to this determination, we consider that, for the
purposes of our assessment in these proceedings, a US share of imports of 20 per cent constitutes a
reasonable threshold by which to estimate the extent to which Brazil may be able to find alternative
sources of supply for these three remaining categories of consumer goods imports. This does not take
into account the fact that the actual market shar e of US products might be smaller if domestic
competition were to be included also, but we have not been provided any figures that would have
allowed us to estimate that. In selecting this indi cative threshold, we also bear in mind our earlier
determinations in relation to other categories of imports. In particular, we recall that we have
accepted Brazil's broad assertion that all capital goods, intermediate goods and other inputs in to the
Brazilian economy should be excluded from considera tion. We have also accepted Brazil's overall
classification of consumer goods, including the excl usion of computers from this category. At the
same time, in future arbitrations of this nature , a Member arguing against the plausibility of another
Member's determination of the practicality and e ffectiveness of taking countermeasures only within
the goods sector might present a more detailed and sci entific rebuttal of the determination made by
that other Member. In applying a benchmark of 20 per cent, this Arbitrator is not intending to signal
that this is the appropriate percentage to use in this kind of analysis in all cases.
5.182 The table below (Table 4) reflects the results of this assessment. It calculates the amount of
Brazil's imports of consumer goods from the Un ited States that could be the subject of
countermeasures. It is based on data at the 8-digi t level of the tariff headings within the relevant
consumer good categories, as reflec ted in Brazil's own submission.
306 The calculations proceed as
follows. First, it excludes the value of imports of books and autos from the United States reflecting
Brazil's determination that suspension of con cessions in these sectors would entail "serious and

305 Tariff line 9603.21.00, Exhibit Bra-823.
306 Exhibit Bra-823.

unreasonable costs". Second, it includes imports of "other" consumer goods, which amount to
US$182.8 million, reflecting Brazil's acceptance that in relation to "other" consumer goods, the costs
of suspension would not be excessive. Finally, for food, pharmaceutical products and arms, it
includes only the import value of those tariff lines wher e the US share in Brazil's imports is less than
20 per cent. For illustrative purposes, the table also includes the results of the same calculation for a
10 per cent and 30 per cent threshold.
Table 4: Amount of Brazil's imports of consumer goods from the United States
that could be the subject of countermeasures
(Millions of dollars)

Threshold Applicable to Food, Medical Products and Arms
Item
10% 20% 30%
 - Food $11.0 $33.2 $48.8
 - Medical products $15.3 $193.7 $333.1
 - Arms $0.0 $0.0 $0.0

 - Books $0.0* $0.0* $0.0*
 - Autos $0.0* $0.0* $0.0*

 - Others $182.8** $182.8** $182.8**
All Consumer goods $209.1 $409.7 $564.6

 * In respect of Books and Autos, no amount is included, to take into account our determination that we
accept Brazil's position that suspension in these sectors would entail "serious and unreasonable costs".

 ** In respect of the "Others" category, the total amount of imports from the United States is included,
as Brazil accepts that suspension in these sectors would not entail "serious and unreasonable costs".

 Sources: Exhibit Bra-754 and Exhibit Bra-823.

5.183 Using the 20 per cent benchmark for the shar e of the US imports (and not taking into
consideration the availability of dom estic products that also can substitu te imports), the results of this
calculation suggest that, even if we were to assume that Brazil would choose not to suspend
concessions in any category of imports of capital go ods, intermediate goods and other inputs into its
economy, and that it would also not suspend concess ions in books or the automotive sector, it would
still have at its disposal imports of other consumer goods from the United States amounting to a total
value of at least US$409.7 million, from which to su spend concessions or other obligations. This
would therefore still leave a value of US imports of consumer goods significantly in excess of
US$294.7 million, to which suspension could be applied.
307
5.184 We also recall that, of these US$409.7 m illion of consumer goods imports from the
United States, Brazil itself concedes that the costs would not be "serious and unreasonable", up to a

307 We also note that Brazil accepts that suspension of concessions in relation to certain items that
could be considered luxury products, amounting to a total of US$28 million, would probably not lead to
excessive costs on the Brazilian economy. This amount may partially overlap with other categories, so we have
not added it to the figures considered in this section.

level of US$182.8 million. This means that Brazil would only in fact need to find an additional
amount of imports of other goods from the United States to a total value of US$112.1 million to
which to apply the suspension of concessions or othe r obligations, in order to apply the full level of
suspension that it is entitled to, on imports of goods from the United States.
5.185 We further observe that the above calculation is made on the basis of the arguments and
information provided by the parties. For the purposes of the calculation, we have accepted Brazil's
determinations in relation to capital goods, intermediate goods and other inputs into the economy, and
also in relation to various categories of consumer goods. However, our analysis does not imply that
Brazil necessarily has to retaliate in the categories in question. It would in fact remain entitled to
apply the suspension to any imports of goods that it chooses to target for suspension. Keeping in
mind that the overall amount of imports from the Un ited States to Brazil is US$18.7 billion, and that
imports of consumer goods alone represent at least US$1.273 billion in total, we are confident that, on
the basis of what was put before us in these proceedings and at current levels, Brazil has at its disposal
a sufficient level and variety of imports from the United States, to which it could apply the suspension
that it is entitled to, without incurring "serious or unreasonable costs" to its economy.
(iv) General considerations
5.186 Even in relation to the range of imports in re lation to which Brazil considers that it could in
principle be practicable to retaliate (which it estimates at US$182.8 million) 308, Brazil also argues that
such suspension would not be practicable or effective, due to its potential adverse welfare effects in an
inflationary environment and also because any meas ures contrary to Brazil's development objectives
should be avoided. Brazil also generally argues th at the trade imbalance between the parties would
render such suspension ineffective. We therefore now consider these aspects.
General economic and welfare costs
5.187 Brazil considers that "within the very limited scope of consumer goods that it has to target,
the costs and welfare-reducing effects resulting fro m the adoption of counter measures exclusively in
that sector would render such an alternative not practicable".
5.188 As we have observed in para graph 5.133 above, a consideration of the economic costs
associated with the suspension is legitimate, but it is not just any economic costs associated with the
suspension of concessions or other obligations in a given sector or agreement that would justify a
conclusion that such suspension would be "not practi cable or effective". Rather, the costs at issue
would have to be of such extent and magnitude as to render the suspension "not practicable or
effective". We have also already considered in detail Brazil's specific arguments relating to the
economic and welfare costs of the suspension of concessions and other obligations on various
categories of US imports. Even considering cons umer goods alone, our determinations above suggest
that, at current levels, Brazil has at its disposal a total value of at least US$409.7 million of imports of
goods from the United States, to which it could apply a suspension.
5.189 This confirms to us that, in principle, Brazil has at its disposal sufficient imports of goods
from the United States and elsewhere in order to allow it to suspend concessions on a total value of
US$294.7 million of imports from the United States without incurring significant costs to its
economy. We further emphasize that nothing w ould compel Brazil to apply the suspension of
concessions or other obligations "exclusively in that sector". As we have observed in paragraph 5.185
above, Brazil would be entitled to apply the suspensi on to any imports of US goods that it chooses to
target for suspension. As we also observed above, keeping in mind that the overall amount of imports
from the United States to Brazil is of US$18.7 billi on, and that imports of consumer goods alone

308 Based on Exhibit Bra-754.

represent at least US$1.273 billion, we are confident th at, on the basis of what was put before us in
these proceedings and at current levels, Brazil has at its disposal a sufficient level and variety of
imports from the United States, to which it could apply the suspension that it is entitled to, without
incurring "serious or unreasonable costs" to its economy.
Inflationary pressure

5.190 Brazil also argues that the adoption of counter measures exclusively in the small range of
consumer goods that it has to target would add to inflationary pressures at a time when increasing
prices have pointed to "a worrying inflationary scenario" and would limit access of Brazilian
consumers to these imported goods, negatively affec ting Brazil's economy and the welfare of its
population.
309
5.191 As evidence of the threat of inflation, Brazil, points out that all its price monitoring agencies
have recorded rising inflation in 2008, whichever measuring standard is used. As an example, it
claims that the annualized change in the Broad C onsumer Price Index (IPCA), which is used as the
standard inflation index by the Brazilian Central Bank, reached 5.9 per cent in 2008. 310 Brazil
contends that this surpassed the inflation target of 4.5 per cent set by the Central Bank.
5.192 As a result of these strong inflationary pressures, it claims that the Brazilian Central Bank has
been compelled to consistently raise basic interest rates since the beginning of 2008. After four
consecutive increases, yearly basi c interest rates reached 13.75 per cent in September 2008, making
Brazil one of the countries with the highest real interest rates in the world.311
5.193 The United States does not dispute that there are co sts, including the risk of inflation, from
imposing countermeasures on merchandise goods. But it argues that countermeasures are by
definition counter to WTO disciplines. Furthermore, given the size and diversity of Brazil's economy,
and the availability of goods from other sources or from Brazil itself, it claims that Brazil has many
tools at its disposal to apply countermeasures within the goods sector.312
5.194 Brazil has provided sufficient evidence to show that the threat of inflation seriously concerns
Brazilian policymakers. The United States has not dis puted the magnitude of the inflation rate in the
country nor of the successive steps taken by the Ce ntral Bank to increase the interest rate. However,
we believe that while the risk of price incr eases from applying countermeasures on merchandise
goods exist, it does not rise to a level where Br azil has no room to apply countermeasures on
merchandise goods.
5.195 The size of the countermeasures, at current le vels, is not large relative to the value of
consumer goods imports from the United States. We also note that the inflation index is based on
domestic consumption, which is made up predominantly of dom estically-produced goods. This
suggests that countermeasures on merchandise goods imports may only have a limited impact on
inflation given the composition of the basket of good s that enter into the calculation of the inflation
index.
Development objectives, imbalance in trade relations and political influence
5.196 Brazil further argues that any measures that are contrary to the objectives of a developing
country to ensure steady and sustainable developmen t will necessarily be costly and impracticable by

