Document: WT/DS267/R/Add.2 Page I-1 ANNEX I ANSWERS OF PARTIES TO THE PANEL'S QUESTIONS AND OTHER COMMENTS AND DOCUMENTS RECEIVED FROM PARTIES Contents Page Annex I-1 Answers of Brazil to the Panel's Questions Posed Following the First Session of the First Subs tantive Meeting (11 August 2003)
Date: 11 August 2003
Document codes: WT/DS267/R/Add.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

ANNEX I

ANSWERS OF PARTIES TO THE PANEL'S QUESTIONS AND
OTHER COMMENTS AND DOCUMENTS RECEIVED FROM PARTIES

Contents Page
Annex I-1 Answers of Brazil to the Panel's Questions Posed Following the
 First Session of the First Subs tantive Meeting (11 August 2003)
I-3
Annex I-2 Answers of the United States to the Panel's Questions Posed
 Following the First Session of the First Substantive Meeting
 (11 August 2003)
I-77
Annex I-3 Comments of Brazil to Answers to Questions Posed by the Panel
 Following the First Substantive Meeting of the Panel
 (22 August 2003)
I-132
Annex I-4 Answer of the United Stat es to the Additional Question from the
 Panel (27 August 2003)
I-169
Annex I-5 Answers of Brazil to the Panel's Questions Posed Following the
 Resumed Session of the First Substantive Meeting
 (27 October 2003)
I-170
Annex I-6 Answers of United States to the Panel's Questions Posed Following
 the Resumed Session of the First Substantive Meeting
 (27 October 2003)
I-235
Annex I-7 Answers of Brazil to the Panel's Questions Posed Following the
 Second Substantive Meeting (22 December 2003)
I-275
Annex I-8 Answers of United States to the Panel's Questions Posed Following
the Second Substantive Meeting (22 December 2003)
I-344
Annex I-9 Comments of the United States of America Concerning Brazil's
 Econometric Model (22 December 2003)
I-396
Annex I-10 Answers of Brazil to the Pa nel's Additional Questions Posed on
23 December 2003 and 12 January 2004 (20 January 2004)
I-419
Annex I-11 Answers of United States of America to the Panel's Additional
 Questions Posed on 23 December 2003 (20 January 2004)
I-437
Annex I-12 Brazil's Comments on the 22 December US Comments
 Concerning Brazil's Econometri c Model (20 January 2004)
I-440
Annex I-13 Brazil's Comments on the US Answers to Questions Posed by the
 Panel Following the Second Substantive Meeting of the Panel
 (28 January 2004)
I-467
Annex I-14 Comments of the United States of America on the Answers of
 Brazil to Further Questions from the Panel to the Parties following
 the Second Panel Meeting (28 January 2004)
I-552
Annex I-15 Brazil's Comments and Requ ests Regarding Data Provided by the
 United States on 18/19 December 2003 and the US Refusal to
 Provide Non-Scrambled Data on 20 January 2004
 (28 January 2004)
I-612
Annex I-16 Comments of the United States of America on Comments by Brazil
 on US Comments Concerning Brazil's Econometric Model
 (28 January 2004)
I-648

Contents Page
Annex I-17 Brazil's Answers to the Pa nel's Additional Questions Posed on
 3 February (11 February 2004)
I-660
Annex I-18 Answers of the United States of America to the Panel's Additional
 Questions Posed on 3 February (11 February 2003)
I-664
Annex I-19 Comments of the United States of America on the Comments of
 Brazil to US Data Submitted on 18 and 19 December 2003
 (11 February 2004)
I-677
Annex I-20 Brazil's Comments on US 11 Fe bruary 2004 Answers to the Panel's
 Additional Questions (18 February 2004)
I-704
Annex I-21 Comments of the United States of America to the
 11 February 2004, Answers of Brazil to Panel Question 276
 (18 February 2004)
I-728
Annex I-22 Brazil's Comments on US 11 February Comments on Brazil's
 28 January "Comments and Requests Regarding Data Provided by
 the United States on 18/19 December 2003 and the US Refusal to
 Provide Non-Scrambled Data on 20 January" (18 February 2004)
I-734
Annex I-23 Comments of the United States of America on the
 February 18, 2004, Comments of Brazil (3 March 2004)
I-796
Annex I-24 Responses of the United States of America to the Panel's
 February 3, 2004 Data Request, As Clarified on February 16, 2004
 (3 March 2004)
I-819
Annex I-25 Answers of the United States of America to Question 264(b) Dated
 February 3, 2004, from the Panel to the Parties Following the
 Second Panel Meeting (3 March 2004)
I-825
Annex I-26 Brazil's Comments on US 3 March 2004 Data (10 March 2004) I-827
Annex I-27 Brazil's Comment on US 3 March 2004 Answer to Question 264(b)
 (10 March 2004)
I-843
Annex I-28 Comments of the United States of America on the 10 March 2004,
 Comments of Brazil on the US Data Submitted on 3 March 2004
 (15 March 2004)
I-845

TABLE OF CASES CITED

Short Title Full Case and Citation
Brazil - Aircraft Appellate Body Report, Brazil – Export Financing Programme for
Aircraft, WT/DS46/AB/R, adopted 20 August 1999
Brazil – Aircraft (21.5) Panel Report, Brazil – Export Financing Programme for Aircraft .
Recourse by Canada to Article 21.5 of the DSU, WT/DS46/RW, , adopted
4 August 2000
Brazil – Aircraft (21.5) Appellate Body Report, Brazil – Export Financing Programme for
Aircraft. Recourse by Canada to Article 21.5 of the DSU ,
WT/DS46/AB/RW, adopted 4 August 2000
US – Shrimp (21.5) Panel Report, United States – Import Prohibition of Certain Shrimp and
Shrimp Products. Recourse to Article 21.5 by Malaysia, WT/DS58/RW,
adopted 21 November 2001
Canada – Aircraft
(21.5)
Panel Report, Canada – Measures Affecti ng the Export of Civilian
Aircraft, Recourse by Brazil to Article 21.5 of the DSU , WT/DS70/RW,
adopted 20 August 1999
Canada - Aircraft Appellate Body Report, Canada – Measures Affecting the Export of
Civilian Aircraft, WT/DS70/AB/R, adopted 20 August 1999
India – Patents (EC) Panel Report, India – Patent Protection for Pharmaceutical and
Agricultural Products, WT/DS/79R, adopted 2 October 1998
Canada – Dairy Appellate Body Report, Canada – Measures Affecting the Importation of
Milk and the Exportation of Dairy Products , WT/DS103/AB/R and
WT/DS113/AB/R, adopted 27 October 1999.
US - FSC Appellate Body Report, United States – Tax Treatment for “Foreign
Sales Corporation”, WT/DS108/AB/R, adopted 20 March 2000.
US – FSC (21.5) Appellate Body Report, United States – Tax Treatment for “Foreign
Sales Corporation”. Recourse to Article 21.5 of the DSU by the European
Communities, WT/DS108/AB/RW, adopted 29 January 2002.
EC – Bed Linen (21.5) Appellate Body Report, European Communities – Anti-Dumping Duties
on Imports of Cotton – Type Bed Linen from India. Recourse to Article
21.5 of the DSU by India, WT/DS141/AB/RW, adopted 24 April 2003
Chile – Agricultural
Products (Price Band)
Appellate Body, Chile – Price Band System and Safeguard Measures
Relating to Certain Agricultural Products, WT/DS207/AB/R, adopted 23
October 2002.
Canada – Aircraft II Panel Report, Canada – Export Credits and Loan Guarantees for
Regional Aircraft, WT/DS222/R, adopted 19 February 2002.

LIST OF EXHIBITS

Agricultural Assistance Act of 2003, in P.L. 108-7 Exhibit Bra-135
P.L. 106-113 Exhibit Bra-136
P.L. 106-224 Exhibit Bra-137
P.L. 107-25 Exhibit Bra-138
68 Federal Register 20331, 20331-20332 Exhibit Bra-139
Pindyck, Robert S. and Rubinfeld, Daniel L., Microeconomics, 5 Edition
(2002), Prentice hall, New Jersey. Exhibit Bra-140
7 U.S.C. 5622 Exhibit Bra-141
Agricultural Outlook, USDA, May 2002 Exhibit Bra-142
Agricultural Statistics 2003, USDA Exhibit Bra-143
G/AG/R/31 Exhibit Bra-144
US and State Farm Income Data , (United States and States 1997-2001),
USDA Exhibit Bra-145
Acreage, NASS, 28 June 2002 Exhibit Bra-146
Estimate of Support Granted by Commodity via Counter-Cyclical
Payments. Agricultural Prices Exhibit Bra-147
Statement of Administrative Action Exhibit Bra-148
Agricultural Outlook, USDA, August 2002 Exhibit Bra-149
G/AG/N/USA/10 Exhibit Bra-150
“US Export Credit Guarantee Programs: What Every Importer Should
Know About the GSM-102 and GSM-103 Programs”, USDA, November
1996.
Exhibit Bra-151
GAO, Statement of Allan I. Mendelowitz, Director, Trade, Energy and
Finance Issues, National security and International Affairs Division,
before the Task Force on Urgent Fiscal Issues of the Committee on
Budget of the US House of Representatives, “Status Report on GAO’s
Reviews of the Targeted Expor t Assistance Program, the Export
Enhancement Program, and the GSM 102/103 Export Credit Guarantee
Programs,” GAO/T-NSIAD-90-53, 28 June 1990.
Exhibit Bra-152

US Department of Agriculture Office of Inspector General Financial and
IT Operations Audit Report of the Commodity Credit Corporation’s
Financial Statements for Fiscal Y ear 2000, Audit Report N° 06401-14-
FM, June 2001
Exhibit Bra-153
US Department of Agriculture Office of Inspector General Great Plains
Region Audit Report of the Commodity Credit Corporation’s Financial
Statements for Fiscal Year 2001, Audit Report N° 06401-4-KC,
February 2002.
Exhibit Bra-154
US Department of Agriculture Forei gn Agricultural Service, “Notice to
GSM – 102 and GSM – 103 Programme Participants”, 24 September
2002
Exhibit Bra-155
US Export-Import Bank, “Comparison of Major Features of Programs
Offered by Ex-Im Bank and Commodity Credit Corporation for Support
of Bulk Agricultural Commodities”
Exhibit Bra-156
US General Accounting Office, Report to the Chairman, Task Force on
Urgent Fiscal Issues, Committee on the Budget, House of
Representatives, “International Trade: Iraq’s Participation in US
Agricultural Export Programs”, GAO/NSIAD-91-76, November 1990
Exhibit Bra-157
US Department of Agriculture, Office of Inspector General, Financial
and IT Operations Audit Report, “Commodity Credit Corporation’s
Financial Statement for Fiscal Year 2002”, Audit Report N° 06401-15-
FM, December 2002
Exhibit Bra-158
US General Accounting Office, Report to Congressional Requesters,
“Loan Guarantees: Export Credit Guarantees Programs’ Costs are
High”, GAO/GGD-93-45, December 1992
Exhibit Bra-159
US Department of Agriculture, Offi ce of the Chief Financial Officer,
Credit, Travel, and Accounting Division, “Agriculture Financial
Standards Manual (May 2003)
Exhibit Bra-160
US Federal Accounting Standards A dvisory Board, Federal Financial
Accounting and Auditing Technical Re lease 3, “Preparing and Auditing
Direct Loan and Loan Guarantee Subsidies under the Federal Credit
Reform Act”, 31 July 1999.
Exhibit Bra-161
Government – Wide Audited Financia l Statements Task Force on Credit
Reform, “Issue Paper, Model Credit Programme Methods and
Documentation for Estimating Subsidy Rates and the Model Information
Store”, 96-CR-7, 1 May 1996
Exhibit Bra-162
Office of Management and Budget Annual Training, Introduction to
Federal Credit Budgeting, 24 June 2002 Exhibit Bra-163
US Department of Agriculture, Fore ign Agricultural Service, “Revised
FY 2001 and FY 2002 Annual Performance Plan”. Exhibit Bra-164

US Department of Agriculture, Fore ign Agricultural Service, “Revised
FY 2000 and FY 2001 Annual Performance Plan”. Exhibit Bra-165
US Department of Agriculture Fo reign Agricultural Service, News
Releases regarding extension of GSM 102 and GSM 103 guarantees to
Dominican Republic, Morocco, Ghana, South Korea, Vietnam and
Algeria
Exhibit Bra-166
12 Steps to Participating in the USDA Supplier Credit Guarantee
Program, Step 5. Exhibit Bra-167
US Department of Agriculture Fo reign Agricultural Service, News
Releases regarding extension of SCGP guarantees to Tunisia,
Azerbaijan, Vietnam, South Korea, Japan and Nigeria
Exhibit Bra-168

A. UPLAND COTTON

1. Please confirm that all information and data that you have provided to the Panel
relating to "cotton" in fact relates to upland cotton only. BRA, USA

Brazil's answer

1. Brazil can confirm that, except as explicitly stated otherwise, all the data and references made
by Brazil to “cotton” relate and will relate to “upland cotton” only.