312 US responses to questions from the Arbitrators, question 68, para. 206.

definition, and that the significantly unbalanced na ture of the trade relations between Brazil and the
United States, and the considerable economic di fferences between the tw o countries, render the
suspension of concessions and other obligations un der trade in goods alone neither practicable nor
effective as a response to the US failure to comply with its obligations.
5.197 Finally, Brazil also argues that suspension in the area of trade in goods alone may not have
sufficient political influence to press for the United States' withdrawal of the billions of dollars it pays
annually in subsidies or to remove their adverse effe cts, and that, therefore, they are not "effective"
for the purpose of encouraging compliance.
5.198 We agree that a complaining Member seeking to suspend concessions or other obligations
should not be required to act against its own intere sts in applying such suspension. However, our
findings above suggest to us that Brazil has at its disposal a sufficient range of imports of goods,
including consumer goods, from the United States, so as to enable it to suspend concessions in the
area of trade in goods alone, without causing itself such economic harm as to render such suspension
"not practicable or effective". In the absence of other specific detailed arguments as to why such
suspension would otherwise adversely affect Brazil's interests, we conclude that, on the basis of the
elements presented to us and at current levels, Br azil could not conclude that suspension in trade in
goods alone would not be "practicable or effec tive". Further, Brazil's insistence that its
countermeasures must have "sufficient political infl uence" from the perspective of the United States
to press for the withdrawal of the subsidies and the removal of their adverse effects is misplaced.
"Effectiveness" relates to the ability of a Member to have recourse to the authorized remedy, such that
it can serve to induce compliance. However, the pr eference of a Member for a particular type of
countermeasure, because it would constitute a more powerful form of persuasion in a political sense,
is not a relevant consideration for an arbitrator in these proceedings.
5.199 Our conclusion is not modified by the "signifi cantly unbalanced nature of the trade relations
between Brazil and the United States". As we have observed above, the elements presented to us do
not suggest that Brazil's dependence on US imports is such that it could not find at least
US$239.6 million worth of imports of goods from the United States in relation to which it would have
sufficient alternative domestic or imported sour ces of supply at its disposal, so as to suspend
concessions effectively. In addition, the fact that exports to Brazil only represent a very small
proportion of US exports generally does not, in itsel f, necessarily imply that countermeasures applied
to some of these goods would not be "effective" for the purposes of inducing compliance. It would be
up to Brazil to identify those US exports in relation to which it would apply the suspension, and to do
this in a manner that would make such measures as effective as possible within the limits of the
permissible level of countermeasures. In light of th e fact that the total value of imports to Brazil from
the United States, at current levels, significantly ex ceeds the level of permissible countermeasures, we
see no reason to assume that this would not provide a sufficient margin or discretion for Brazil to
target accordingly the specific products to which suspension would be applied.
(v) Overall conclusion
5.200 In light of all the above, we conclude that, on th e basis of the elements presented to us and at
current levels, Brazil could not plausibly have reac hed the conclusion that it is not practicable or
effective to suspend concessions or other obligations in trade in goods alone, even if it had considered
the "necessary facts", i.e. taking into account a level of permissible countermeasures not exceeding
US$294.7 million.
5.201 We note, however, that the level of counterme asures that was determined to be permissible
under the Decision contained in WT/DS267/ARB/1 is variable. We have ba sed our determinations
above on the level of those countermeasures as calcu lated on the basis of FY 2006 and on the basis of
Brazil's imports of consumer goods in the year 200 7. Given the volume and composition of Brazil's

imports of consumer goods in the year 2007, we de termined that there was at least US$409.7 million
worth of Brazil's imports of consumer goods from the United States that could be the subject of
countermeasures ("threshold"). However, in the ev ent that the level of countermeasures that Brazil
would be entitled to in a given year 313 should increase to a level that would exceed this threshold,
updated for the same year in a manner described in Section V.C.6 below to account for the change in
Brazil's total imports from the United States, then, we find that it would be concluded, on the basis of
the elements presented to us, that the suspension of concessions or obligations applied to trade in
goods alone would not be "practicable or effective" within the meaning of Article 22.3(c) of the DSU.
5.202 In light of this determination, we must cons ider further Brazil's determination that "the
circumstances are serious enough" within the mean ing of Article 22.3 and its consideration of the
elements of subparagraph (d) of Article 22.3.
4. Whether "the circumstances are serious enough"
(a) Main arguments of the parties
5.203 Brazil says that, with respect to prohibited s ubsidies, the granting or maintenance of such
subsidies constitutes in itself, at the very least, a strong indication that "circumstances are serious
enough". In addition, the seriousness of the breach in the present case is compounded by the specific
characteristics of the subsidy at issue. Th e GSM 102 programme and the guarantees granted
thereunder constitute recurrent export subsidies, granted year after year in connection with billions of
dollars in agricultural exports in violation of US WTO obligations. Brazil notes that these subsidies
have been granted since 1981 and have been dist orting international markets on a continuous and
cumulative basis for the whole period covered by this dispute (from 1999 up to 2009). The statutory
framework of the programme ensures that it is of fered continuously and requires that billions of
dollars in guarantees be made available every year. Brazil argues that the subsidies are particularly
pernicious in light of their stated objective and pe rformance measure, to open high risk markets to US
commodities and establish the dominance of US exporters by means of prohibited export subsidies, to
the detriment of competing exporters. In a single day, on 6 October 2008, the USDA received
applications for ECGs worth US$3.5 billion. Acco rding to a director of CoBank, this enormous
amount of applications is a result of "the credit markets seizing up".
314
5.204 With respect to the actionable subsidies, Br azil considers that the sheer amount of the
subsidies granted under the ML and CCP progra mmes, which have been found to cause adverse
effects in the form of significant price suppression in the world market; the repeated refusal of the
United States to comply, since 2005, with the ruli ngs and recommendations adopted by the DSB; and
the concrete expectation, confirme d in the 2008 Farm Bill, that the same design and structure for the
granting of the same subsidies will be maintain ed in the future also demonstrate that the
circumstances are serious enough to justify the types of countermeasures proposed by Brazil.315
5.205 Brazil says that these subsidies provide a pern icious predictability for US producers and
exporters – who may take for granted that they will enjoy an artificial competitive advantage vis-à-vis
other competitors every year – and for producers of the other Members – who have their production
and investment decisions negatively affected in the long term by the chilling effect caused by the
permanent availability of the US subsidies. Braz il argues that these subsidies constitute a structural
element of the world markets for the wide range of products they support, and that the current credit

313 It is understood that this amount is to be calcu lated taking into account the entirety of the level of
countermeasures that Brazil is entitled to at that point in time, arising both from this Decision and from the
Decision by the Arbitrator contained in WT/DS267/ARB/1.

crisis only heightens their distorting effects. Producers and exporters all over the world, who are
struggling to find credit for their operations, have to compete with US producers and exporters that
are cushioned from the effects of the crisis by the unlawful subsidies, as the US$5.5 billion worth of
ECGs under the GSM 102 available in FY 2008 strikingly reminds us. In Brazil's view, these features
render the circumstances certainly no less than serious enough.316
5.206 In Brazil's view, the fact that the United St ates has revived in the 2008 Farm Bill, under a
slightly different disguise, the only subsidy it had eliminated as part of its implementation of the
recommendations and rulings of the DSB in the pr esent case – the "Step 2" programme – constitutes
additional indication that the circumstances are serious enough.317
5.207 The United States argues that "'circumstances ar e serious enough' may refer to the potential
consequences for the Member of suspending concessi ons in the same sector and agreement, or the
potential consequences of forgoing the right to suspend concessions". 318 In the circumstances of this
dispute, where Brazil's proposal for countermeasur es does not substantiate any adverse effect on
Brazil from the measure at issue, it is not clear, in the United States' view, what consequences these
would be or whether they would be serious at all. 319 In the United States' view, Brazil's agricultural
sector, and its cotton producers in particular, have been effective competitors worldwide even with the
existence of GSM 102, marketing loan payments and countercyclical payments and without any
countermeasures, and Brazil's cotton exports have reached record levels in recent years.320
5.208 Brazil responds that the United States' erroneous legal analysis first equates the meaning of
"circumstances" with that of "potential conseque nces" and then moves on to argue that "potential
consequences" means trade damage to Brazil. In Brazil's view, however, there is no legal basis to
argue that in selecting the type of countermeasures Brazil must show "any adverse effect on Brazil
from the measures at issue" to enab le an assessment of whether circ umstances are serious enough. In
any event, Brazil argues, as regards actionable subs idies, the existence of adverse effects of the
measures at issue has already been determined by two panels and the Appellate Body. Brazil notes
that, with respect to the GSM 102 subsidies, the tw o panels and the Appellate Body found that they
constitute prohibited subsidies – arguably the most egregious violation of WTO disciplines, as can be
inferred from the special rules applicable to them – and that they should have been withdrawn without
delay. Hence, Brazil argues, even under the US flawed and convoluted logic, circumstances would be
serious enough because the consequences of maintaini ng the subsidies in place could not be anything
less than serious, as is made clear by the findings, rulings and recommendations of the panels and the
Appellate Body in this dispute.
321
5.209 Brazil considers that Article 22.3(c) of the DSU can encompass the impact on Brazil of
applying countermeasures under trade in goods alone, as well as broader circumstances which
surround Brazil's consideration of retaliatory action ag ainst the United States' failure to comply with
the DSB's recommendations and rulings in this disp ute, such as the demonstrated lack of willingness
of the United States to comply.322
5.210 In the view of the United States, the circum stances surrounding potential countermeasures in
services and intellectual property are also a factor . Brazil has not detailed how it might impose such
countermeasures; and in fact it is not obligated to do so at this time. Effectively, the United States

318 US responses to questions from the Arbitrator, question 136, para. 174.
319 US responses to questions from the Arbitrator, question 136, para. 174.
320 US responses to questions from the Arbitrator, question 136, para. 175.
321 Brazil's comments on US responses to questions from the Arbitrator, question 136, paras. 401-402.
322 Brazil's comments on US responses to questions from the Arbitrator, question 136, para. 403.

argues, if Brazil is authorized to impose c ountermeasures under these other Agreements it would
cause an additional layer of uncertainty fo r these sectors, with potentially devastating
consequences.323
5.211 Brazil welcomes the United States' acknowledgement that Brazil "is not obligated" to detail
how it might impose countermeasures with respect to services and intellectual property rights. 324
Brazil also notes that the United States, by refe rring to "potentially devastating consequences", 325
seems to agree with Brazil's view that count ermeasures under the TRIPS Agreement and the GATS
would be much more effective within the meaning of Article 22.3 of the DSU than countermeasures
under trade in goods alone.326
(b) Analysis by the Arbitrator
5.212 Under Article 22.3(c) of the DSU, in order for suspension of obligations to be permissible, the
complaining party is required to have determined that "the circumstances are serious enough", in
addition to having determined that suspension unde r the same agreement is "not practicable or
effective".
5.213 We recall our determination in paragraph 5.84 above that an assessment of whether "the
circumstances are serious enough" is necessarily a case-by-case assessment depending on the specific
circumstances of the case.
5.214 The United States argues that "'circumstances ar e serious enough' may refer to the potential
consequences for the Member of suspending concessi ons in the same sector and agreement, or the
potential consequences of forgoing the right to suspend concessions". 327 In Brazil's view,
Article 22.3(c) of the DSU can encompass the impact on Brazil of applying countermeasures under
trade in goods alone, as well as broader circum stances which surround Brazil's consideration of
retaliatory action against the United States' failure to comply with the DSB's recommendations and
rulings in this dispute, such as the demonstrated lack of willingness of the United States to comply.
5.215 As we have determined in paragraph 5.83 a bove, an assessment of whether circumstances are
"serious enough" would legitimately include a c onsideration of the elements identified in
subparagraph (d) of Article 22.3, namely the trade in the sector in which a violation has been found
and its importance to the complaining party (in th is case, trade in goods, including trade in cotton and
other products affected by the measures at issue), as well as "the broader economic elements related to
the nullification or impairment and the broader ec onomic consequences of the suspension". At the
same time, the assessment is not limited to these factors, and may include other elements, depending
on the specific "circumstances" of the case. We ther efore agree with Brazil that a determination of
whether "the circumstances are serious enough" may in principle encompass both the impact on Brazil
of applying countermeasures under trade in goods (i.e . "the broader economic consequences of the
suspension") and "broader circumst ances which surround Brazil's consid eration of retaliatory action"
against the US failure to comply with the DSB's recommendations and rulings.
5.216 Brazil considers that a number of elements rende r the circumstances "serious enough" in this
case, including the granting or maintenance by the United States of the prohibited subsidies, the
fourfold increase in the transactions supported by the GSM 102 programme in 2009; the continued
granting of actionable subsidies and the enactment of 2008 Farm Bill. In Brazil's view, these facts

323 US responses to questions from the Arbitrators, question 136, para. 176.
324 US response to questions from the Arbitrators, question 136, para. 176.
325 US response to questions from the Arbitrators, question 136, para. 176.
326 Brazil's comments on US responses to questions from the Arbitrator, question 136, para. 399.
327 US responses to questions from the Arbitrator, question 136, para. 174.

show that the United States has no intention of complying with the DSB recommendations and
rulings. Brazil further argues that the design and struct ure of the subsidies at issue is such as to create
"an artificial competitive advantage for US operators vis-à-vis other competitors every year" to the
detriment of producers of other Members "who ha ve their production and investment decisions
negatively affected in the long term by the chilling effect caused by the permanent availability of the
US subsidies". Brazil argues that these subsidies constitute "a structural element of the world markets
for the wide range of products they support", and that the current credit crisis only heightens their
distorting effects. Brazil further considers that th e conditions that render the circumstances "serious
enough" also include the potential effects on Braz il if countermeasures are confined to the goods
sector, which will lead to disproportionate costs to the Brazilian economy and to the welfare of its
population.
328
5.217 In our view, Brazil's determination that the circumstances are serious enough within the
meaning of Article 22.3(c) of the DSU is reasonable in light of the circumstances of the case.
5.218 In this regard, we recall some salient aspects of the findings of the original and compliance
panels and of the Appellate Body in relation to the subsidies concerned:
"As we have just indicated, several of the United States subsidies are directly linked
to world prices for upland cotton, thereby numbing the response of United States
producers to production adjustment decisions when prices are low . We have readily
available information on the record showing us that the price-contingent subsidies in
question involve very large amounts of Un ited States government money benefiting
United States upland cotton. In our view, the collective operation of these subsidies
was akin to a very large, counter cyclical, deficiency payment laced with additional
enhancements. We believe that the structure, design and operation, particularly of the
price-contingent subsidies, constitutes st rong evidence supporting a finding of price
suppression."329 (emphasis added)
"Given that in most recent years actual mark et prices have been lower than expected
market prices at the time of planting and th at the adjusted world price has been below
the marketing loan rate, the Panel considers that it is reasonable to conclude that the
fact that US cotton producers know that th ey will receive marketing loan payments
whenever the adjusted world price is below the marketing loan rate continues to be an
important factor affecting the level of acreag e planted to cotton (and thus the level of
production), even when, as in MY 2006, the expected market price for upland cotton
at the time of planting is higher than the ma rketing loan rate. The Panel also notes in
this regard that accordi ng to FAPRI and USDA data, the projected amount of
marketing loan payments in MY 2006 is very significant. "330 (emphasis added,
footnote omitted)
"First, we recall that the original panel noted that the CCC has access to funds from
the US Treasury and benefits from the fu ll faith and credit of the US Government.
This is still the case, and were the GSM 102 programme to incur massive losses, it
would have access to additional funds from the US Treasury ."331 (emphasis added,
footnote omitted)

328 Brazil's comments on US responses to questions from the Arbitrator, question 136, paras. 404-405.
330 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 10.81.
331 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 14.110.

"The Panel considers, in light of the appr oach taken by the pa nel and Appellate Body
in the original proceeding, that in determining whether the magnitude of the subsidies
at issue in this proceeding supports a findi ng that the effect of these subsidies is
significant price suppression, it is necessary to examine this factor in relation to other
factors. Thus, the relevance of the magnitude of the subsidies in this connection must
also be assessed in light of our analysis above of the structure, design and operation
of the subsidies. We recall, in this re spect, our conclusion regarding the important
revenue-stabilizing effect of these mandatory, price-contingent subsidies. In the latter
regard, the evidence before us indicates th at marketing loan and counter-cyclical
payments play a significant role in stabilizing the revenues of US upland cotton
producers. The share of marketing loan payments and counter-cyclical payments in
total revenues of US upland cotton producers was 35 per cent in MY 2004 and 27 per
cent in MY 2005."332 (emphasis added, footnotes omitted)
"Table 6B shows market revenue from cotton lint, total costs (less ginning costs) and
the difference between market revenue a nd total costs on a per acre basis in MY
2002-2006. Over the period examined, US cotton producers' market revenue
exceeded total costs of production twice, in MY 2003, when cotton prices were at
their highest since MY 1997, and also in the year immediately following that. In
other marketing years, total costs of pr oduction exceeded market revenue, at times by
very huge margins. In MY 2002, for example, total costs exceeded market revenue
by 84 per cent. Data provided by Brazil for MY 2006 suggests that total costs will
continue to exceed market revenue. The gap is expected to be about 56.25 dollar per
acre, which would be equivalent to about 14.7 percent of US cotton producers' market
revenue in that marketing year. Cumulated over the five marketing years 2002-2006,
US cotton farmers' costs of production have exceeded market revenues by an average
of 227.49 dollars per acre."
333 (emphases added)
"In conclusion, the Panel finds that there exists a significant gap between the total
costs of production of US upland cotton producers and their market revenue. The
Panel considers that this gap between costs and revenue, when analyzed in
conjunction with the magnitude of the mark eting loan and counter-cyclical subsidies
and their importance as a share of the revenue of US cotton producers, supports the
proposition that the marketing loan and counter-cyclical payments are an important
factor affecting the economic viability of US upland cotton farming . The Panel
therefore also considers that without these subsidies the level of US upland cotton
acreage and production would be considerably lower."
334 (emphasis added, footnotes
omitted)
"We do not see a contradiction between the fact that United States shares of world
production and exports of upland cotton have remained stable at consistently high
levels between MY 2002 a nd MY 2007 and the Panel's findings of substantial
proportionate influence of the United States in the world market for upland cotton.
This is because stable high United States shares of world production and exports of
upland cotton could be seen as evidence of the fact that the United States continued to
exert a substantial proportionate influence in the period examined by the Panel, just
as it had during the period examined by the original panel. We also observe that the
Panel specifically noted that this element supported its finding of significant price
suppression when "analysed in the light of the totality of the evidence". Therefore, we

332 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 10.111.
333 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 10.190.
334 Panel Report, US – Upland Cotton (Article 21.5 – Brazil), para. 10.196.

do not consider that the Panel erred in finding that the United States exerts a
substantial proportionate influence on the world market for upland cotton ."335
(emphasis added, footnotes omitted)
5.219 We are not persuaded that, as Brazil argues, the very granting of the subsidies at issue would
be sufficient to conclude that the circumstances are "s erious enough". It is inherent in the situation at
hand that a violation has taken place and that comp liance has not been achieved in a timely manner.
This circumstance alone, which is common to all ca ses in which suspension of obligations is sought
under the DSU, would not in our view justify the conclusion that the circumstances are "serious
enough". However, we agree with Brazil that the specific design and structur e of the subsidies at
issue, as they have been maintained over a signifi cant period of time, is such as to have created an
artificial and persisting competitive advantage for US producers over all other operators, and that this
has a significant trade-distorting impact, not just on the US domestic market, but on the world market
in these products.
5.220 The United States responds that Brazil has in fact remained very competitive in the
agricultural sector, including cotton, even w ith the US subsidies in place and without
countermeasures. We are not persuaded, however, th at this consideration alters the essence of the
situation. The fact that Brazil may have remain ed competitive in spite of the trade-distorting
conditions arising from the granting and maintenanc e of the subsidies at issue does not in essence
modify the fact that these subsidies have a trade- distorting impact on the world market for cotton and
the other products affected by them. Given the st ructure and design of the programmes at issue, and
in light of the time period over which they have been in place, these distortions are virtually, as Brazil
puts it, a "structural" element of the world market for the affected products, including cotton, as long
as they remain available. Our earlier determin ations in relation to the level of permissible
countermeasures suggest that these trade-distorting e ffects are not insignificant, including on Brazil.
Furthermore, these impacts are felt not only on the US market but on other markets for the products at
issue. In addition, as Brazil observes, in times of credit crisis, this trade-distorting impact will be
further amplified, at least in so far as the GSM 102 programme is concerned. These considerations, in
our view, support the conclusion that "the circumstances are serious enough".
5.221 In addition, Brazil observes that the dispropor tionate adverse impact of the suspension of
concessions or other obligations on its economy, if a pplied only to trade in goods, also contributes to
the "circumstances" being "serious enough". We agree that this may also be a relevant consideration
in such determination.
336 We have considered extensively Brazil's arguments concerning the potential
adverse impact on its economy of a suspension applie d to trade in goods alone, in reviewing whether
it is "practicable or effective" for Brazil to seek su spension in trade in goods alone. In this context,
we concluded that, to the extent that the level of countermeasures that Brazil would be entitled to take
would exceed a certain threshold, such suspension would be "not practicable or effective". These
considerations also inform the determination of whether "the ci rcumstances" would be "serious
enough" to justify cross-agreement suspension. If the threshold were reached, such that suspension of
concessions or other obligations under the same sect or or agreement would not be practicable or
effective for Brazil, this would also directly contri bute to the circumstances being "serious enough" to
justify recourse to suspension under another agreement.

335 Appellate Body Report, US – Upland Cotton (Article 21.5 – Brazil), para. 446.
336 We note in this respect the observation of the arbitrator on US – Gambling that the circumstances
that justified a determination that "the circumstances ar e serious enough" in that case could be "directly related
to the practicability and effectiveness of suspension under the agreement in which the violation was found (in
that case, the GATS). See Decision by the Arbitrator, US – Gambling (Article 22.6 – US), para. 4.115.