B. PRELIMINARY ISSUES

Note to parties: As indicated in the cover note, the Panel has expressed its views in respect of the
three United States requests for preliminary rulings . The Panel's questions reflected in this
compilation relating to the requested preliminary rulings on which the Panel has expressed its views
are those that were posed in the c ourse of the first session of the first Panel meeting. This is to give
an opportunity for the parties to transpose into writing their oral responses.

1. Product scope of Panel's terms of reference relating to Brazil's export credit guarantee
claims

2. Is Brazil's claim in relation to export cred it guarantees against the measures said to
constitute the GSM-102, GSM-103 and SCGP programmes in their entire application, or
against the measures said to constitute the GSM-102, GSM-103 and SCGP programmes in their
application to upland cotton, or both? BRA

Brazil's answer

2. Brazil confirms that its claims agai nst GSM 102, GSM 103 and SCGP concern the
programmes in their entirety and are not limited to their application to upland cotton.

3. If the request for consultations in this di spute omitted certain products in relation to
export credit guarantees, on what basis is it ar gued that it failed to identify the measures at
issue in accordance with Article 4.4 of the DSU? USA

4. Is it argued that the export credit gu arantee programmes concerning upland cotton are
each a separate or independent measure, in that they operate independently? USA

5. Is there a specification in any legislation or regulation (or any other official government
document) which limit or restrict the export cred it guarantee programmes at issue exclusively
to upland cotton? USA

6. For the purposes of the Panel's examinatio n of Brazil's claims relating to GSM-102,
GSM-103 and SCGP under the Agreement on Agricu lture and the SCM Agreement, is accurate
data and information available with respect to these export credit guarantee programmes
concerning upland cotton alone (e.g. with respect to "long-term operating costs and losses")? In
this respect, the Panel also directs the parties' attention to the specific questions below relating
to the programmes. USA

7. Are commitments with respect to export subsidies under the Agreement on Agriculture
commodity-specific? How, if at all, is this relevant? BRA, USA

Brazil's answer:

3. Under Articles 3.3 and 8 of the Agreement on Agriculture, a Member can only grant export
subsidies for agricultural products if that Member has an export subsidy reduction commitment for the
agricultural product in question. The commodity sp ecific aspect becomes relevant in Step 2 and ETI
export subsidies because the United States scheduled no reduction commitments for upland cotton. In
the case of the export credit guarantee programs chal lenged by Brazil, the commodity specific aspect
becomes relevant only after the Panel has found that export credit guarantees are export subsidies
within the meaning of the Agreement on Agriculture . At that stage, the Panel needs to examine
whether (a) for the group of unscheduled commodities, which includes upland cotton, and (b) for each
of scheduled commodities, there is a threat of circum vention of the US e xport subsidy reduction
commitments. Brazil has set forth its arguments that GSM 102, GSM 103 and SCGP violate
Article 10.1 of the Agreement on Agriculture for both scheduled and unscheduled commodities in
paragraphs 295-305 of its First Submission.

4. The commodity-specific nature of expor t subsidy reduction commitments is, however,
irrelevant for determining whethe r GSM 102, GSM 103 and SCGP in their application to all eligible
products are within the Panel’s terms of reference.

8. Does the United States confirm that the qu estions referred to by Brazil in paragraph 92
of Brazil's oral statement were posed to the United States in the consultations? USA

9. How does the United States respond to pa ragraph 94 of Brazil's oral statement? USA

10. What actual prejudice, if any, has the United States suffered as a result of the alleged
omission of products other than upland cotton from the request for consultations? USA

11. Does the United States agree that Brazil's request for establishment of the Panel can be
understood to indicate that Brazil's export credit guarantee claims relatesto products other than
upland cotton? How, if at all, is this relevant? USA

12. Please address issues and submit eviden ce regarding the three export credit guarantee
programmes concerned relating to upland cotton a nd other eligible agricultural commodities in
your answers to questions and rebuttal submissions. BRA, USA

Brazil's answer

5. Brazil has presented its arguments and eviden ce concerning the three export credit guarantee
programmes always with respect to all eligible agricultural commodities
1 and will continue to do so in
its answers to these questions and in future submissions to the Panel.

13. Please include any argumentation and evidence to support your statement during the
Panel meeting that the inclusion of such oth er eligible agricultural commodities would create
additional "work" for the Panel with respect to each of these commodities under Article 13 of
the Agreement on Agriculture. USA

 1 See paragraphs 252-314 of the First Submission of Brazil and paragraphs 116-133 of the Oral
Statement of Brazil.

2. Expired measures

14. Please submit evidence regarding th e programmes under the 1996 FAIR Act, in
particular, production flexibility contract payments and market loss assistance payments, to the
extent that they would be relevant to the Panel's determination under Article 13 of the
Agreement on Agriculture in your answers to questions and rebuttal submission. USA

15. Do the parties agree that it is beyond a Panel's power to recommend a remedy for an
expired measure? Could the Panel could be req uired to examine "expired measures" in order
to conduct its assessment of the matter before it? How, if at all, is Article 7.8 of the SCM
Agreement relevant to these matters? BRA, USA

Brazil's answer

6. The Panel must examine any continuing effect s of subsidies provided by expired measures,
and it can recommend a remedy for any such continuing effects. Brazil has set forth its arguments in
that respect in paragraphs 4-7 of its Closing Stat ement at the First Substantive Meeting of the Panel
with the Parties, as well as in paragraphs 141-144 of its Oral Statement at the same meeting.
Subsidies provided under expired subsidy measures can be the source of present adverse effects.
Preventing a panel from examining expired measures in its assessment of the matter before it would
render the adverse effects provisions of the SCM Agreement a nullity, as a Member would be freed
from any responsibility for the effects of its subsidi es by, for example, simply letting the legislation
expire and renewing it every year (or in even shorte r periods). The Panel is, thus, required to analyze
the effects of subsidies provided by production flex ibility contract (“PFC”) payments and market loss
assistance payments in its assessment of Brazil’s adverse effects claims. Disregarding those payments
would not enable the Panel to conduct “an objective assessment of the matter before it”, as it would
disregard a source of present adverse effects.
2

7. Article 7.8 of the SCM Agreement offers th e Panel the possibility to recommend a remedy for
the adverse effects from subsidies provided by ex pired measures. Under Article 7.8, a Panel can
recommend that a Member withdraw the adverse effects of the expired measures. By virtue of DSU
Appendix 2, Article 7.8, not DSU Article 19, provi des the basis for remedies involving claims under
Articles 5 and 6 of the SCM Agreement. In maki ng recommendations under such claims, the Panel is
not limited to a recommendation that a Member bring its measures into conformity with a covered
agreement. Rather, a Panel finding adverse effects caused by a Member’s actionable subsidies must
recommend that the Member withdraw the subsidy or remove the adverse effects.

8. In sum, the Panel is required to objectively assess the present effects of PFC and market loss
assistance payments on US production, US exports and prices of upland cotton. If it finds that these
subsidies cause adverse effects within the meaning of Articles 5 and 6 of the SCM Agreement – as
Brazil believes the Panel will find based on the argum ents and evidence to be presented by Brazil on
9 September 2003 – the Panel should recommend that the United States remove the adverse effects
pursuant to ASCM Article 7.8.

3. Agricultural Assistance Act of 2003

16. What, if any, prejudice in terms of the presentation of its case does the United States
allege, should the Panel proceed to consider th e measures constituting the cottonseed payments
under the Agricultural Assistance Act of 2003? USA

 2 The analysis in this paragraph is relevant to the first paragraph of Brazil’s Answer to Panel
Question 19.

17. (a) What is the relationship of the Ag ricultural Assistance Act of 2003 to other
legislation in the request for establishment of the Panel? BRA, USA

 (b) Do the legal instruments follow directly one after another, or are there temporal
gaps? Are payments authorized under a broad legislative authority or are they specific
to each legal instrument? BRA, USA

 (c) Please provide any implementing regulations. Do these implementing
regulations resemble those relating to p revious programmes or payments? Are
payments made retrospectively? How if at all is this relevant? BRA, USA

Brazil's answer

9. Cottonseed payments for MY 2002, as with the previous cottonseed payments in MY 1999
and 2000, were authorized by a nnual appropriations acts involving a variety of other legislative
provisions that do not relate to cottonseed payments.
3 Public Law 106-113, inter alia, appropriated
funds otherwise unused for assistance to produ cers or first-handlers of the MY 1999 crop of
cottonseed.4 The United States indicated in consultations that $79 million had in fact been used for
that purpose. Public Law 106-224, inter alia, appropriates $100 million for assistance to producers
and first-handlers of the MY 2000 crop of cottonseed. 5 Public Law 107-25, inter alia, added an
appropriation of $84.7 million for assistance to producers and first-handlers of the same MY 2000
crop of cottonseed. 6 No cottonseed payments were author ized for MY 2001. The Agricultural
Assistance Act of 2003, inter alia, appropriated co ttonseed payments for the 2002 crop in the amount
of $50 million.7

10. None of these statutory pr ovisions contains any guidance on how USDA was to implement
the cottonseed payments. Eligibility, administration, application and payment rates and details are all
provided for in regulations. Brazil has provided in Exhibit Bra-32 the regulations applicable to the
MY 2000 crop of cottonseed. Regulations governin g payments for the MY 2002 crop of cottonseed
were issued on 25 April 2003 and are set forth in Exhibit Bra-139. Comparing these regulations with
the regulations that implement 2002 cottonseed payments
8 demonstrates that both regulations are
almost identical. In f act, the preamble to the 2002-crop regulations provides that “[p]revious 1999-
crop and 2000-crop cottonseed programs were codified in 7 CFR part 1427. This rule follows the
model set by those preceding programs.”9 Additionally the preamble to the regulations states:

Presumably, Congress expected the old programme to serve as the model for the new
programme provided for in the new legislation as no dissatisfaction was expressed.
10

11. This evidence demonstrates that the Co ttonseed Payment Programme in MY 2002 was a
continuation of the Cottonseed Payment Program me with respect to MY 1999 and 2000. The
Agricultural Assistance Act of 2003 appropriated ne w funds for the MY 2002 crop to the existing
programme (after no such appropriations took place for MY 2001). The 2002 cottonseed payments
provided for in the Agricultural Assistance Act of 2003 are “future measures implementing” 11 the

 3 Exhibit Bra-135 (Agricultural Assistance Act of 2003, in P.L. 108-7), Exhibit Bra-136 (P.L. 106-
113), Exhibit Bra-137 (P.L. 106-224) and P.L. Exhibit Bra-138 (107-25).
 4 Exhibit Bra-136 (Section 104 of P.L. 106-113).
 5 Exhibit Bra-137 (Section 204(e) of P.L. 106-224).
 6 Exhibit Bra-138 (Section 6 of P.L. 107-25).
 7 Exhibit Bra-135 (Section 206 of P.L. 108-7).
 8 Exhibit Bra-139 (68 Federal Register 20331).
 9 Exhibit Bra-139 (68 Federal Register 20331, p. 20331).
 10 Exhibit Bra-139 (68 Federal Register 20331, p. 20332).
 11 Brazil’s Request For the Establishment of a Panel, WT/DS267/7, p. 2. See Appellate Body Report,
Chile – Agricultural Products (Price Band), WT/DS207/AB/R, paras. 135-136 and 144.

existing (but unfunded) Cottonseed Payment Progr am, which formed part of the request for
consultations and which has been consulted upon. The MY 2002 cottonseed payments are therefore
within the terms of reference of this Panel and Brazil is entitled to challenge the adverse effects
caused by these payments.