5.222 In light of all the above, and on the basis of the elements pr esented to us, we find that Brazil
could reasonably determine that "the circumstan ces are serious enough" within the meaning of
Article 22.3(c) of the DSU.
5.223 In light of our determinations in the previ ous section above, we note that the two conditions
foreseen in Article 22.3(c), i.e. a determination th at "it is not practicable or effective" to seek
suspension under the same agreement and a determination that "the circumstances are serious enough"
would only be met simultaneously in this case when ever the threshold identified in paragraph 5.201
above would be exceeded.
5.224 The United States has suggested that the potential implications of a suspension of obligations
under the TRIPS Agreement is also a consideration to be taken into account, in light of the "layer of
uncertainty" that may arise from such suspensi on in the sectors concerned and the "potentially
devastating consequences" of such suspension. We recognize that there may be legitimate
considerations to which the complaining Member should be attentive in applying any suspension of
obligations under the TRIPS Agreement. 337 We are not persuaded, however, that this is a relevant
consideration for us to take into account in revi ewing the question of whether the "circumstances are
serious enough" to justify suspension of obligations u nder that agreement. We first note that there is
no general hierarchy in the DSU as between susp ension in various sectors or under various WTO
Agreements, such that we should assume that a suspension of obligations under the TRIPS Agreement
would be inherently more detrimental to the respond ing Member than another. The only hierarchy to
be found in the DSU in this respect is relative to the sector and agreement in which the violation has
been found (thus, in a case involving a TRIPS viola tion, same-sector suspension would have to be
sought first under the TRIPS Agreement). We also not e that the level of suspension authorized will be
the same whatever sector or agreement it may apply to. We further note that, as the United States
itself has observed in these proceedings, Brazil is not ob ligated at this time to explain in detail how it
might impose such countermeasures. This question is , in our view, beyond the scope of this enquiry,
and it is not for us to speculate how a suspensi on of certain obligations under the TRIPS Agreement
might be applied by Brazil or to assume that it wo uld have more detrimental consequences than a
suspension in another sector or agreement. In fact the United States itself does not explain what
"devastating consequences" it is referring to.
5.225 We make no determination in relation to th e United States' willingness or unwillingness to
comply with the recommendations and rulings at issue. We assume that the United States intends in
good faith to promptly comply with these recommendati ons and rulings. We have also not based our
findings on Brazil's arguments relating to the adopti on of the 2008 Farm Bill, as such, in relation to
which we have made no specific determinations.
5. Brazil's consideration of the elements under subparagraph (d) of Article 22.3
5.226 Subparagraph (d) of Article 22.3 of the DSU requires the complaining party to "take into
account", in applying the principles of subparagraphs (a) to (c), two elements:
"(i) the trade in the sector or under the ag reement under which the panel or Appellate
Body has found a violation or other nullifi cation or impairment , and the importance
of that trade to [the complaining] party
(ii) the broader economic elem ents related to the nullification or impairment and the
broader economic consequences of the suspension of concessions or other
obligations".

337 See para. 5.233.

5.227 As we have determined in Section V.C.1(c) above, in the circumstan ces of this case, this
means that what is to be taken into account is "the trade" in all goods under the trade in goods
agreement, that is, trade in goods generally, and its importance to Brazil, as well as "the broader
economic elements" relating to the nullification or impairment arising for Brazil from the subsidies at
issue and the broader economic consequences of th e suspension, including a consideration of the
economic consequences of the suspension.
5.228 As we have discussed extensively in the pr eceding sections above, Brazil's determinations
that it was not practicable or effective for it to seek to suspend obligations in trade in goods alone and
that the circumstances are serious enough, were based importantly on a consideration of the
importance to its economy of its trade in goods with the United States, and of the potential
consequences of the proposed suspension, which it considers would be disproportionately detrimental
to its economy if applied solely to trade in goods. In addition, Brazil has also taken into account the
economic impact of the measures on the market of the products affected by the measures at issue.
5.229 In light of these elements, we are satisfied th at Brazil has taken into account the relevant
elements under subparagraph (d) of Article 22.3 in accordance with the requirements of that
provision.
6. Conclusion
5.230 In light of our determinations above, we find that in the event that the level of
countermeasures that Brazil would be entitled to in a given year 338 should increase to a level that
would exceed the threshold identified in paragraph 5.201 above, updated for the same year in a
manner described in the next paragraph to account for the change in Brazil's total imports from the
United States, then Brazil would be entitled to suspend certain obligations under the
TRIPS Agreement and/or the GATS as identified in its request pursuant to Article 7.9 of the
SCM Agreement and Article 22.2 of the DSU 339, with respect to any amount of permissible

338 It is understood that this amount is to be calcu lated taking into account the entirety of the level of
countermeasures that Brazil is entitled to at that point in time, arising both from this Decision and from the
Decision by the Arbitrator contained in WT/DS267/ARB/1.
339 See WT/DS267/26. Brazil identifies the following obligations in its request:

With respect to the TRIPS Agreement:

"The following sections of Part II of the Ag reement on Trade-Related Aspects of Intellectual
Property Rights:

 Section 1: Copyright and related rights
 Section 2: Trademarks
 Section 4: Industrial designs
 Section 5: Patents
 Section 7: Protection of undisclosed information."

With respect to the GATS:

"horizontal and/or sectoral concessions and obligations for all sectors contained in Brazil's
Schedule of Specific Commitments (GATS/SC/13) under the General Agreement on Trade in
Services. Those sectors are:

 1. Business Services
 2. Communication Services
 3. Construction and Related Engineering Services
 4. Distribution Services

countermeasures applied in excess of that figure. In any subsequent year where the level of
countermeasures that Brazil would be entitled to falls below this threshold, updated to account for the
change in Brazil's total imports from the Unite d States, Brazil would be entitled to suspend
concessions or other obligations only in trade in goods.
5.231 As stated in the previous paragraph, in or der to determine whether suspension of certain
obligations under the TRIPS Agreement or the GATS is permissible in a given year, the threshold
should be updated to account for the change in Brazil's total imports from the United States. For year
2008, for example, the updated amount of the threshold would be equal to US$409.7 million
multiplied by (1 + g 2008), where g 2008 is the percentage change in the value of Brazil's total imports
from the United States between the years 2007 and 2008, or in the absence of the trade data for years
2007 and 2008, the percentage change in the value of Brazil's total imports from the United States
based on the last available annual trade statistics. 340 In general, the following difference equation and
initial condition shall determine the updated amount of the threshold:
 (2) )1(* 11 ++ += ttt gTT , T 2007 = US$409.7 million

where:

Tt+1=threshold value in year t+1;

Tt =threshold value in year t;

g
t+1 = percentage change in the value of Brazil's to tal imports from the United States between the
years t and t+1, or in the absence of the trade data for years t and t + 1, the percentage change in the
value of Brazil's total imports from the United States based on the last available annual trade
statistics.

5.232 The "same" year shall mean that the amount of countermeasures, calculated based on the
fixed amount awarded under this Decision and the va riable amount arising from the Decision by the
Arbitrator contained in WT/DS267/ARB/1, shall be compared to the value of the threshold in year
2008 (1 January 2008 to 31 December 2008).
5.233 In light of our determination that Brazil, ma y, in application of the above, be entitled to
suspend certain obligations under the TRIPS Agreement and the GATS, we note the remarks made by
the arbitrators on EC – Bananas III (Ecuador) (Article 22.6 – EC), with respect to the suspension of
obligations under the TRIPS Agreement
341, which were also noted by the arbitrator on US – Gambling
(Article 22.6 – US) .342 We consider these remarks to be releva nt also to this case, in that the same
considerations will be pertinent to the manner in which Brazil might implement a suspension of its
obligations under the TRIPS Agreement in this case.
5.234 In light of the fact that the form of permissible countermeasures may vary over time, we urge
Brazil, if and when it submits a revised request for authorization to suspend concessions or other

 7. Financial Services
 9. Tourism and Travel Related Services
 11. Transport Services"

340 Brazil shall use UN Comtrade data for the purpose of calculating the percentage change of its total
imports from the United States.
341 Decision by the Arbitrators, EC – Bananas III (Ecuador) (Article 22.6 – EC) , Section V,
paras. 139-165.
342 Decision by the Arbitrator, US – Gambling (Article 22.6 – US), para. 5.11.

obligations to the DSB in accordan ce with this Decision, to be as specific as possible about the terms
of the measures to be adopted, so as to promote transparency and predictability in this process.
5.235 We also take note of the undertaking by Br azil in its request under Article 4.10 of the
SCM Agreement and Article 22.2 of the DSU, that:
"Every year, Brazil will notify to the DSB th e amount and the form of the suspension
of concessions and other obligations in the light of data concerning the operation of
the identified programmes in the most recent concluded marketing and fiscal year, as
applicable."343
5.236 We suggest that Brazil also similarly notify the amount and form of the suspension of
concessions and other obligations arising from this Decision, with respect to its request under
Article 7.10 of the SCM Agreement and Article 22.2 of the DSU.
5.237 Finally, like previous arbitrators 344, we also note that the United States may have recourse to
the appropriate dispute settlement procedures in the event that it considers that the level of
concessions or other obligations suspended by Br azil exceeds the level of countermeasures we have
determined to be "commensurate with the degree and nature of the advers e effects determined to
exist" in this case.
VI. CONCLUSIONS AND AWARD
6.1 For the reasons set out above, the Arbitrator determines that the annual level of
countermeasures "commensurate with the degree and nature of the adverse effects determined to
exist" in relation to the marketing loan and countercyclical payments amounts to US$147.3 million.
6.2 We have also determined that Brazil has not followed the principles and procedures of
Article 22.3 of the DSU in determining that it is not practicable or effective to suspend concessions or
other obligations in trade in goods, and that, at cu rrent levels, it could not have plausibly determined
that it is not practicable or effective to suspend c oncessions or other obligations in trade in all goods
under the Agreements contained in Annex 1A of the WTO Agreement. We have also found,
however, that, in the event that the level of countermeasures that Brazil would be entitled to in a given
year345 should increase to a level that would exceed a threshold, as identified in paragraph 5.201
above, updated for the same year in a manner described in paragraphs 5.231-5.232 to account for the
change in Brazil's total imports from the United Stat es, then, it could be reasonably concluded that it
is not practicable or effective for Brazil to susp end concessions or other obligations on trade in goods
alone. We have also determined that the ci rcumstances are serious enough and that Brazil has
complied with the requirements of subparagraph (d) of Article 22.3.
6.3 In light of these findings, we find that Brazil w ould be entitled to suspend certain obligations
under the TRIPS Agreement and/or the GATS, w ith respect to any amount of permissible
countermeasures applied in excess of the threshold identified in paragraph 5.201 above, updated for
the same year in a manner described in paragraphs 5.231-5.232 to account for the change in Brazil's
total imports from the United States. In any subse quent year where the level of countermeasures that
Brazil would be entitled to falls below this threshol d, updated to account for the change in Brazil's

343 WT/DS267/21.
344 Decisions by the Arbitrators, EC – Hormones (US) (Article 22.6 – EC), para. 82; US – 1916 Act
(EC) (Article 22.6 – US ), para. 9.2; US – Offset Act (Byrd Amendment) (EC) (Article 22.6 – US), para. 4.27;
and US – Gambling (Article 22.6 – US), para. 5.12.
345 It is understood that this amount is to be calcu lated taking into account the entirety of the level of
countermeasures that Brazil is entitled to at that point in time, arising both from this Decision and from the
Decision contained in WT/DS267/ARB/1.

total imports from the United States, Brazil woul d be entitled to suspend concessions or other
obligations only in trade in goods.
6.4 We have also found that, in determining whether the level of countermeasures that Brazil
would be entitled to has increased to an amount th at would allow it to suspend certain obligations
under the TRIPS Agreement and/or the GATS, the data in Table 4 shall be updated to reflect the
amount of imports in the same year, as described in paragraph 5.232 above.
6.5 Accordingly, the Arbitrator determines that:
(a) Brazil may request authorization from th e DSB to suspend concessions or other
obligations under the Agreements on trade in goods in Annex 1A, at a level not to
exceed the value of US$147.3 million annually.
(b) In the event that the total level of counter measures that Brazil would be entitled to in
a given year346 should increase to a level that would exceed the threshold described in
paragraph 5.201, updated to account for the change in Brazil's total imports from the
United States, then, Brazil would also be entitled to seek to suspend certain
obligations under the TRIPS Agreement and/or the GATS as identified in
footnote 339, with respect to any amount of permissible countermeasures applied in
excess of that figure.

Decision contained in WT/DS267/ARB/1.

ANNEX 1

Root Mean Square Error Results and Data

1. Stata log file

----------------------------------------------------------------------------------------------
log: F:\Article 22.6\Final Calculations\Actionable\RMSE.smcl
log type: smcl
opened on: 15 May 2009, 16:18:14

. use "F:\Article 22.6\Final Calculations\Actionable\RMSE.dta", clear

. regress Farmprice LagFarmprice if Year>=1975&Year<=2005

 Source | SS df MS Number of obs = 31
-------------+------------------------------ F( 1, 29) = 6.64
 Model | 557.674474 1 557.674474 Prob > F = 0.0153
 Residual | 2434.25281 29 83.939752 R-squared = 0.1864
-------------+------------------------------ Adj R-squared = 0.1583
 Total | 2991.92728 30 99.7309094 Root MSE = 9.1619

------------------------------------------------------------------------------
 Farmprice | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
LagFarmprice | .4230483 .1641283 2.58 0.015 .0873683 .7587284
 _cons | 33.35276 9.584455 3.48 0.002 13.75035 52.95517
------------------------------------------------------------------------------

. regress Farmprice FebFutures if Year>=1975&Year<=2005

 Source | SS df MS Number of obs = 31
-------------+------------------------------ F( 1, 29) = 9.55
 Model | 741.187194 1 741.187194 Prob > F = 0.0044
 Residual | 2250.74009 29 77.6117272 R-squared = 0.2477
-------------+------------------------------ Adj R-squared = 0.2218
 Total | 2991.92728 30 99.7309094 Root MSE = 8.8098

------------------------------------------------------------------------------
 Farmprice | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
 FebFutures | .4870207 .1575967 3.09 0.004 .1646993 .8093422
 _cons | 26.6572 10.166 2.62 0.014 5.86539 47.44902
------------------------------------------------------------------------------

. regress Farmprice LagFarmprice if Year>=1985&Year<=2007

 Source | SS df MS Number of obs = 23
-------------+------------------------------ F( 1, 21) = 7.36
 Model | 667.012479 1 667.012479 Prob > F = 0.0130
 Residual | 1903.19719 21 90.6284377 R-squared = 0.2595
-------------+------------------------------ Adj R-squared = 0.2243
 Total | 2570.20967 22 116.827712 Root MSE = 9.5199

------------------------------------------------------------------------------
 Farmprice | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
LagFarmprice | .5101912 .1880608 2.71 0.013 .1190974 .901285
 _cons | 27.61829 10.75863 2.57 0.018 5.24449 49.9921
------------------------------------------------------------------------------

. regress Farmprice JanMarFutures if Year>=1985&Year<=2007

 Source | SS df MS Number of obs = 23
-------------+------------------------------ F( 1, 21) = 9.32
 Model | 790.326662 1 790.326662 Prob > F = 0.0060
 Residual | 1779.88301 21 84.7563337 R-squared = 0.3075
-------------+------------------------------ Adj R-squared = 0.2745
 Total | 2570.20967 22 116.827712 Root MSE = 9.2063

------------------------------------------------------------------------------
 Farmprice | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
JanMarFutu~s | .6679844 .2187505 3.05 0.006 .2130678 1.122901
 _cons | 14.63084 13.78153 1.06 0.300 -14.02942 43.29109
------------------------------------------------------------------------------

. log close
log: F:\Article 22.6\Final Calculations\Actionable\RMSE.smcl
log type: smcl
closed on: 15 May 2009, 16:19:39
-----------------------------------------------------------------------------------

2. Data

Year JanMarFutures FebFutures Farmprice LagFarmprice
1960 . . 30.1 .
1961 . . 32.8 30.1
1962 . . 31.7 32.8
1963 . . 32 31.7
1964 . . 30.9 32
1965 . . 29.3 30.9
1966 . . 21.5 29.3
1967 . . 26.5 21.5
1968 . . 23 26.5
1969 . . 21.9 23
1970 . . 22.82 21.9
1971 . . 28.07 22.82
1972 . . 27.2 28.07
1973 . . 44.4 27.2
1974 . . 42.7 44.4
1975 . 44.19 51.1 42.7
1976 . 58.7 63.8 51.1
1977 . 68.23 52.1 63.8
1978 . 59.3 58.1 52.1
1979 . 64.86 63.1 58.1
1980 . 77.36 74.4 63.1
1981 . 82.61 54 74.4
1982 . 71.69 59.1 54
1983 . 67.92 66 59.1
1984 . 72.36 57.5 66
1985 66.5 66.48 56.8 57.5
1986 46.1 46.8 51.5 56.8
1987 54.2 53.45 63.7 51.5
1988 59.8 59.5 55.6 63.7

Year JanMarFutures FebFutures Farmprice LagFarmprice
1989 60 58.81 63.6 55.6
1990 64.8 65.31 67.1 63.6
1991 66.6 67.69 56.8 67.1
1992 61.1 60.32 53.7 56.8
1993 61.3 61.87 58.1 53.7
1994 70.5 70.61 72 58.1
1995 75.8 75.25 75.4 72
1996 78.6 78.58 69.3 75.4
1997 76.8 76.82 65.2 69.3
1998 72.7 72.15 60.2 65.2
1999 61.1 60.27 45 60.2
2000 61 61.31 49.8 45
2001 57.8 58.63 29.8 49.8
2002 42.7 42.18 44.5 29.8
2003 59.1 59.6 61.8 44.5
2004 67.4 66.81 41.6 61.8
2005 52.9 45.67 47.7 41.6
2006 59.3 . 46.5 47.7
2007 58.8 . 59.3 46.5
Sources: Exhibit Bra-770 and US responses to questions from the Arbitrator, question 7, para. 39.

ANNEX 2

Worksheet 1

Overview

– Worksheet 2 "Instructions for Simulation" c ontains details for unde rstanding and using the
model.

– Worksheet 3 "Param Matrix" contains the pa rameters to be used in the simulation.

– Worksheet 4 "Model Run" contains the operational simulation model.

– Worksheet 5 "Instructions for Data" cont ains details for understanding and using the
subsequent four spreadsheets.

– Worksheet 6 is based on sheets " γ and P over g" and "Regressions" of Exhibit Bra-17 nov
(Annex I).

– Worksheet 7 is based on sheets "dLnG" and "Regressions" of Exhibit Bra-17 nov (Annex I).

– Worksheet 8 contains data on US and ROW production, consumption and exports.

– Worksheets 9 and 10 presents the model results, including the apportioning of adverse effects
to Brazil.

– Worksheet 11 contains the regressions results from sheet "Regressions" of Exhibit Bra-17 nov
(Annex I).

– Each of the individual spreadsheets also contain instructions and explanations.

Worksheet 2

Instructions for Simulation

1. Enable Macros:
 (a) The default security setting in Microsoft Excel will likely disable the macro that
executes the simulation.

 (b) To enable the macro and run the simula tion, the security level in Microsoft Excel
must be reduced.
 – Go to "Options" in the Tools menu.
 – Click on the "Security" tab.
 – Click on "Macro Security".
 – Set security to "Medium" or "Low".

 (c) If necessary, close and reopen Microsoft Excel.

2. Set parameters in spreadsheet 3 "Input param Matrix".
 (a) Instructions for data input:
 (i) Rows 4 and 5 have US and rest-o f-world production and consumption shares
in the world. These can be obtained from worksheet 8 "US and RoW shares".

 (ii) Rows 6-9 have US and rest-of-w orld supply and demand elasticities. These
have to be entered manually here.

 (iii) Row 10 shows dlnG. The dlnG data is taken from worksheet 7 "dlnG"
(row 63) for the partial reductions that apply when ML and CCP subsidies are
removed.
 – When pasting from the dlnG spreadsheet use "Paste Special" and
"Values and Number formatting".

 (iv) Rows 11 and 12 show γ and P/g. Data for these rows is taken from
worksheet 6 "γ and P over g".
 – When pasting from the γ and P/g spreadsheet use "Paste Special" and
"Values and Number formatting".

3. Run the model and get results:
 (a) Copy the entire input parameter matrix (cells B4:H12, in all simulations use the full

dimensions of this matrix) out of work sheet 3 "Input Param Matrix" into cells
G5:M13 of worksheet 4 "Model Run".

 NOTE: It is important to always copy and paste the whole parameter matrix to
spreadsheet 4 "Model Run", meaning cells B4:H12, no matter which marketing year.

 (b) In worksheet 4 "Model Run", click "Run" in order to run a simulation. A macro will
copy results into cells C27:M30 of worksheet 4 "Model Run".

 (c) Click "Switch" to align year s into ascending chronological order.