12. Finally, the Agricultural Assistance Act of 2003 appropriated $50 million in cottonseed
payments expressly for the MY 2002 crop. Paym ents will be made after the United States has
received all applications and has calculated the payment rate.
12 Since, payments are made after the
2002 crop has been harvested, payments can be cons idered to be made retrospectively. Yet,
irrespectively of when the payments are made and irrespective of the Panel’s decision whether they
form part of the Panel’s te rms of reference, they are made in respect of MY 2002 13 and, therefore,
these payments should be included in the calcula tion of the MY 2002 support to upland cotton for
purposes of the test under Article 13(b)(ii) of the Agreement on Agriculture.

18. If the Panel is correct in understanding that cottonseed payments are divided between
processors and producers, how is this reflected in Brazil's calculations? BRA

Brazil’s answer

13. Brazil has included the full amount of cottonseed payments in its peace clause calculations for
MY 1999, 2000 and 2002 because cottonseed payments constitute support to upland cotton. This
approach is consistent with the United States’ notifications of these payments as product-specific
support to upland cotton in its notification of domestic support for MY 1999.
14

14. Brazil furthermore notes that the full amount of cottonseed payments is available to stimulate
production and distort trade. Including the full amount of cottonseed payments is also consistent with
basic principles of microeconomics that the incidence of a tax or subsidy does not depend on where in
the processing chain the tax or subsidy is applied. The production or consumption effects of a tax or
subsidy depends on supply and demand elasticities and market c onditions, but these market impacts
do not depend on whether government checks are written in the name of farmers or initial
processors.
15

C. MEASURES AT ISSUE

19. The Panel notes that Brazil's panel request refers, inter alia, to alleged "subsidies" and
"domestic support" "provided" in various contexts . Please specify the measures, in particular,
the legislative and regulatory provisions, by num ber and letter, in respect of which Brazil seeks
relief and indicate where each is referred to in the panel request. BRA

Brazil’s answer

15. Brazil’s Request for Establishment of a Pa nel (“Panel Request”) ch allenges two types of
domestic support “measures” provided to upland cotton and various different types of export subsidy
measures. The first type of domestic support “measure” is the payment of subsidies for the
production and use of upland cotton. These payments were and continue to be made between MY
1999 to the present (and will be made through MY 2007) through the various statutory and regulatory
instruments listed on pages 2-3 of Brazil’s Panel Request. Brazil referred to these payments at
pages 2-3 of the Panel Request as “subsidies and domestic support provided u nder” or “mandated to

 12 Exhibit Bra-139 (7 CFR 1427.1107-1110 as provided in 68 Federal Register 20331, p. 20333).
 13 See Brazil’s answer to Question 34.
 14 See Exhibit Bra-47 (G/AG/N/USA/43, p. 20).
 15 Exhibit Bra-140 (Pindyck, Robert S. and Rubinfeld, Daniel L. , Microeconomics, 5th edition (2002),
Prentice Hall, New Jersey, p. 313-317).

be provided” under the various liste d statutory and regulatory instruments. Brazil has tabulated the
different types of payments (i.e., the measures) made under these legal instruments in paragraphs 146-
149 of its First Submission. Brazil’s “Furth er Submission” on 9 September 2003 will provide
considerable detail concerning the effects of the subsidies provided and manda ted to be provided by
the United States. It is these effects in respect of which Brazil seeks relief with respect to the first
type of domestic support measures.

16. A second type of domestic support “measure” challenged by Brazil are legal instruments as
such. The “legislative and regulatory provisions, by number and letter, in respect of which Brazil
seeks relief” are those involving the 2002 FSRI Ac t and the 2000 Agricultural Risk Protection Act
and in particular the following:
16

• Marketing loan/loan deficiency payments: Sections 1201(a)-(b), 1202(a)(6),
1202(b)(6), 1204(b), 1205(a)(1), 1205(b), 1205(c)(1), 1608 of the 2002 FSRI Act and
7 U.S.C. 7286 (Section 166 of the 1996 FAIR Act as amended) and 7 CFR 1427.22 to
the extent that these provisions require th e provision of marketing loan and loan
deficiency payments for all production of upland cotton.

• Counter-cyclical payments: Section 1104(a)-(f)(1) of the 2002 FSRI Act and 7
CFR 1412.503.

• Direct payments: Section 1103(a)-(d)(1) of the 2002 FSRI Act and 7 CFR
1412.502.

• Step 2 Domestic Payments: Section 1207(a) of the 2002 FRSI Act and 7 CFR
1427.103, 7 CFR 1427.104(a)(1), 7 CFR 1427.105(a), 7 CFR 1427.108(d) requiring
cotton user marketing certificate (“Step 2”) payments to be made to domestic users of
US upland cotton.

• Crop Insurance payments: Section 508(a)(8), 508(b)(1), 508(b)(2)(A)(ii),
508(b)(3), 508(e) and 508(k) of the 2000 ARP Act
17 mandating the provision or crop
insurance policies to farmers, premium s ubsidies to farmers and reinsurance to
insurance providers to the extent that these provisions apply to upland cotton.
Section 516 providing for unlimited funding of the crop insurance programme to the
extent that these funds are available to upland cotton producers

17. Finally, Brazil challenges three types of e xport subsidies provided by the United States.
Regarding Step 2 export subsidies, the measure Br azil challenges is Section 1207(a) of the FSRI Act,
and 7 CFR 1427.103, 7 CFR 1427.104(a)(2), 7 CFR 1427.105(a), and 7 CFR 1427.108(d) requiring
cotton user marketing certificate (“Step 2”) payments to be made to exporters of US upland cotton.
18
Brazil also challenges as a “measure” subsidies provi ded by Step 2 export programme as actionable
subsidies.

18. Regarding Brazil’s ETI Act claim, the measur e challenged by Brazil is the FSC Repeal and
Extraterritorial Exclusion Act of 2000, Public La w 106-519, 114 Stat. 2423 (2000), and in particular,
Section 3 (entitled “Treatment of Extraterritorial Income”), which amends the US Internal Revenue

 16 These Acts are referenced on page 2 of Brazil’s Panel Request (WT/DS267/7), and Brazil’s per se
claim regarding these Acts and the regulations is referenced at page 4 of Brazil’s Panel Request.
 17 Page 2 of Brazil’s Panel Request (WT/DS267/7) identifies the Agricultural Risk Protection Act of
2000.
 18 Page 2 of Brazil’s Panel Request (WT/DS267/7) identifies the 2002 FSRI and the regulations in
relation to Step 2 payments.

Code (IRC) by inserting into it a new Section 114, as well as a new Subpart E, which is in turn
composed of new IRC Sections 941, 942 and 943.
19

19. With respect to Brazil’s export credit guaran tee claims, the measures challenged by Brazil are
the GSM 102, GSM 103 and SCGP programs as esta blished and maintained by 7 U.S.C. 5622
20 and 7
CFR 1493. 21 Brazil challenges 7 U.S.C. 5622(a)(1) and (b), 22 which provide for the extension of
export credit guarantees on terms better than those available on the marketplace. Furthermore, Brazil
challenges the maintenance of the GSM 102, GSM 103 and SCGP programs at premium rates that are
inadequate to cover the long-term operating costs and losses of the programs. Additionally, Brazil
challenges the failure of 7 U.S.C. 5622 and 7 CFR 1493 to prevent circumvention (or the threat of
circumvention) of the US export subsidy commit ments under the Agreement on Agriculture. Brazil
also challenges as a “measure” GSM 102, GSM 103 and SCGP export credit guarantees facilitating
the production and export of US upland cotton as act ionable subsidies and thereby causing adverse
effects to the interests of Brazil.

D. ARTICLE 13(B): DOMESTIC SUPPORT MEASURES

1. "exempt from actions"

20. In paragraph 8 of its initial brief (dated 5 June, 2003), the United States argued that the
word "actions" as used in the phrase "exempt from actions" in Article 13 of the Agreement on
Agriculture includes the "bringing of a case" and consultations. In paragraph 36 of its first
written submission (dated 11 July, 2003), the United States stated as follows:

 "[P]rior to this point in the process, the DSU rules did not afford the United States any
opportunity to prevent the dispute from proceeding through consultations and panel
establishment automatically, regardless of the US insistence that its measures conform
to the Peace Clause."

Is it the United States' understanding that the drafters used the phrase "exempt from actions"
knowing that under the DSU it would not be possib le fully to exempt "actions", as the United
States interprets that term? USA

21. In US - FSC and US - FSC (21.5) the Appellate Body made findings under the SCM
Agreement relating to export subsidies in resp ect of agricultural products without making a
finding in respect of Article 13 of the Agreement on Agriculture. How is this relevant to the
United States' interpretation of the phrase "exempt from actions" as used in Article 13? USA

2. "such measures" and Annex 2 of the Agreement on Agriculture

22. Please explain the difference, if any, between the meaning of "defined" and the meaning
of "fixed" in the phrase "a defined and fixed ba se period" in paragraph 6(a) of Annex 2 of the
Agreement on Agriculture. BRA, USA

 19 Page 2 of Brazil’s Panel Request (WT/DS267/7) identifies the ETI Act.
 20 Exhibit Bra-141 (7 U.S.C. 5622) codifies the relevant provisions of the 1978 Agricultural Trade Act
as amended, identified on page 2 of Brazil’s Panel Request (WT/DS267/7).
 21 See Exhibit Bra-38 (7 CFR 1493). Pages 2 and 5 of Brazil’s Panel Request (WT/DS267/7) identifies
GSM 102, GSM 103, and SCGP programs.
 22 Exhibit Bra-141 (7 U.S.C. 5622) codifies the relevant provisions of the 1978 Agricultural Trade Act
as amended, identified on page 2 of Brazil’s Panel Request (WT/DS267/7).

Brazil’s answer:

20. The meaning of the term “defined” in relati on to “base period” is the period of time used to
define the parameters (“indicate the extent”
23) of the base period. The word “period” is defined as “a
course or extent of time”. 24 For example, the “defined” “base period” to determine the amount of
upland cotton base acreage for the PFC (and market loss assistance) payments was the average
planted and considered planted acreage during MY 1993-95. 25 The term “fixed” in relation to “base
period” means that the “defined” base period cannot ch ange or be updated. This is confirmed by the
dictionary meaning of the term “fixed,” which is “definitely and permanently placed or assigned;
stationary or unchanging in relative pos ition; definite, permanent, lasting.”26 In sum, a base period is
first “defined” in terms of a period of time, and th en that period remains definitely and permanently
assigned.