 (d) To save results they must be c opied into a separate sheet or file.

Worksheet 3

Input Parameter Matrix
 MY 1999-2005 (for instructions see below and worksheet 2 "Instructions for
simulation")

– Copy from here (B4:H12) to cells G5:M13 in worksheet 4 "Model Run". Always copy the whole area,
even if not interested in all years.

 1999 2000 2001 2002 2003 2004 2005
δsu 0.193 0.193 0.206 0.189 0.189 0.192 0.205
δdu 0.112 0.096 0.082 0.074 0.064 0.062 0.051
εu 0.8 0.8 0.8 0.8 0.8 0.8 0.8
εr 0.2 0.2 0.2 0.2 0.2 0.2 0.2
ηu -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2
ηr -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2
dlnG -0.543 -0.529 -0.519 -0 .677 -0.606 -0.571 -0.698
γ 0.633 0.661 0.717 0.698 0.674 0.673 0.676
P/g 1.66 1.77 1.67 0.82 1.37 1.86 1.11

– Description of parameters:

δsu Share of US production in world production ( see worksheet 8 "US and RoW shares")
δdu Share of US consumption in world consumption ( see worksheet 8 "US and RoW shares")
εu Elasticity of supply in US
εr Elasticity of supply in RoW
ηu Elasticity of demand in US
ηr Elasticity of demand in RoW
dlnG Percentage change in the effective government subsidy (measured as a price-subsidy equivalent; see
worksheet 7 "dlnG")
γ overall "coupling factor": degree to which government revenue provides a production incentive
relative to revenue from the
 market ( see worksheet 6 "γ and P over g")
P/g Ratio of market revenue to revenue from government subsidy ( see worksheet 6 "γ and P over g")

– Instructions for data input (the second step in worksheet 2 "Instructions for simulation"):

 1. Rows 4 and 5 contain US production and consumption shares in the world. The shares
currently listed are from the worksheet 8 "US and RoW shares".
 2. Rows 6-9 contain US and ROW supply and dema nd elasticities. These are entered manually.
 3. Data for row 10 is taken from the worksheet 7 "dlnG" (row 63) for the partial reductions that
apply when the ML and CCP subsidies are removed. This is based on worksheet "dLnG"
from Bra-17 nov (Annex I). When pasting from the dlnG spreadsheet use "Paste Special" and
"Values and Number formatting".
 4. Rows 11 and 12 show γ and P/g. Data inputs are taken from the worksheet 6 " γ and P over g"
(rows 34 and 35). This is based on worksheet " γ and P over g" of Bra-17 nov (Annex I).
When pasting from the γ and P/g spreadsheet use "Paste Special" and "Values and Number
formatting".

Worksheet 4

– This is the simulation sheet. For instructions see below and worksheet 2 "Instructions for simulation".
– Before running this spreadsheet, the parameter input matrix s hould have been copied to cells G5:M13 (from worksheet 3 "Input param. matrix").
– If desired, copy the results from ce lls H36:N38 into a new spreadsheet.

 A B C D E F
4 Input 2005 Parameter Description
5 0.205 δsu is the share of US in world production δsu
6 0.051 δdu is the share of US in world consumption δdu
7 0.8 εu is the elasticity of supply in US εu
8 0.2 εr is the elasticity of supply in ROW εr
9 -0.2 ηu is the elasticity of demand in US ηu
10 -0.2 ηr is the elasticity of demand in ROW ηr
11 -0.698 dlnG reduction dlnG
12 0.676 γ γ
13 1.11 P/g P/g
14 0.3779 1- α
15 0.6221 α

 A B C D E F G H I J K L M N
20 1-α Calculations Price Quantities supplied, demanded, exported
21 ( γ/(γ + P/g) α dln P = 0.062 δsuεu(1-α) dlnSu= -0.1644 dlnSr= 0.0188 dlnXr=
22 0.3779 0.6221 -0.200 δduηu + (1- δdu)ηr dlnDu= -0.0188 dlnDr= -0.018764
23 0.261 δsuαεu + (1- δsu)εr dlnXu= -0.211631
24 dln P = 0.09382053 S/X 1.32 dlnX u = dln(Su – Du) = (Su/Xu)dlnSu – (Du/Xu)dlnDu.
25 D/X 0.33 dlnI u = dln(Du-Su) = (Du/Xu)dlnDu- (Su/Xu)dlnSu

 A B C D E F G H I J K
28 Results 2005 2004 2003 2002 2001 2000 1999
29 dlnP
30 dlnSu=
31 dlnXu=
32
33 switch to get the right chronological order
34

 A B C D E F G H I J K L M N
35 Results in reverse order 1999 2000 2001 2002 2003 2004 2005
36 dlnP 4.87% 4.68% 5.40% 10.65% 6.50% 4.89% 9.38%
37 dlnSu= -9.13% -8.76% -9.42% -20.39% -12.49% -9.24% -16.44%
38 dlnXu= -11.78% -11.30% -12.13% -26.31% -16.13% -11.92% -21.16%

Worksheet 5

Instructions for Data Input

1. Worksheet 6 " γ and P over g" calculates fa rmers' expectations of "γ" (overall coupling factor)
and "P/g" (ratio of market revenue to reve nue from government subsidy), which are then
copied into worksheet 3 "Input param matrix".

 – Cells B4:K11 in worksheet 6 " γ and P over g" contain subsidy data.

 – Rows 20 through 23 contain the calculations for the per-unit payment of the PFC, DP,
MLA and Crop Insurance Program. These payments are non-price based and thus
independent of the expectation values of P, g and γ. Instead, direct payments are
based on well-known formulas that are publicized well in advance of the crop year.
Actual direct payments each year are u sed to represent what farmers expected to
receive.

 – The resulting per unit payment rates from the four programs are marked in grey
highlight and in bold.

 – Rows 27 through 29 show the calculation of the per unit payment rates of the CCP,
marketing loan and Step 2 programs based on the regressions of actual payments on
futures prices. The per unit rates are in grey highlight and in bold.

 – Rows 31 through 39 show the calculations of γ and P/g based on the payment rates
derived using futures prices to model expectations. The resulting P/g and γ are in bold
and grey highlight.

 – Because the cells are connected by formul ae, any change in subsidy information in
cells B4:K11 will also result in a change of outcome for P/g and γ.

 – If one wanted to change the calculation of P/g and γ, one would have to change the
subsidy data in B4:K11 (if PFC, DP, MLA or CIS figures were to be changed).

2. Worksheet 7 "dlnG" calculates dlnG, the pe rcentage change in the effective government
subsidy (measured as a price-subsidy equivalent). The result is then copied into worksheet 3
"Input param matrix".

 – Worksheet 7 "dlnG" is not linked to worksheet 6 " γ and P over g". So, if the per-unit
payment data is updated, the new per unit payment rates (E(P), MLA, CCP, ML,
Step 2, DP, etc.) have to be copied into spreadsheet 7 "dlnG" and dlnG has to be
recalculated. Do not copy and paste the three lines " γ", "g", "P/g" from worksheet 6
"γ and P/g" to worksheet 7 "dlnG".

 – Rows 17-50 show the dlnG calculations for each individual program payment.

 – In order to calculate the withdrawal of individual subsidies, proceed in the following
manner. The example given here is for ML payments, but it applies to ML and CCP
subsidies in the same way.

 – The dlnG for the ML program is shown in rows 43-45. In row 43, g1 stands for total
g (government subsidies) without including the ML payment. In row 44, γ1 stands
for a γ (total coupling factor) without having the ML program in place. To obtain this
latter number, one must delete row 11 (ML payments) and then copy and paste the
new resulting γ (from row 15) into row 44. After th at, paste back in the data for ML
payments into row 11 and move on to the next program. The resulting figure in row
45 is the dlnG for the ML program.

 – After conducting the same calculations fo r the CCP subsidies, one can add up the
dlnG for the two individual programs into one dlnG for an aggregate of programs.

 – In row 58, the impacts of the removal of CCP and ML subsidies are shown.

 – Rows 60-63 contain the same figures as in row 55-58 times (-1).

 – Results from row 63 are then pasted into the worksheet 3 "Input param. matrix".

3. Worksheet 8 "US and RoW shares" calculates the production and consumption shares of the
US in the world, which are copied into rows 4 and 5 of worksheet 3 "Input param matrix" and
the ratios US production over US Exports and US Consumption over US exports, which are
copied into worksheet 4 "Model Run", cell K24 + K25 (Shares of MY 2005 are used for all
years).

4. Once the input parameter matrix is fully comp iled, the data can be inserted in worksheet 4
"Model run" ( see worksheet 2 "Instructions for simulation"). The output matrix shows the
results for dlnP, dlnSu, and, less pertinent for the question at hand, dlnXu, for the
MY 1999-2005. These percentage changes from the initial equilibrium are then used as data
inputs for the calculations in worksheet 9 "Model results MY1999-2005" as indicated.

Worksheet 6

Expected prices and expected subsidy revenue (using futures prices)

3 Subsidy data* 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
4 Production Flexibility Contract payments ( PFC)1) 699 597 637 616 575 474 436 0 0 0
5 Direct payments ( DP)1) 0 0 0 0 0 0 182 616 615 611
6 Counter Cyclical payments ( CCP)1) 0 0 0 0 0 0 1312 392 1375 1376
7 Market Loss Assistance payments ( MLA) 1) 0 0 316 613 612 524 0 0 0 0
8 User Marketing ( Step 2) payments1) 3 390 308 422 236 193 429 350 544 350
9 Marketing Loan Program benefits ( ML)1) 0 29 534 1546 531 2520 871 168 1842 1257
10 Crop insurance subsidy (CIS)1) 185 67 308 317 426 473 277 279 79 -11
11 Total support 887 1083 2103 3514 2380 4184 3507 1805 4455 3583
12 Value of production 6,125 5,710 3,894 3,665 4,109 2,904 3,676 5,415 4,643 5,470
13 Quantity produced, in million lbs 3) 8,838 8,758 6,468 8,145 8,250 9,745 8,260 8,762 11,160 11,467
14 Per unit market revenue $/lb. 2) $0.69 $0.65 $0.60 $0.45 $0.50 $0.30 $0.45 $0.62 $0.42 $0.48

The following per-unit calculations refer to the expected per unit rate of the PFC, DP, MLA and CIS programs FAPRI expected production1)

 bales 17.25 18.88 18.67 17.02 16.45 17.44 18.14
 pounds 8,280 9,062 8,962 8,170 7,896 8,371 8,707

PFC4) per unit rates 0.074 0.063 0.053 0.053 0.000 0.000 0.000
DP4) per unit rates 0.000 0.000 0.000 0.022 0.078 0.073 0.070
MLA4) per unit rates 0.074 0.068 0.058 0.000 0.000 0.000 0.000
CIS4) 0.025 0.031 0.046 0.046 0.045 0.038 0.024