23. Please explain the meaning of "a" in "a defined and fixed base period" in paragraph
6(a) of Annex 2 of the Agreement on Agriculture, the meaning of "the" in "the base period" in
paragraphs 6(b), (c) and (d), and the difference between these and the phrase "based on the
years 1986-88" in Annex 3. BRA, USA

Brazil’s answer:

21. Paragraph 6(a) requires Members to establis h clearly defined eligibility criteria for a de-
coupled direct payment measure. These eligibility cr iteria must be taken from “a” defined and fixed
base period of time. Paragraph 5 of Annex 2 makes it clear that all of the subparagraphs of paragraph
6 apply to the same type of de-coupled income support. Thus, a de-coupled income support measure
with “a” “fixed base period” must also comply with Annex 2, paragraphs 6(b), (c) and (d). These sub-
paragraphs use the phrase “after the base period.” Because Article 6(a) establishes that there can only
be “a” (single) “fixed” base period for a particular de-coupled domestic support measure, the use of
the term “the” in 6(b)-(d) refers back to “a” “fixed” base period established in Article 6(a). Thus, a
de-coupled income support measure can have only one “fixed” base period.

22. The Panel is faced with the question whethe r a Member can make minor adjustments to a
decoupled support measure, label it a new decoupl ed support measure and then update the base
period. Guidance for this question is provided by th e first part of Annex 2, paragraph 6(a), which sets
out a transparency requirement that eligibility cr iteria for decoupled support measures be determined
by “clearly-defined criteria”. In assessing whet her one decoupled income support measure is
essentially the same as a replacement decoupled in come support measure, the Panel could examine
the eligibility criteria for each set of measures. If the structure, design, and eligibility criteria have not
significantly changed between the original measur e (containing the “fixed base period”) and its
replacement, then there is no basis for any updating of the “fixed base period”.

23. The factual question the Panel must address in this case is whether the “direct payment”
programme in the 2002 FSRI Act contains similar design, structure, and eligibility criteria as the
“production-flexibility contract payments” for uplan d cotton in the 1996 FAIR Act. The clearest
evidence that the direct payment pr ogramme is the direct successor to production flexibility contracts
is found in Section 1107(b) of the 2002 FSRI Act. It provides as follows:

If a producer receives all or any portion of the payment authorized for fiscal year
2002 under a production flexibility contract, the Secretary shall reduce the amount of

 23 The New Shorter Oxford English Dictionary, 1993 edition, p. 618 (definition of “define”).
 24 The New Shorter Oxford English Dictionary, 1993 edition, p. 2163.
 25 See First Submission of Brazil, para. 46. See also Exhibit Bra-31 (7 CFR 1412.103) in connection
with Exhibit US-3 (7 CFR 1413.7(c)).
 26 The New Shorter Oxford English Dictionary, 1993 edition, p. 962.

the direct payment otherwise due the producer for the 2002 crop year under section
1103 by the amount of fiscal year 2002 payment received by the producer under the
production flexibility contract.
27
24. Trading PFC dollars for direct payment do llars makes perfect sense given the very close
similarities in the eligibility criteria between PFC and direct payments reflected in the statutes and
regulations governing each. This is best illustrated in the following table:

Similarities of Production Flexibility Contract and Direct Payments

Eligibility Criteria Production Flexibility
Contracts
Direct Payments
Payment contract

Annual fiscal payment based
on 7 year contract28

Annual payment based on
annual contract29
Eligible Recipients

“Producers” who assume all
or part of the risk of
producing a crop
30
Same31
Contract Acreage
(Base Acreage)
MY 1993-9532 MY 1993-95 or MY 1998-
200133
Programme crops 7 Crops34

Same plus soybeans, other
oilseeds, and peanuts35
Planting Flexibility and
Restrictions
Limitations on fruits and
vegetables (wild rice added
in 2000).
36
Same.37

Payment Yield Base yield same as
deficiency payment base
average MY 1981-8538
Same.39

Cotton Payment Payment on 85% of base
acres times base yield times
7.07 cents per pound 40 on
average between 1999-2001
for upland cotton
41
Payment on 85% of base
acres times base yield times
6.67 cents per pound for
upland cotton
42
Compliance conditions Abide by conservation
compliance requirements43
Same. 44

 27 Exhibit Bra-29 (Section 1107(b) of the 2002 FSRI Act).
 28 Exhibit Bra-31 (7 CFR 1412.101 and 1412.103)
 29 Exhibit Bra-35 (7 CFR 1412.401)
 30 Exhibit Bra-31 (7 CFR 1412.202)
 31 Exhibit Bra-35 (7 CFR 1412.402)
 32 Exhibit Bra-31 (7 CFR 1412.103)
 33 Exhibit Bra-35 (7 CFR 1412.201)
 34 Exhibit Bra-31 (7 CFR 1412)
 35 Exhibit Bra-35 (7 CFR 1412.103)
 36 Exhibit Bra-31 (7 CFR 1412.206)
 37 Exhibit Bra-35 (7 CFR 1412.407)
 38 Exhibit Bra-31 (7 CFR 1412.103)
 39 Exhibit Bra-35 (7 CFR 1412.301 and 1412.302)
 40 Exhibit Bra-142 (Agricultural Outlook, May 2002, p. 50). Brazil notes that these payment rates were
not statutory rates but resulted from the allocation of a fixed amount of budgetary outlays to holders of upland
cotton base under the PFC programme in MY 1999-2001.

41 Exhibit Bra-31 (7 CFR 1412.103)
 42 Exhibit Bra-35 (7 CFR 1412.502(e))
 43 Exhibit Bra-31 (7 CFR 1410.20)

25. For an upland cotton producer with upland cotton base in MY 2001 and MY 2002, the direct
payments available in MY 2002 were based on the following four elements: (1) yield (the average of
the farm for MY 1981-85), (2) base acreage for the farm (resulting from either MY 1993-95 or MY
1998-2001 production), (3) only 85 percent of base acres could receive payment, and (4) the payment
rate of $0.0677 cents per pound (applied to base ac reage x yield x .85). The production flexibility
contract payment for that same upland cotton farmer in MY 2001 would have been based on (1) yield
(the average for MY 1981-85), (2) base acreage resulting from MY 1993-95 production, (3) only
85 percent of base acres could receive payment, and (4) 5.99 cents per pound. 45 Thus, with the
exception of the per pound payment rate – which increased under the 2002 FSRI Act – and the ability
in 2002 to update base acreage, the payment formula was the same under both programmes.

26. In addition to these payment formula similariti es, the eligibility criteria for an upland cotton
producer in MY 2001 and MY 2002 are either identical or very similar under both programmes. For
example, eligible recipients under both programm es are “producers,” defined in each programme as
“an owner, operator, landlord, tenant, or sharecr opper that shares in the risk of producing a crop”.
46
The “producer” under each programme could not pl ant fruits, vegetables, tree nuts or wild rice
without either a forfeiture of all pa yments or a reduction of payments. 47 And each “producer” under
both programmes had to maintain the land in agricultural use and adhere to conservation
requirements.48

27. In addition to the possibilit y to update the base acreage, a nother difference between the PFC
and direct payment is the addition of three add itional programme crops for purposes of the direct
payment programme – soybeans, other oilseeds, and peanuts.49 Further, instead of a single seven-year
contract, annual contacts are entered into between USDA and “producers” who must demonstrate that
they are eligible for payments based, inter alia, on demonstrating that they “share in the risk of
producing a crop and are entitled to share in the crop available for marketing from the farm”. 50 The
final difference was to set fixed amounts of paym ents per pound that did not decrease over the six-
year term of the 2002 FSRI Act. The 1996 FA IR Act based the payment rate on annual budgeted
amounts and as the budgeted amounts declined, the payment rate declined.

28. None of these changes to the direct paymen t programme in any way changed the eligibility
criteria, the design, or the structure of the prod uction flexibility programme as it applied to upland
cotton producers. For the typical upland cotton producer farming on upland cotton base acreage, the
only thing that changed was that the producer received the option to increase payments by updating
base acreage and obtained an increased payment rate. Given the identical nature of most aspects of
the production flexibility contract payments and dir ect payments, there was no basis to change the
“fixed base period” of marketing years 1993-1995 for the calculation of these direct payments.

29. In light of this evidence, the Panel is not f aced in this case with the situation where a Member
significantly changes the structure, design, and eligibility criteria of an older measure. For example, if
a Member replaces an amber box domestic support meas ure with a green box measure, the structure

 44 Exhibit Bra-35 (7 CFR 1412.203)
 45 Exhibit Bra-142 (Agricultural Outlook, May 2002, p. 50). Brazil notes that this payment rate was
not a statutory rate but resulted from the allocation of a fixed amount of budgetary outlays to holders of upland
cotton base under the PFC programme in MY 2001.
 46 Exhibit Bra-29 (7 CFR 1001(1) of the 2002 FSRI Act), Exhibit Bra-28 (Section 102(12) of the 1996
FAIR Act)

47 Exhibit Bra-28 (Section 118 b(1) of the 1996 FAIR Act), Exhibit Bra-29 (Section 1106 b(3) of the
2002 FSRI Act).
 48 Exhibit Bra-31 (7 CFR 1410.20) and Exhibit Bra-35 (7 CFR 1412.203)
 49 Exhibit Bra-29 (Section 1101-1103 of the 2002 FSRI Act), Exhibit Bra-27 (“Side by Side
Comparison of the 1996 and 2002 Farm Act, USDA).
 50 Exhibit Bra-29 (Section 1001(1) of the 2002 FSRI Act).

and eligibility criteria is likely to be sufficiently di fferent to permit the establishment of a new “fixed”
base period for the new measure. But replacing an older green box measure with a new alleged green
box measure, which basically only updates the base pe riod and thereby results in increased payments,
violates the requirement of “a” “fixed” base period in Article 6(a).
51

30. Finally, Brazil believes that Annex 3, paragr aphs 9 and 11 provide contextual support for the
requirement that “a” “fixed” base period for essentially the same measure should not be changed. For
the purposes of calculating total AMS, Annex 3 establishes “a” “fixed” base period – 1986-1988 – for
determining the reference price that serves as a basi s for the formula approach to calculating AMS for
price support measures. This base period could no t be changed without eliminating the basis for
calculating the total AMS and the required reductions in domestic support. Similarly, paragraphs 6(a)
and 6(b) of Annex 2 require a fi xed base period and prevent an updating of a base period for “green
box” domestic support measures that remain essentially the same programme.

24. How often can a Member define and fix a base period in accordance with paragraph 6
of Annex 2 of the Agreement on Agriculture? BRA, USA

Brazil’s answer:

31. As set out in Brazil’s Answer to Panel Question 23, the answer is never if the replacement de-
coupled direct payment measure has a comparable st ructure, design and eligibility criteria as the older
de-coupled direct payment measure.

25. Does the United States consider that there is any ambiguity in the term "type of
production" as used in paragraph 6(b) of Annex 2 of the Agreement on Agriculture? USA

26. Can the United States confirm Brazil's asse rtions in paragraph 174 of its first written
submission that the implementing regulations for direct payments prohibit or limit payments if
base acreage is used for the production of certain crops? If so, can the United States clarify the
statement in paragraph 56 of its first written submission that direct payments are made
regardless of what is currently produced on th ose acres? Can the United States confirm the
same point in relation to production flexibility contracts? USA

27. Does Brazil argue that any United States measure that does not comply with the
fundamental requirement of paragraph 1 of A nnex 2 of the Agreement on Agriculture is
actionable independently of any failure of that measure to comply with the basic or policy-
specific criteria in Annex 2? BRA

Brazil’s Answer:

32. Yes. A domestic support measure that does not meet the “fundamental requirement” of the
first sentence of Annex 2, paragra ph 1, cannot be considered to be properly in the “green box”. In
addition to the arguments at paragraphs 163-17 2 of Brazil’s First Submission, Brazil provides
additional rationale for this argument below.

33. The use of the words “fundamental requireme nt” in the first sentence of paragraph 1,
Annex 2, demonstrates that the obligation contained in the sentence is separate and distinct from the
obligation to meet the basic and policy-specific requirements set forth in Annex 2. The ordinary
meaning of those words, in that context and in light of the object and purpose of the Agreement in
Agriculture, support this interpretation.

 51 See First Submission of Brazil, paras. 177-181.

34. The ordinary meaning of “requirement” is “a thing required or needed, a want, a need;
something called for or demanded; a co nditions which must be complied with”.
52 Interpreted in the
context of paragraph 1, Annex 2, it means that havi ng no, or at most minimal, trade-distorting effects
or effects on production is a condition for a domestic support measure, which must be complied with,
for exempting this domestic support measure from the reduction commitments.

35. The word “fundamental” qualifies the word “re quirement”. The ordinary meaning of the term
“fundamental” is “going to the root of the matte r; serving as the base or foundation; essential or
indispensable”.53 The use of this adjective emphasizes a nd underscores that the requirement that a
measure does not have trade-distorting effects or effects on production is essential and indispensable
for a domestic support measure to be exempted from reduction commitments.

36. In sum, the ordinary meaning of a “f undamental requirement” is an “essential and
indispensable condition that must be complied with”. It follows that the fundamental requirement in
the first sentence of Annex 2, paragraph 1 must be read as a stand-alone obligation and that it is
untenable to relegate the obligation in the first sen tence of Annex 2, paragraph 1 to a policy objective
role that merely informs the rest of the Annex. In stead, it is a condition of central importance that all
domestic support measures must meet in order to be exempted from reduction commitments. Its
importance is such that it serves as the premise on which the basic and policy-specific criteria are
predicated.

37. The principle of effective interpretation ( l'effet utile), recognized by panels and the Appellate
Body, requires that a treaty be interpreted to give m eaning and effect to all the terms of the treaty.
The first sentence of Annex 2, paragraph 1 of the Agreement on Agriculture, which imposes an
obligation in clear and unequivocal terms, has to be accorded full meaning. Nothing suggests that
recognizing the fundamental requirement as a sta nd-alone obligation would undermine or render
inutile the obligation to conform to the basic and policy-specific criteria. To interpret the fundamental
requirement as a policy objective that merely info rms the rest of Annex 2 would detract from the
unambiguous obligation that domestic support measures have no, or at most minimal, trade-distorting
effects or effects on production.

38. The obligation to meet the fundamental require ment set forth in Annex 2, paragraph 1 is the
overriding principle that determines whether a me asure can be exempt from reduction commitments.
The purpose of the disciplines on domestic support in the Agreement on Agriculture, made effective
in part through the reduction commitments, is to el iminate trade and production-distorting effects of
domestic support measures or permit these measures to only have at most minimal trade or
production-distorting effects. Where a measure does not create trade-distorting effects or effects on
production, the rationale for limiting the use of that support measure disappears. Conversely, where a
measure does have trade-distorting effects or effects on production, it must be subject to reduction
commitments, regardless of whether it complies with certain other basic or policy-specific criteria.
To exempt a measure because a Member alleges th at it is classified as a green box measure, despite
having trade-distorting effects or effects on production, would be to accept a circular reasoning and
would undoubtedly undermine the disciplines on domestic support measures.

39. Brazil has set forth the evidence demonstrating that production flexibility contracts and direct
payments have more than a minimal effect on production and thus are inconsistent with the
fundamental requirement of the first sentence of Annex 2, paragraph 1.54 These production effects are
not surprising given the fact that both PFC and direct payments limit payments based on the type of

 52 The New Shorter Oxford English Dictionary, 1993 edition, p. 2557.
 53 The New Shorter Oxford English Dictionary, 1993 edition, p. 1042.
 54 First Submission of Brazil, paras. 163-172; 183-191; First Oral Statement of Brazil, paras 50-54, 57-
61; Exhibit Bra-105 (Statement of Professor Daniel Sumner at the First Meeting of the Panel 22 July 2003,
paras. 20-28).

production. Further, the updating of the base acrea ge for the direct payment programme (which one
third of all eligible US farms took advantage of to increase their base acres eligible to receive direct
payments), created further production enhancing eff ects today (as well as in the future) as detailed by
Professor Sumner in paragraphs 20-29 of his Statement at the First Meeting of the Panel on
22 July 2003.
55

40. Brazil finally notes that if follows from the first sentence of Annex 2, paragraph 1 that any
domestic support measures not complying with one of the basic or policy-specific criteria in Annex 2
is to be presumed to violate the fundamental require ment that it have no, or at most minimal, trade-
distorting effects or effects on production. This conclusion holds regardless of the finding of the
Panel on the character of the first sentence of Annex 2, paragraph 1 as a stand-alone obligation.
56

28. Please explain the meaning of the word "criteria" in Articles 6.1 and 7.1. What effect, if
any, does the use of the word "Accordingly" in paragraph 1 of Annex 2 of the Agreement on
Agriculture have on the meaning of the preceding sentence? BRA

Brazil’s Answer

41. Articles 6.1 and 7.1 reference “criteria” in general, without a specific mention of “basic
criteria”, or “policy-specific” criteria. To give meaning to the “fundamental requirement” of Annex 2,
paragraph 1, the use of the word “criteria” must en compass all the rules, standards, or requirements
established by Annex 2 as conditions for determin ing whether a domestic support measure can be
exempted from reduction commitments. There is no basis, therefore, on which to exclude the
fundamental requirement in Annex 2, paragraph 1 from the criteria that a domestic support measure
must meet to be exempted from the reduction commitments.

42. Brazil further notes that, while Article 6.1 refers to “criteria set out in this Article”, nowhere
in the subsequent sub-paragraphs of Article 6 can the word “criteria” be found. This suggests that the
term “criteria” as used in the Agreement on Agriculture cannot be interpreted in such a way as to limit
its coverage to “basic criteria” or “policy-specific criteria” in Annex 2. The word “criterion” means
“a principle, standard or test by which a thing is judged, assessed or identified”.
57 It follows that the
term “criteria” encompasses all standards and tests set up by the provisions in the Agreement on
Agriculture and its Annexes to which Article 6.1 and 7.1 refer. This standa rds and tests include the
fundamental requirement in the first sentence of Annex 2, paragraph 1.

43. The word “accordingly” does not (and cannot be read to) emasculate a “fundamental
requirement”. It introduces the related but distin ct obligation to conform to the basic and policy-
specific criteria. “Accordingly” is defined as “in accordance with the logical premise”. It is also
defined as “harmoniously, agreeably,” or “in natural sequence,” 58 or “appropriate, fitting”. 59 The
word “accordingly” indicates that the “basic cr iteria” are derivative of the more fundamental
obligation in the first sentence of that same paragra ph. “Accordingly” simply explains that because it
is a fundamental requirement that domestic support measures have no, or at most minimal, trade-
distorting effects or effects on production, it is necessary that the measures also meet certain basic
criteria. Thus, the “fundamental requirement” is a premise, and the “basic criteria” in the second
sentence of Annex 2, paragraph 1 are in accordance – i.e., not contrary – to that fundamental
requirement. Because the first is a premise of the second, it is incorrect, indeed illogical, to say that
the second sentence takes precedence, subsumes or subordinates the first more fundamental
obligation.

 55 See Exhibit Bra-105 (Statement of Professor Daniel Sumner at the First Meeting of the Panel).
 56 See First Oral Statement of Brazil, para. 21.
 57 The New Shorter Oxford English Dictionary, 1993 edition, p. 551.
 58 The New Shorter Oxford English Dictionary, 1993 edition, p. 15.
 59 The New Shorter Oxford English Dictionary, 1993 edition, p. 15.

29. Please explain the meaning of the words "the fundamental requirement" as used in
paragraph 1 of Annex 2 of the Agreement on Agriculture. USA

30. Do the parties consider that direct p ayments and production flexibility contract
payments meet or met the basic criteria referred to in paragraph 1 of Annex 2 of the Agreement
on Agriculture? BRA, USA

Brazil’s Answer

44. The direct payments and production flexibility co ntract payments meet the first basic criteria
in paragraph 1(a) of Annex 2. With respect to the second basic criteria, Brazil is not alleging that
either of these two types of payments “have the effect of providing price support to producers”.

31. If the first sentence of paragraph 1 of Annex 2 is not a stand-alone obligation, then must
new, non- or minimally trade-distorting measures that do not conform to the criteria listed in
Annex 2 be classified as non-Green Box? BRA, USA

Brazil’s Answer:

45. Yes. As explained in answer to Question 27 above, any domestic support measures that do
not comply with the basic or policy-specific criteria in Annex 2 shall be presumed to violate the
fundamental requirement in the first sentence of paragraph 1 of Annex 2 and must, therefore, be
considered non green-box domestic support measures. This is true regardless whether the Panel
concludes that the first sentence of paragraph 1 of Annex 2 is a stand-alone obligation.

32. If the first sentence of paragraph 1 of Annex 2 expresses a general principle which
informs the interpretation of the criteria in Annex 2, please explain how this affects the
assessment of the direct payments programme's compliance with paragraph 6 of Annex 2. USA

3. "do not grant support to a specific commodity"

33. According to the United States' interpretat ion of the word "grant", when can a Member
claim that a measure is not exempt from action under Article 13(b)? What if the measure is
enacted annually? Can the Member obtain a remedy in respect of that measure under the
DSU? USA

(34) Does Brazil interpret the word "grant" as used in Article 13(b)(ii) of the Agreement on
Agriculture to mean payment made in a specific year or payment made in respect of a specific
year? BRA

Brazil’s Answer:

46. Brazil interprets the word “grant” to mean “payment made in respect of a specific year”.60

35. Does a failure by a Member to comply in a given year with either the chapeau of
Article 13(b) or the proviso in subparagraph (ii) of Article 13(b) impact its entitlement to benefit
in an earlier or a later year from the exempt ion from action provided by Article 13(b)? BRA,
USA

 60 See First Oral Statement of Brazil, para. 31 (“Thus , the neutral term ‘decision’ must be read
consistently with ‘grant.’ In sum, a harmonious interpretation of ’decided’ exists where the ‘decision’ is to fund
marketing year 1992 non-‘green-box’ expenditures for a specific commodity.”).

Brazil’s Answer:

47. Yes. A failure of a Member’s measures to m eet in any given year the conditions of the peace
clause lifts the entitlement to p eace clause protection for the whole implementation period for all
measures found to fail meeting the conditions of the peace clause. This conclusion applies to
domestic support measures as well as export subsidies.

48. At the outset, Brazil would like to recall that the peace clause provides Members only limited
protection from actionable and prohibited subs idy claims under the SCM Agreement and GATT
Article XVI. Domestic support measures are only exempt from action under Articles 5 and 6 of the
SCM Agreement and under GATT Article XVI:1, if the domestic support measures do not violate the
Total AMS reduction commitments of a Member a nd if they do not grant support to a specific
commodity in excess of that decided during the 1992 marketing year. Export subsidies are only
exempt from actions under Articles 3, 5 and 6 of th e SCM Agreement and GATT Article XVI, if they
conform fully to the provisions of Part V of the Agreement on Agriculture.