The following per-unit calculations refer to the expected per-unit rate of CCP, ML and Step 2 subsidies (based on regressions on futures prices)

CCP5) 0.000 0.000 0.000 0.137 0.113 0.081 0.137
ML5) 0.111 0.108 0.117 0.171 0.113 0.090 0.142
Step 25) 0.039 0.038 0.039 0.048 0.039 0.035 0.043

E(P) 0.538 0.546 0.525 0.390 0.533 0.591 0.463
PFC4) 0.074 0.063 0.053 0.053 0.000 0.000 0.000
DP4) 0.000 0.000 0.000 0.022 0.078 0.073 0.070
CCP 0.000 0.000 0.000 0.137 0.113 0.081 0.137
MLA4) 0.074 0.068 0.058 0.000 0.000 0.000 0.000
Step2 0.039 0.038 0.039 0.048 0.039 0.035 0.043
Loan 0.111 0.108 0.117 0.171 0.113 0.090 0.142
CIS4) 0.025 0.031 0.046 0.046 0.045 0.038 0.024
E(g) 0.32 0.31 0.31 0.48 0.39 0.32 0.42
E(γ)6) 0.633 0.661 0.717 0.698 0.674 0.673 0.676
E(P/g)6) 1.66 1.77 1.67 0.82 1.37 1.86 1.11

Notes:
* Rows 4-14 are identical to Exhibit Bra-705 (US Upland cotton subsidy, and value of production MY 1996-2005 ($million and million lbs)).
1) See Exhibit Bra-705.
2) Cotton farm-gate price data available from http://usda.mannlib.cornell.edu/usda/ers/89004/Table11.xls (last accessed 10 October 2008).
3) Data taken from worksheet 8 "US and RoW shares".
4) These cotton subsidies do not change with variations in price expectation.
5) The cells in grey highlights depict US cotton farmers' subsidy expectations according to worksheet 11 "Regressions". It is b ased on sheet "Regressions" in Bra-17 nov (Annex
I).
6) The results in grey highlights enter directly into worksheet 3 "Input param matrix".

Worksheet 7

dlnG calculations

Expectations formed using futures prices

4 1999 2000 2001 2002 2003 2004 2005
5 E(P) 0.54 0.55 0.52 0.39 0.53 0.59 0.46
6 PFC 0.07 0.06 0.05 0.05 0.00 0.00 0.00
7 DP 0.00 0.00 0.00 0.02 0.08 0.07 0.07
8 CCP 0.00 0.00 0.00 0.14 0.11 0.08 0.14
9 MLA 0.07 0.07 0.06 0.00 0.00 0.00 0.00
10 Step 2 0.04 0.04 0.04 0.05 0.04 0.04 0.04
11 ML 0.11 0.11 0.12 0.17 0.11 0.09 0.14
12 CIS 0.03 0.03 0.05 0.05 0.04 0.04 0.02
13 g 0.323 0.31 0.31 0.48 0.39 0.32 0.42
14 P/g 1.66 1.77 1.67 0.82 1.37 1.86 1.11
15 γ 0.633 0.661 0.717 0.698 0.674 0.673 0.676
1 6
1 7 P F C
18 g1 0.25 0.24 0.26 0.42 0.39 0.32 0.42
19 γ1 0.777 0.793 0.832 0.767 0.674 0.673 0.676
20 dlnG 0.055 0.047 0.035 0.024 0.000 0.000 0.000
2 1
2 2 D P
23 g1 0.32 0.31 0.31 0.46 0.31 0.24 0.35
24 γ1 0.633 0.661 0.717 0.720 0.781 0.801 0.762
25 dlnG 0.000 0.000 0.000 0.017 0.075 0.086 0.062
2 6
2 7 C C P
28 g1 0.32 0.31 0.31 0.34 0.27 0.24 0.28
29 γ1 0.633 0.661 0.717 0.818 0.787 0.767 0.811
30 dlnG 0.000 0.000 0.000 0.165 0.173 0.152 0.195
3 1
3 2 M L A
33 g1 0.25 0.24 0.25 0.48 0.39 0.32 0.42
34 γ1 0.746 0.776 0.824 0.698 0.674 0.673 0.676
35 dlnG 0.090 0.083 0.065 0.000 0.000 0.000 0.000
3 6
3 7 U s e r
38 g1 0.28 0.27 0.27 0.43 0.35 0.28 0.37
39 γ1 0.583 0.613 0.676 0.664 0.638 0.632 0.638
40 dlnG 0.188 0.187 0.175 0.143 0.149 0.165 0.153
4 1
4 2 M L
43 g1 0.21 0.20 0.20 0.31 0.27 0.23 0.27
44 γ1 0.441 0.478 0.549 0.529 0.540 0.545 0.509
45 dlnG 0.543 0.529 0.519 0.513 0.433 0.419 0.503
4 6
4 7 C I S
48 g1 0.30 0.28 0.27 0.43 0.34 0.28 0.39
49 γ1 0.601 0.622 0.668 0.665 0.632 0.629 0.656
50 dlnG 0.124 0.154 0.205 0.139 0.170 0.178 0.086
5 1
52 Test 1.00 1.00 1.00 1.00 1.00 1.00 1.00
5 3
5 4

55 MLA+CCP+ML 0.633 0.612 0.584 0.677 0.606 0.571 0.698
56 MLA+CCP+ML+Step2 0.821 0.799 0.760 0.820 0.755 0.736 0.852
57 Step2 0.188 0.187 0.175 0.143 0.149 0.165 0.153
58 CCP+ML 0.543 0.529 0.519 0.677 0.606 0.571 0.698
5 9
60 MLA+CCP+ML -0.633 -0.612 -0.584 -0.677 -0.606 -0.571 -0.698
61 MLA+CCP+ML+Step2 -0.821 -0.799 -0. 760 -0.820 -0.755 -0.736 -0.852
62 Step2 -0.188 -0.187 -0.175 -0.143 -0.149 -0.165 -0.153
63 CCP+ML -0.543 -0.529 -0.519 -0. 677 -0.606 -0.571 -0.698

Notes:
(i) Worksheet 7 "dlnG" calculates dlnG, the percentage change in the effective government subsidy
(measured as a price-subsidy equivalent). The result is then copied into the worksheet 3 "Input param
matrix".
(ii) For input details (rows 5-12), see worksheet 6 " γ and P over g".
(iii) This spreadsheet is not linked to worksheet 6 " γ and P/g". So, if the per-unit payment data is updated
or changed, the new per-unit payment rates have to be copied into this spreadsheet (dlnG) and dlnG has
to be recalculated.
(iv) Rows 17-50 show the dlnG calculations for each individual program payment.
(v) In order to calculate the withdrawal of ML an d CCP subsidies, proceed in the following manner.
 – The example given here is for The ML payment, but it applies to ML and CCP subsidies in the
same way.
 – The dlnG for the ML program is shown in rows 43-45. In row 43, g1 stands for total g
(government subsidies) without including the ML payment. In row 44, γ1 stands for a γ (total
coupling factor) without having the ML program in place. To obtain this latter number, one
must delete row 11 (ML payments) and then copy and paste the new resulting γ (from row 15)
into row 44. After that, paste back in the data for ML payments into row 11 and move on to
the next program. The resulting figure in row 45 is the dlnG for the ML program. After
conducting the same calculations for the CCP subs idies, one can add up the dlnG for the two
individual programs into one dlnG for an aggregate of programs. In rows 58 the resulting sum
is presented.
(vi) Rows 60-63 contain the same figures as in row 55-58 times (-1).
(vii) Results from row 63 are then pasted into worksheet 3 "Input param matrix".

Worksheet 8

US and rest-of-world shares in cotton production, consumption and exports

 1999 2000 2001 2002 2003 2004 2005
Production in 1000 480 lb bales1),2),3)
 United States 16,968 17,188 20 ,303 17,209 18,255 23,251 23,890
 World Total 87,964 89,099 98,702 90,991 96,782 121,386 116,590
 ROW (World - US) 70,996 71,911 78,399 73,782 78,527 98,135 92,700
 Share US in World, in % 19.29% 19.29% 20.57% 18.91% 18.86% 19.15% 20.49%
 Share ROW in % 80.71% 80.71% 79.43% 81.09% 81.14% 80.85% 79.51%

Consumption In 1000 480 lb bales1),2)
 United States 10,194 8,862 7,696 7,237 6,266 6,691 5,871
 World Total 91,082 92,158 94,278 98,355 98,033 108,586 116,241
 ROW (World - US) 80,888 83,296 86,582 91,118 91,767 101,895 110,370
 Share US in World, in % 11.19% 9.62% 8.16% 7.36% 6.39% 6.16% 5.05%
 Share ROW in % 88.81% 90.38% 91.84% 92.64% 93.61% 93.84% 94.95%

Exports in 1000 480lb bales1),2)
 United States 6,750 6,740 11,000 11,900 13,758 14,436 18,036
 World Total 27,195 26,258 29, 093 30,325 33,277 35,012 44,935
 ROW (World - US) 20,445 19,518 18,093 18,425 19,519 20,576 26,899
 Ratio US Production/US Exports5) 2.51 2.55 1.85 1.45 1.33 1.61 1.32
 Ratio US Consumption/US Exports6) 1.51 1.31 0.70 0.61 0.46 0.46 0.33
 Ratio ROW Production/ROW Exports 3.23 3.39 3.39 3.00 2.91 3.47 2.59
 Ratio ROW Consumption/ROW Exports 3.96 4.27 4.79 4.95 4.70 4.95 4.10

Notes:
1) Source: Panel Report, US – Upland Cotton (21.5), Table 3, and http://www.fas.usda.gov/psdonline/.
2) Production, consumption and exports are converted into pounds (lb) in columns L-S.
3) The share of US production in world production (row 13) enters into worksheet 3 "Input param matrix" cells B4:H4.
4) The share of US consumption in world consumption (row 20) enters into worksheet 3 "Input param matrix" cells B5:H5.
5) The ratio of US production over US exports (row 27) enter into worksheet 4 "Model Run" to calculate the approximate change in US exports (dlnXu).
6) The ratio of US consumption over US exports (row 28) enters into worksheet 4 "Model Run" to calculate the approximate change in US exports (dlnXu).