49. The peace clause does not impose any positive obliga tions and can, thus, not be violated. It
constitutes a right and defence of a Member that this Member may or may invoke. The US – FSC and
US – FSC (21.5) dispute are examples of disputes, in whic h a Member has chosen not to invoke the
peace clause defence. Brazil has demonstrated before , that the peace clause is in the nature of an
affirmative defence.
61 Accordingly, a complaining party does not bear the burden of proof that the
measures at issue do not meet the conditions of the peace clause.

50. Nothing in the text of Article 13 suggests that a Member, which foregoes its peace clause
exemption for particular measures in one year durin g the implementations period, shall be entitled to
claim peace clause exemption for those measures for ot her – earlier or later – years. Article 13 offers
peace clause exemption for measures that “fully conform” to Article 6 and that do not “grant support”
“in excess of” that decided during the 1992 marketi ng year, as well as for measures that “fully
conform” to Part V of the Agreement on Agriculture . If measures fail to meet one of the relevant
conditions in any year – be it the current year or an earlier year during the implementation period –
those measures can no longer be considered to “ful ly conform” or to not “grant support” “in excess
of”. Consequently, those measures are not exempt from action.

51. Finally, Brazil notes that the Panel need not d ecide this issue due to the circumstances of the
present case. Brazil has demonstrated that the Un ited States’ domestic support measures at issue in
this dispute do not meet the conditions of the peace clause in any marketing year from MY 1999 to
the present and that the US export subsidies also do not conform fully to Part V of the Agreement on
Agriculture. Thus, none of the subsidies at issue in this dispute is entitled to exemption from actions
pursuant to the peace clause.

36. Does a failure by a Member to comply wi th Article 13(b) in respect of a specific
commodity impact its entitlement to benefit in respect of other agricultural products from the
exemption from action provided by Article 13(b)? BRA, USA

Brazil’s Answer:

52. No. In fact, this is one of the purposes of the word “specific” in Article 13(b)(ii) – to
differentiate a specific commodity whose amount of support was greater than the amount of support in
marketing year 1992 from other specific commodities whose support may not have exceeded the 1992
marketing year level.

 61 See First Submission of Brazil, para. 110-121, and First Oral Statement of Brazil, para. 5-11.

37. In the United States' view, why did the drafters not use the exact term "product-
specific" in Article 13(b)(ii)? USA

38. Given the fact that subsidies available for more than one product could have various
effects on production, how does the United Stat es demarcate between product-specific support
and non-product specific support ? USA

39. If "such measures" in Article 13(b)(ii) refers to all those in the chapeau of Article 13(b),
why are they not all included in the potential comparisons with 1992? In what circumstances
can measures which grant non-product specific support lose exemption from action under
Articles 5 and 6 of the SCM Agreement and Article XVI of GATT 1994? USA

40. In relation to which other provisions in th e Agreement on Agriculture is it relevant to
disaggregate non-product specific support in terms of specific commodities? BRA

Brazil’s Answer:

53. The Panel’s question uses the phrase “non-pr oduct specific support”, which is not defined
explicitly in the Agreement on Agriculture. Therefor e, before responding to this question, Brazil will
set forth its understanding of what this term means and which measures at issue in this dispute fall
within that definition.

54. “Aggregate Measurement of Support” and “AMS ” are defined in Article 1(a) as the “annual
level of support, expressed in monetary terms” (a) “in favour of the producers of the basic agricultural
product” or (b) “non-product-specific support provided in favour of agricultural producers in general .
. .” (emphasis added). Brazil notes that the ordinary meaning of the word “general” is “including,
involving, or affecting all or nearly all the parts of a (specified or implied) whole.”
62 The “whole” in
the case of Article 1(a) of the Agriculture Agreement refers to agricultural producers of all or nearly
all basic agricultural products covered by the Ag reement on Agriculture. Because the universe of
domestic support measures includes either “pr oduct-specific” or “non-product-specific” domestic
support measures, it follows that any domestic suppor t that is not provided “in favour of agricultural
producers in general” is deemed to be “in favour of the producers of the basic agricultural product”.
Accordingly, the test for determining whether a domestic support measure is “non-product specific”
for the purpose of calculating AMS is whether, as a factual matter, the measure provides support to
“agricultural producers in general”.

55. The United States has argued that Article 1(a) is useful context for interpreting the meaning of
“support to a specific commodity”.
63 However, the United States latches on to only the first part of
Article 1(a), and ignores the “in general” qualification in the second part, which provides the essential
meaning as to the scope of what is and is not “product-specific”. Brazil notes that none of the
measures it used to calculate the levels of s upport for purposes of Article 13(b)(ii) for MY 1992 or
MY 1999-2002 could properly be deemed to be “non-product-specific” support as defined in
Article 1(a) of the Agreement on Agriculture. A nd, as Brazil has previously argued, all of these
measures are “support to” upland cotton within the meaning of Article 13(b)(ii).

56. With that introduction, the answer to the Pane l’s question is that Brazil is not aware of any
provision of the Agreement on Agriculture requiring th e dis-aggregation of support that is “provided
in favour of agricultural producers in general”, as discussed above. However, Brazil notes that
Article 13(b)(ii) is a sui generis provision of th e Agreement on Agriculture that does not use the
phrases “AMS”, “non-product specific” or “product-specific” support. Contrary to all of the other

 62 The New Shorter Oxford English Dictionary, 1993 edition, p. 1073.
 63 First Submission of the United States, para. 78; See also Closing Statement of the United States,

provisions of the Agreement on Agriculture, Artic le 13(b)(ii) alone addresses the process for
disciplining domestic support provided to a specific commodity under Articles 5 and 6 of the SCM
Agreement and Article XVI:1 of GATT 1994.

41. What is the position of Brazil with regard to certain other domestic support measures
not cited by Brazil that were notified by the United States as non-product-specific
(e.g. G/AG/N/USA/43), some of which presumabl y deliver support to upland cotton (e.g. state
credit programmes, irrigation subsidies etc). Why have budgetary outlays for such measures
related to upland cotton not been included in the comparison of support with 1992? BRA

Brazil’s Answer:

57. Brazil did not include any other types of domestic support measures for MY 1992 or MY
1999-2002 in calculating peace clause amounts because no other measures appeared to meet the test
of being non-green box “support to” upland cotton in Article 13(b)(ii). Similarly, these measures
appear to meet the test of being provided “in favour of agricultural producers in general”. None, of
these other measures notified by the United States as non-product specific had any upland cotton
specific link in terms of historic, updated, or present upland cotton acreage, present upland cotton
production or prices, or upland cotton groups of insu rance policies or any other specific upland cotton
provisions. Further, the United States has not in dicated in any documents that these state credit
programmes, irrigation subsidies, etc. were not made available “in favour of agricultural producers in
general”. If the United States is able to provide such information, then it would be appropriate for the
Panel to allocate such support to, inter alia, upla nd cotton. As detailed in Brazil’s answer to
Question 40, the United States was obligated to notify to the Committee on Agriculture and to allocate
as “product-specific support” to upland cotton any domestic measure that did not provide support “in
favour of agricultural producers in general. . .”.

58. The only US domestic support measures that Brazi l is aware of that would meet the test of
being “support to upland cotton” are those that it lis ted for purposes of calculating the level of peace
clause support in its First Written Submission.
64 In the view of Brazil, these non-green box domestic
support measures are the measures that constitute “support to” upland cotton for the purpose of
Article 13(b).

42. If the word "specific" were deleted from Article 13(b)(ii), would this change the
meaning of the subparagraph? BRA

Brazil’s Answer:

59. Brazil believes that the meaning would change . The deletion of the word “specific” would
create some ambiguity. The ordinary meaning of the phrase “a commodity” is “a thing that is an
object of trade, esp. a raw material or agricultural crop”. Therefore, the meaning of a commodity is
rather broad and could for instance refer to “grains”. 65 While the term “grains” may refer to “a
commodity,” it cannot connate “a specific commodity”. Specific commodities that make up the
commodity “grains” would be wheat, barley, oats, ri ce etc. Thus, the use of the term “specific
commodity” clarifies that the subject of Article 13( b)(ii) is support to specific, i.e., individual,
commodities and that this provisions does not deal with groups of individual commodities such as
grains.

 64 First Submission of Brazil , paras. 144, 148, 149.
 65 Also Annex 1 of the Agreement on Agriculture refers to some broad commodity categories such as
“animal hair” and “essential oils.” These would cover several specific commodities such as specific types of
animal hair, or specific essential oils like jasmin oil or peppermint oil.

60. Further, the phrase “a specific commodity” al so makes it clearer that the “commodity” at
issue is equivalent to the “like product” as defined, inter alia, in the SCM Agre ement. This parallel
construction of the term “specific commodity” and “lik e product” is consistent with the fact that the
peace clause provides a conditional exemption from Articles 5 and 6 of the SCM Agreement and
Article XVI:1 of GATT 1994 – which require the ex amination of effects of subsidies on products
“like” those receiving the subsidies.

43. What are the precise differences between deficiency payments and counter-cyclical
payments that lead you to classify the former as product-specific and the latter as non-product
specific? How do you classify market loss assistance payments? USA

44. Do you allege that counter-cyclical paym ents could be considered product-specific?
BRA

Brazil’s Answer:

61. Brazil notes its discussion of “non-product sp ecific” and “product-specific” support in its
Answers to Questions 40-41. For the purpose of ca lculating AMS, counter-cyclical payments (CCP)
are “product-specific” support for two main reasons: (i) they are not “support provided in favour of
agricultural producers in general”, and (ii) they are directly linked to upland cotton-specific
parameters (current prices and historical acreage and yield). Indeed, when the US 2002 FSRI Act was
examined by the WTO Committee on Agriculture, the European Communities agreed with Brazil that
CCP payments could not be consid ered “non-product-specific” support.66 New Zealand has taken a
similar view in its Third Party Submission in this dispute.67

62. Brazil has provided extensive facts that upl and cotton producers receive CCP payments as
support to upland cotton and that such payments are support to upland cotton for the purposes of
Article 13(b)(ii). These facts also support a finding that CCP payments are “product-specific”
support. Further, Brazil notes the following facts de monstrating that counter-cyclical payments (and
direct payments) are not provided “in favour of ag ricultural producers in general”, but are instead
provided to only a fraction of US agricultural production:

• CCP payments are made to holders of up land cotton base acreage when US upland cotton
prices fall below 65.73 cents per pound. Produ cers/holders of all other farm acreage in
the United States do not receive CCP payments when US upland cotton prices received
by US producers fall. In MY 2001, (non-updated) upland cotton base acreage represented
1.7 percent of total US farmland.
68

• CCP payments for upland cotton (and direct payments) are received by holders of upland
cotton base acreage, i.e. for land that grew upland cotton between 1998-2001 or between

 66 Exhibit Bra-144 (G/AG/R/31, para. 30) (“Braz il would not accept [CCP] classification as ‘non-
product-specific payment’.”); para 31 (“The EC also shared Brazil’s an alysis on how the counter-cyclical
payments should be classified and pointed to US insu rance programmes as not bei ng properly classified at
present”).
 67 Third Party Submission of New Zealand, para. 2.24 (“Accordingly, New Zealand considers that the
United States incorrectly categorizes CCP payments as non-product specific support.”).
 68 In MY 2001, total US farmland was 959.163 million acres ( See Exhibit Bra-143 (Agricultural
Statistics 2003, USDA, Table 9.6). Average US upland cotton base acreage for MY 1997-2001 was
16.3 million acres ( See Exhibit Bra-142 (Agricultural Outlook, US DA, May 2002, Table 19). Brazil has
requested the United States to prov ide information on updated base acr eage for the CCP and direct payment
programme in questions during consultations and in the Annex V proceedings. Brazil has not received that
information and, therefore, uses 16.3 million acreage as a proxy for the direct paym ent base acreage noting that
USDA reports that more than 99 percent of eligib le acreage signed up for the CCP and direct payment
programme (Exhibit Bra-44 (“Direct Payment and CCP Enrollment Report,” USDA, 19 June 2003).

1993-1995. USDA reported in 2001 that the 1997 census showed there were 31,500
upland cotton farms. Assuming no increase in the number of US upland cotton farms
since 1997, this represents 1.46 percent of all farms in the United States.
69

• Upland cotton cash receipts as a percentage of total cash receipts from all agricultural
commodities was 2.5 percent in MY 1999, 2.35 percent in MY 2000, and 3.05 percent in
MY 2001.70

• The 10 “programme” crops in the CCP (and direct payment) programme represented only
23.49 per cent of total farm cash receipts from all agricultural commodities on average
between MY 1997-2001.71

• The base acreage of the 10 “programme” crops in the CCP (and direct payment)
programme represented only 30 percent of total US farm acreage in MY 2001.72

• In MY 2002, CCP payments to holders of upland cotton base acreage represented
approximately 80 percent – or $1.143 billion – of total CCP payments ($1.420 billion) for
the ten eligible programme crops.73

• In MY 2002, no CCP payments were made to holders of 8 of the 10 eligible crops. In
particular, holders of base acreage for barley , corn, grain sorghum, oats, soybeans, other
oilseeds, and wheat received no CCP payments.74

• CCP base acreage receiving CCP payments in MY 2002 (upland cotton and rice base
acreage) represented only 2.2 percent of total US farmland.75

• 90 percent of US acreage eligible to r eceive upland cotton CCP payments for upland
cotton is located in only 10 out of 50 US st ates, with the top 5 US States accounting for
66 percent of US upland cotton production. 76 Thus, upland cotton CCP payments are
focused on farms in a limited number of US States (i.e., the “cotton belt”).

 69 Exhibit Bra-143 (Agricultural Statistics 2003, USDA, Table 9-9). There were 2.155 million farms in
the United States in 2001. USDA reported that in 1997, there were 31,500 farms that grew cotton. Exhibit Bra-
46 (“Cotton: Background and Issues for Farm Legislation,” USDA, July 2001, p. 2).
 70 Exhibit Bra-142 (Agricultural Outlook, USDA, May 2 002, p. 59). The calculations cited above were
derived from comparing upland cotton cash receipts co mpared to total commodity cash receipts net of
government payments.
 71 Exhibit Bra-145 (US and State Farm Income Data (United States and States 1997-2001), USDA,
Table 5).

72 Brazil does not have access to actual CCP base acreage figures. Therefore, Brazil has used MY 2001
figures as a proxy and relies on MY 2001 PFC base acreage for the 7 crops covered by PFC payments (Exhibit
Bra-142 (Agricultural Outlook, USDA, May 2002, p. 50) and has added MY 2001 soybean, peanut and other
oilseed acreage (Exhibit Bra-146 (Acreage, NASS, 28 June 2002, p. 14, 15 and 17) (286.8 million acres). Total
US farmland in 2001 was 959,163,331 million acres (E xhibit Bra-143 (Agricultura l Statistics 2003, USDA,
Table 9.6).

73 Exhibit Bra-147 (“Estimate of Support Granted by Commodity via Counter-Cyclical Payments”).
 74 Exhibit Bra-147 (“Estimate of Support Granted by Commodity via Counter-Cyclical Payments”).
 75 Upland cotton and rice PFC base acreage represen ted 16.2 and 4.1 million acres (Exhibit Bra-142
(Agricultural Outlook, USDA, May 2002, p. 50)). Brazil does not have any information on the effects of the
base acreage update and, therefore, uses the PFC base acreage as a proxy for CCP base acreage. Total US
farmland in 2001 was 959,163,331 million acres (Exhibit Bra-143 (Agricultural Statistics 2003, USDA,
Table 9.6).
 76 Exhibit Bra-107 (“US and State Farm Income Data, Farm Cash Receipts,” ERS, USDA, June 2003).

63. This evidence demonstrates that CCP (and direct payments) are provided to only a fraction of
the producers of agricultural commodities in the Un ited States and that payments are focused to
producers of a limited number agricultural products. In view of these facts – particularly that upland
cotton has its own “target price” of 72.4 cents per pound and accounted for 80 percent of all CCP
payments in MY 2002 – it is appropriate for the Pa nel to consider only upland cotton statistics to
conclude that these payments are “support to cotton” and are also “product-specific”.

64. But even if the Panel relie s on data regarding all 10 CCP pr ogramme crops, the evidence still
demonstrates that CCP and direct payments ar e “support to cotton” and “product-specific” support
because they are not provided to producers of US agricultural commodities “in general”. Only around
30 percent of the farm acreage in the United States is farmed by producers with the possibility of
receiving CCP payments.
77 In MY 2002, only 2.2 percent of total US farmland was eligible to receive
CCP payments.78 In light of these facts, it is not surprisi ng that the EC correctly recognized in June
2002 that the US CCP programme does not repr esent a domestic support programme “provided in
favour of agricultural producers in general”.79

45. If the Panel considered that Step 2 paymen ts paid to exporters were an export subsidy,
would the United States count them as domest ic support measures for the purposes of Article
13(b)? Please verify Brazil's separate data for Step 2 export payments and Step 2 domestic
payments in Exhibit BRA-69 or provide separate data. BRA, USA

Brazil’s Answer:

65. Brazil can verify that the Step 2 informati on its representatives received and that is tabulated
in Exhibit Bra-69 was obtained from Wayne Bjorlie ( wayne_bjorlie@wdc.usda.gov
) in the Kansas
City Commodity Office (KCCO) upon request for such data in December 2002.

46. What is the relevance, if any, of the concept of "specificity" in Article 2 of the SCM
Agreement and references to "a product" or "sub sidized product" in certain provisions of the
SCM Agreement to the meaning of "support to a specific commodity" in Article 13(b)(ii)
Agreement on Agriculture? BRA, USA

Brazil’s Answer:

66. The concept of “specificity” in Article 2 of the SCM Agreement is useful context in
interpreting the meaning of “support to a specific commodity” in Article 13(b)(ii). As the
United States recognized at the First Meeting of the Panel with the parties, the word “support” as used
in the Agreement on Agriculture is a synonym for “subsidy”.
80 The term “support to a specific
commodity” has a similar meaning as “subsidized product,” as used in, inter alia, Article 6.3(c) of the

 77 Brazil does not have access to actual CCP base acreage figures. Therefore, Brazil has used MY 2001
figures as a proxy and relies on MY 2001 PFC base acreage for the 7 crops covered by PFC payments (Exhibit
Bra-142 (Agricultural Outlook, USDA, May 2002, p. 50) and has added MY 2001 soybean, peanut and other
oilseed acreage (Exhibit Bra-146 (Acreage, NASS, 28 June 2002, p. 14, 15 and 17) (286.8 million acres). Total
US farmland in 2001 was 959,163,331 million acres (E xhibit Bra-143 (Agricultura l Statistics 2003, USDA,
Table 9.6).
 78 Upland cotton and rice PFC base acreage represen ted 16.2 and 4.1 million acres (Exhibit Bra-142
(Agricultural Outlook, USDA, May 2002, p. 50)). Brazil does not have any information on the effects of the
base acreage update and, therefore, uses the PFC base acreage as a proxy for CCP base acreage. Total US
farmland in 2001 was 959,163,331 million acres (Exhibit Bra-143 (Agricultural Statistics 2003, USDA,
Table 9.6).
 79 Exhibit Bra-144 (G/AG/R/31, paras. 30-31).
 80 Brazil does not mean to imply that in the second phase of this proceeding it will not have the burden
of demonstrating that each of the domestic support pr ograms are “subsidies” within the meaning of the SCM
Agreement.

SCM Agreement. Given the textual similarities between “subsidized product” and “support to a
specific commodity”, assessment of whether “support to a specific product” exists could be examined
with at least some reference to the specificity criteria of Article 2 of the SCM Agreement. Article 2 of
the SCM Agreement provides, in relevant part:

 2.1 In order to determine whether a subsidy, as defined in paragraph 1 of Article 1, is
specific to an enterprise or industry or group of enterprises or industries (referred to
in this Agreement as “certain enterprises”) within the jurisdiction of the granting
authority, the following principles shall apply:

 (a) Where the granting authority, or the legislation pursuant to which the granting
authority operates, explicitly limits access to a subsidy to certain enterprises, such
subsidy shall be specific.. . .

 (c) If, notwithstanding any appearance s of non-specificity resulting from the
application of the principles laid down in subparagraphs (a) and (b), there are
reasons to believe that the subsidy may in fact be specific, other factors may be
considered. Such factors are: use of the subsidy programme by a limited number
of certain enterprises, predominant use by certain enterprises, the granting of
disproportionally large amounts of subsidy to certain enterprises . . .

 2.2 A subsidy which is limited to certain enterprises within a de signated geographical
region within the jurisdiction of the granting authority shall be specific.

67. The US Statement of Administrative Acti on (“SAA”) describes in some detail how the
United States intends to administer the specificity provisions, suggesting that the US Department of
Commerce applies a low threshold for finding both “de jure” and “de facto” specificity:

The Administration intends to apply the specificity test in light of its original purpose,
which is to function as an initial screeni ng mechanism to winnow out only those
foreign subsidies which truly are broadly available and widely used throughout an
economy.
81
Brazil agrees with this statement that the “origi nal purpose” of the specificity criterion is to make
subsidies non-specific only when they are broadly available and widely used throughout an economy.

68. The ordinary meaning of the plural term “cer tain enterprises,” as set out in the chapeau to
ASCM Article 2.1, underscores that a subsidy can be specific even if it applies to a “group of . . .
industries.” The term “industry” is defined as “a particular form or branch of productive labour; a
trade, a manufacture”.
82 Thus, the text of the chapeau supports the notion that for a subsidy to be
specific under the SCM Agreement it must be limited to a certain number of industries that may be
involved in different trades or manufacturing processes.

69. The object and purpose of the specificity require ment in Article 2.1(a) of the SCM Agreement
is consistent with a broad scope for specificity. One key purpose for the specificity requirement is to
avoid the countervailability of those subsidies widely available in an economy, while at the same time
ensuring that those subsidies that benefit some groups of industries or enterprises more than others are
covered. As the United States noted in the SAA:

The specificity test was intended to function as a rule of reason and to avoid the
imposition of countervailing duties in situa tions where, because of the widespread

 81See Exhibit Bra-148 (“Statement of Administrative Action,” p. 929) (emphasis added).
 82 The New Shorter Oxford English Dictionary, 1993 edition, p. 1356.

availability and use of a subsidy, the benef it of the subsidy is spread throughout an
economy. Conversely, the specificity test was not intended to function as a loophole
through which narrowly focused subsidies pr ovided to or used by discrete segments
of an economy could escape the purview of the CVD law.
83
70. Therefore, the ordinary meaning, context a nd object and purpose of Article 2.1(a) of the SCM
Agreement confirm that subsidies that are availabl e to discrete segments of an economy or to only
particular industries are specific. Under these standards, each of the subsidies challenged by Brazil in
this dispute (and listed as support for the purposes of the peace clause analys is) are provided to
“discrete segments” of the US economy. Indeed, th ey are provided to discrete segments of the sub-
section of the US economy known as “agriculture”. T hus, if the Panel were to apply the specificity
standard set out in Article 2 of the SCM Agre ement to Article 13(b)(ii) of the Agreement on
Agriculture, the identified domestic support subsidies would be considered “specific”.