 1999 2000 2001 2002 2003 2004 2005
Production in lb
 United States 8,144,640,000 8,250,240,000 9,745,440,000 8,260,320,000 8,762,400,000 11,160,480,000 11,467,200,000
 World Total 42,222,720,000 42,767,520,000 47,376,960,000 43,675,680,000 46,455,360,000 58,265,280,000 55,963,200,000
 ROW (World - US) 34,078,080,000 34,517,280,000 37,631,520, 000 35,415,360,000 37,692,960,000 47,104,800,000 44,496,000,000

Consumption in lb
 United States 4,893,120,000 4,253,760,000 3,694,08 0,000 3,473,760,000 3,007,680,000 3,211,680,000 2,818,080,000
 World Total 43,719,360,000 44,235,840,000 45,253,440,000 47,210,400,000 47,055,840,000 52,121,280,000 55,795,680,000
 ROW (World - US) 38,826,240,000 39,982,080,000 41,559,360, 000 43,736,640,000 44,048,160,000 48,909,600,000 52,977,600,000

Exports in lb
 United States 3,240,000,000 3,235,200,000 5,280,00 0,000 5,712,000,000 6,603,840,000 6,929,280,000 8,657,280,000
 ROW 13,053,600,000 12,603,840,000 13,964,640,000 14, 556,000,000 15,972,960,000 16,805,760,000 21,568,800,000
 ROW (World - US) 9,813,600,000 9,368,640,000 8,684,64 0,000 8,844,000,000 9,369,120,000 9,876,480,000 12,911,520,000

Worksheet 9

Model Results MY 1999-2005

1. Model scenario: complete and permanent withdrawal of ML and CCP subsidies.
2. Input parameters: see worksheet 3 "Input param matrix".
3. Price expectations: Futures prices.
4. Coupling factor for CCP is 0.4.

Row A B C D E F G H I
7 Input parameter matrix MY 1999-2005
8 Source 1999 2000 2001 2002 2003 2004 2005
9 δsu worksheet 8 "U.S. and RoW shar es" 0.193 0.193 0.206 0.189 0.189 0.192 0.205
10 δdu worksheet 8 "U.S. and RoW shar es" 0.112 0.096 0.082 0.074 0.064 0.062 0.051
11 εu worksheet 3 "Input param matrix " 0.8 0.8 0.8 0.8 0.8 0.8 0.8
12 εr worksheet 3 "Input param matrix" 0.2 0.2 0.2 0.2 0.2 0.2 0.2
13 ηu worksheet 3 "Input param matrix" -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2
14 ηr worksheet 3 "Input param matrix" -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2
15 dlnG worksheet 7 "dlnG" -0.543 -0 .529 -0.519 -0.677 -0.606 -0.571 -0.698
16 γ worksheet 6 "g and P over g" 0.633 0.661 0.717 0.698 0.674 0.673 0.676
17 P/g worksheet 6 "g and P over g" 1.66 1.77 1.67 0.82 1.37 1.86 1.11
1 8
19 Output matrix MY 1999-2005 (see worksheet 4 "Model run")
20 Output matrix Explanation/calculation 1999 2000 2001 2002 2003 2004 2005
21 dlnP Model run output 1) 4.87% 4.68% 5.40% 10.65% 6.50% 4.89% 9.38%
22 dlnSu Model run output 1) -9.13% -8.76% -9.42% -20.39% -12.49% -9.24% -16.44%
23 dlnXu Model run output 1) -11.78% -11.30% -12.13% -26.31% -16.13% -11.92% -21.16%
24 dlnP Model run output 1) 4.87% 4.68% 5.40% 10.65% 6.50% 4.89% 9.38%
25 dlnSr dlnSr = εr(dlnP) 0.97% 0.94% 1.08% 2.13% 1.30% 0.98% 1.88%
26 dlnDr dlnDr = ηr(dlnP) -0.97% -0.94% -1.08% -2.13% -1.30% -0.98% -1.88%

Notes:
1) See worksheet 4 "Model Run".

Row A B C D E F G H I
31 Model results MY 1999-2005 - US excess production and excess revenue, worldwide adverse effects
32 US production effects Explanation/calculation 1999 2000 2001 2002 2003 2004 2005
33 US excess production
(lb cotton) dlnSu*actual US production -743,597,092 -723,046, 405 -918,506,550 -1,683,967,155 -1, 094,758,202 -1,031,224,878 -1,8 85,027,126
34 US excess revenue
(USD)
dlnSu*actual US
production*actual WP
-$392,991,063 -$413,944,067 -$384,670, 543 -$939,822,069 -$758,010,579 - $552,014,677 -$1,076,350,489
35
36 Worldwide adverse
effects
Explanation/calculation 1999 2000 2001 2002 2003 2004 2005
37 Sales value effect AESV=dlnP*actual WP*world
Prod. (in lb)
$877,604,225 $924,387,671 $851,429,013 $2, 104,166,093 $1,697,696,545 $1, 233,867,383 $2,383,718,532
38 Reduced production
effect
AERP=actual world prod. *
(dlnSr)*(1+dlnP)*actual WP
$184,073,625 $193,525,744 $179,485,392 $465,634, 078 $361,626,110 $258,848,961 $521,472,055
39 Total adverse effects AE SV + AERP $1,061,677,850 $1,117,913,415 $1, 030,914,405 $2,569,800,171 $2,059,322 ,655 $1,492,716,344 $2,905,190,586

World price (A-Index)
1999-2005
 Year 1999 2000 2001 2002 2003 2004 2005

Per unit market revenue
$/lb. P $0.53 $0.57 $0.42 $0.56 $0.69 $0.54 $0.57
Source: http://usda.mannlib.cornell.edu/usda/ers/CWS-yearbook//2000s/2007/CWS-yearbook-12-10-2007.pdf (Appendix table 14); accessed 10 October 2008

Worksheet 10

Apportioning to Brazil
Adverse Effects (Global Level) $2,905,190,586
Brazil's Share $147,314,091

Cotton Production
(1000 480 lb bales)
Country/Region 2005/2006
Brazil 4,700
ROW (World less US) 92,689
World 116,579
Brazil's Share of ROW 5.1%
Source: Exhibit US-68 (worksheet "Production").

Worksheet 11

This spreadsheet contains the regression on future prices, the results, and calculations based on those results.

The resulting expected figures fo r a specific program were then copied into the spreadsheet " γ and P over g". Those figures are here in bold and with grey
background.

1. Regression Results and Expected Market Price

 Average February Price of December Contract Marketing Year Average Farm Price Expected Per Unit Market price
1996 0.786 0.693
1997 0.768 0.652
1998 0.721 0.602
1999 0.603 0.450 0.538
2000 0.613 0.498 0.546
2001 0.586 0.298 0.525
2002 0.422 0.445 0.390
2003 0.596 0.618 0.533
2004 0.668 0.416 0.591
2005 0.511 0.477 0.463
2006 0.604 0.539

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.957943
R Square 0.917655
Adjusted R Square 0.907362
Standard Error 0.037467
Observations 10

ANOVA
 df SS MS F Significance F
Regression 1 0.125149 0.125149 89.1528 1.3E-05
Residual 8 0.01123 0.001404
Total 9 0.136379

 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lo wer 95.0% Upper 95.0%
Intercept 0.04565 0.051091 0.893509 0. 397667 -0.07217 0.16 -0.072165174 0.163
X Variable 1 0.816883 0.086515 9.442076 1.3E-05 0.617378 1.02 0.617378453 1.016

2. Regression Results and Expected Step 2 Payment

 Average February Price of
December Contract Step 2, million $ production, million lbs paym ent rate, $/lb Expected Per Unit Step 2
1996 0.786 3 8,838 0.000
1997 0.768 390 8,758 0.045
1998 0.721 308 6,468 0.048
1999 0.603 422 7,821 0.054 0.039
2000 0.613 236 8,064 0.029 0.038
2001 0.586 193 9,409 0.021 0.039
2002 0.422 429 7,935 0.054 0.048
2003 0.596 350 8,555 0.041 0.039
2004 0.668 544 10,802 0.050 0.035
2005 0.511 350 11,165 0.031 0.043

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.333198
R Square 0.111021
Adjusted R Square -0.0001
Standard Error 0.017144
Observations 10

ANOVA
 df SS MS F Significance F
Regression 1 0.000294 0.00 0294 0.999086 0.346802
Residual 8 0.002351 0.000294
Total 9 0.002645

 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.069045 0.03223 2.142276 0.064547 -0.00528 0.14 -0.00527693 0.143
X Variable 1 -0.05061 0.050632 -0.99954 0.346802 -0.16737 0.07 -0.167365142 0.066

3. Regression Results and Expected Marketing Loan Program Payment

 Average February Price of
December Contract MLG total, million $ production, million lbs payment rate, $/lb Expected Per Unit Loan
Payment
1996 0.786 0 8,838 0.000
1997 0.768 29 8,758 0.003
1998 0.721 534 6,468 0.083
1999 0.603 1,546 7,821 0.198 0.111
2000 0.613 531 8,064 0.066 0.108
2001 0.586 2,520 9,409 0.268 0.117
2002 0.422 871 7,935 0.110 0.171
2003 0.596 168 8,555 0.020 0.113
2004 0.668 1,842 10,802 0.170 0.090
2005 0.511 1,257 11,165 0.113 0.142
2006 0.604 0.111

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.423526
R Square 0.179375
Adjusted R Square 0.076796
Standard Error 0.084794
Observations 10

ANOVA
 df SS MS F Significance F
Regression 1 0.012573 0.01 2573 1.748663 0.222598
Residual 8 0.05752 0.00719
Total 9 0.070093

 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.310755 0.159407 1.949448 0.087066 -0.05684 0.68 -0.056837531 0.678
X Variable 1 -0.33115 0.250421 -1.32237 0.222598 -0.90862 0.25 -0.908621632 0.246

4. Regression Results and Expected CCP payment

 Average February Price of
December Contract CCP, million $ production, million lbs payment rate, $/lb Expected Per Unit CCP
Payment
1996 0.786 0 8,838 0.000
1997 0.768 0 8,758 0.000
1998 0.721 385 6,468 0.060
1999 0.603 1,312 7,821 0.168
2000 0.613 1,312 8,064 0.163
2001 0.586 1,312 9,409 0.139
2002 0.422 1,312 7,935 0.165 0.191
2003 0.596 392 8,555 0.046 0.113
2004 0.668 1,375 10,802 0.127 0.081
2005 0.511 1,376 11,165 0.123 0.151
2006 0.604 0.110

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.754296
R Square 0.568962
Adjusted R Square 0.515082
Standard Error 0.04654
Observations 10

ANOVA
 df SS MS F Significance F
Regression 1 0.022872 0.02 2872 10.55985 0.011708
Residual 8 0.017328 0.002166
Total 9 0.0402

 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.379375 0.087492 4.336105 0.002491 0.177618 0.58 0.177617707 0.581
X Variable 1 -0.44664 0.137446 -3.24959 0.011708 -0.7636 -0.1 -0.763595134 -0.13