71. Brazil notes that further support for the use of specificity concepts from the SCM Agreement
in interpreting Article 13(b)(ii) of the Agriculture Agreement is found in the definition of “AMS” in
Article 1(a) of the Agriculture Agreement. The definition of “non-product specific” support (“support
provided in favour of agricultural producers in genera l”) illustrates that the c oncept of specificity in
the context of the SCM Agreement and of AMS in the Agreement on Agriculture are similar. Both
would require a finding of specificity unless support is provided to an economy generally, in the case
of the SCM Agreement, or to “producers” of ag ricultural commodities “in general,” in the case of
AMS under the Agriculture Agreement.

72. In contrast, the United States seeks to apply an extremely restricted concept of specificity to
the peace clause that begins and ends with the question whether production of a specific commodity is
required to receive the payment. This is one of th e “policy-specific” criteria of a “green box” test in
Annex 2, paragraph 6, but not the test of “support to a specific commodity” required by
Article 13(b)(ii). Further, as demonstrated above , this narrow US interpretation finds no support in
the provisions of the SCM Agreement and the Agreement on Agriculture that speak to specificity.

4. "in excess of that decided during the 1992 marketing year"

47. Where does Article 13(b)(ii) require a year-on-year comparison? BRA, USA

Brazil’s Answer:

73. The text of Article 13(b)(ii) sets up a co mparison between the “support” “grant[ed]“ during
the implementation period with support “decided” during the 1992 marketing year. Brazil cannot
conceive of a methodology in which all support granted during the entire implementation period could
be compared with the support decided during marketi ng year 1992. In order to generate an “apples to
apples” (“support to support”) comparison, it is necessary to compare the support granted in any
marketing year during the implementation period with the support decided during marketing year
1992. No other reading of Article 13(b)(ii) would permit the required comparison.

74. Additionally, Brazil notes that the second co ndition for domestic support measures to be
exempted from actions under the SCM Agreement is that a Member’s domestic support measures
conform fully to Article 6, and, thus, grant suppor t within the limits of that Member’s Total AMS
reduction commitments. These Total AMS reduction commitments are made on a yearly basis. The
nature of the reduction commitment and the ma nner, in which compliance with Article 6 is
determined, demonstrates that Article 13(b)(ii) – read in accordance with its chapeau and the
reference to Article 6 therein – requires a year-b y-year comparison. The context of the chapeau
provides support for Brazil’s argument made above th at the relevant comparison for Article 13(b)(ii)

 83 Exhibit Bra-148 (Statement of Administrative Action, p. 930).

involves a comparison of support granted in any of the marketing years during the implementation
period with support decided in MY 1992.

75. Similarly, Article 13(c) provides furt her context to support the conclusion that
Article 13(b)(ii) requires a year-by-year comparison. Brazil notes in its answer to Question 7, that
export subsidy reduction commitments under th e Agreement on Agriculture are made on a
commodity-specific basis. Brazil has also pointed ou t in its answer to Question 79 that a violation of
Part V of the Agreement on Agriculture, and the r esulting loss of peace clause exemption, must also
be assessed on a yearly basis.

48. Does Article 13(b)(ii) require a comparison of support granted with support decided?
How could such a comparison be made? BRA, USA

Brazil’s Answer:

76. The answer to the first question is yes, the text of Article 13(b)(ii) requires a comparison
between the “support granted” for marketing year s between 1995-2003 with the “support decided” in
marketing year 1992. Brazil has explained in detail in its First Oral Statement the basis for this legal
conclusion.84

77. The second question asks how the comparison must be made. Brazil is of the view that a
harmonious interpretation of “support decided” with “support granted” requires an examination of the
expenditures incurred for all of the support relate d to the 1992 marketing year and each of the
marketing years during the implementation period en ding 1 January 2004. This expenditure approach
permits an objective, easily verifiable approach to compare the support for each of the two time
periods. That is particularly important when, as in this case, there are a wide variety of programmes
that do not provide support on a “cents per pound” b asis to all production. Brazil does not consider
that a comparison based on a “rate of support” appro ach as suggested by the Un ited States allows the
same objective and easily verifiable comparison. Professor Sumner explained the difficulty of
comparing, on a “cents per pound” basis, deficiency payments, Step 2, marketing loans, and crop
insurance provided in marketing year 1992 with the marketing year 1999-2002 measures that replaced
or changed the 1992 measures.
85 Nevertheless, Professor Sumner was able, through a relatively
complex methodology, to calculate and compare a level of support on a per pound basis between
marketing year 1992 and marketing years 1999-2002.

78. Another methodology is the ra te of support taking into account expenditures, as detailed in
Brazil’s answer to Question 60 infra. Brazil would note that a last methodology that would have been
possible, had the text of Article 13(b)(ii) include d the term “AMS,” would be to calculate support
based on the criteria set forth in Annex 3 of the Agriculture Agreement. The results of this calculation
are set forth in Brazil’s answer to Question 67 infra.

49. Brazil claims that the terms "grant" and "d ecided" in Article 13(b)(ii) have broadly the
same meaning. If so, why did the drafters not use the same term? BRA

 84 First Oral Statement of Brazil, para. 31.
 85 Exhibit Bra-105 (Statement of Professor Sumner at the First Meeting of the Panel).

Brazil’s Answer:

79. Brazil set forth its interpre tation of the terms “grant” and “decided” in its First Oral
Statement.
86 Brazil concluded that the text, context, and object and purpose of Article 13(b)(ii) meant
that the MY 1992 “decision” must be related to “support granted” in order to make possible the
comparison between MY 1992 and marketing years dur ing the implementation period. Yet, Brazil
does not believe that the “decision” in marketing y ear 1992 means that all of the support had to be
“granted” (i.e., paid) during the 12-month period of that single marketing year. Rather, the decision
had to authorize payment in respect of a specific marketing year, including MY 1992.
87 However, a
Member could have decided during the 1992 marketi ng year to budget a certain amount of support to
specific commodities for the next several marketing years, including MY 1995 et seq. In that case,
the relevant peace clause comparison would invo lve comparing the support granted to a specific
commodity in any marketing year during the implementation period to what was decided during the
1992 marketing year to be provided for that later marketing year.

80. Brazil has cited the negotiating history of Article 13(b)(ii), which indicates that the EC
insisted on the use of the word “decided” to obtain a safe harbour for the total quantity of its domestic
support subsidies that it had already budgeted in marketing year 1992 for marketing year 1995 and
thereafter.
88 Brazil will comment further, as required, on the intentions of the “drafters” following
receipt of the answers of the European Communities and the United States.

50. Please provide any written drafting history which could shed light on why the proviso
was added to what is now Article 13(b)(ii) a nd, in particular, why both words "grant" and
"decided" were used. USA

51. Could the United States please comment on the interpretation advanced by the EC, in
paragraphs 16 and 18 of its oral statement, of the words "decided during the 1992 marketing
year"? USA

52. Please comment on an interpretation of the words "decided during" in Article 13(b)(ii)
that would read them as synonymous with the words "authorized during". BRA, USA

Brazil’s Answer:

81. Brazil agrees that in its proper context, th e term “decided during” in Article 13(b)(ii) is
synonymous with the words “authorized during”. Brazil has set forth the reasoning and citations
supporting this conclusion in its Answers to Ques tion 49 supra and Question 58 infra, as well as in its
First Oral Statement at paragraph 31.

53. Assume, for arguments sake, that the only "decision" made in the United States in 1992
was the target price. How would Brazil make the comparison vis-à-vis, for example, the year
2001? BRA

Brazil’s Answer:

82. Brazil maintains that the relevant compar ison under Article 13(b)(ii) is to compare
expenditures incurred relating to MY 1992 with ex penditures incurred relating to marketing years
during the implementation period. Only this methodology allows for a comparison irrespective of the
nature and characteristics of the domestic s upport measures provided and does not suffer from the

 86 First Oral Statement of Brazil, paras. 27-34
 87 Brazil and the United States appear to agree th at MY 1992 is the relevant marketing year for
purposes of this dispute.

shortcomings of other approaches, on which Braz il will comment below. In particular only an
expenditure incurred approach allows for an effective comparison in the following situation: Assume,
a Member introduces a payment that is made at a fixed rate per pound and is paid for each pound of
actual upland cotton production. In this situati on, it would be difficult to compare this domestic
support measure, which is completely unrelated to market prices to a domestic support measure
decided by a Member in MY 1992 and which sets a target price and provides price support.

83. With this qualification in mind, Brazil’s unde rstanding of this question is that the assumed
single “decision” was the establishment of a target price of 72.9 cents per pound for eligible US
upland cotton production during MY 1992. The assumed single “decision” on a target price of 72.9
cents per pound comprised of many other s ub-decisions on the mandatory acreage reduction
programme, on the operation of the 50/92-programme option, and on optional flex acres, among
others.
89 Professor Sumner has analyzed in detail th e process through which such a target price of
support could be compared to the support provided in MY 1999-2002. 90 For MY 1992, he found that
the estimated per unit support rates for all progr ams was 60.41 cents per pound. For MY 2001, he
found the per unit support rates for all programme s was 66.51 cents per pound. Brazil refers to
Professor Sumner’s detailed description of the methodology he used to make these calculations.91

84. The irrationality of the simplistic “72.9 is great er than 51.92” approach by the United States is
revealed by comparing it with the results of Professor Sumner taking into account in the calculation of
the “rate of support” eligibility criteria and the costs imposed by participation in the US upland cotton
support programs. It is also demonstrated by comparing the expenditures in MY 1992 ($1.9 billion)
with the expenditures in MY 2001 ($4 billion).

54. Please identify all United States legal a nd regulatory and administrative instruments
decided during the marketing year 1992, with th e respective dates of decision, that decided
support for upland cotton. BRA, USA

Brazil’s Answer

85. Brazil will comment further upon receipt of the answer provided by the United States to this
question. The United States obviously has access to r ecords related to all the decisions taken by the
United States concerning its support programs for MY 1992. However, Brazil notes that given its
understanding of the operation of the US support programmes, the United States took a number of
decisions with respect to the upland cotton support programmes for MY 1992.

86. Many of the US support programmes for MY 1992 were decided by Title V of the Food,
Agriculture, Conservation and Trade (FACT) Act of 1990 (P.L. 101-624), which established US farm
policy for the 5 crop years 1991/92-1995/96, and by the Omnibus Budget Reconciliation Act (OBRA)
of 1990 (P.L. 101-508), which established several programme provisions in order to reduce
programme costs. Brazil considers that among the de cisions taken by the United States in relation to
MY 1992 upland cotton support programmes were the following:

• Continuation of the upland cotton target pr ice under the deficiency payment programme
at the 1990 level of 72.9 cents per pound set by the 1990 FACT Act. The OBRA limited
the maximum payment acreage at 85 percent of the crop acreage minus the acreage
reduction programme requirement, which was set annually. Therefore, the United States
had to take a decision with respect to the MY 1992 percentage of deficiency programme

 89 For a more thorough discussion of the decisions Brazil understands the United States has taken with
respect to MY 1992, see Brazil’s answer to Question 54.
 90 See Exhibit Bra-105 (Statement of Professor Daniel Sumner at the First Meeting of the Panel).
 91 Annex 2 to Exhibit Bra-105 (Statement of Professor Daniel Sumner at the First Meeting of the
Panel).

base acreage that would be required to be set aside under the acreage reduction
programme.

• In connection with the former, the United States also took a decision allowing producers
to plant up to 25 percent of upland cotton acr eage base, the so-called “flex acreage,” to
any commodity except fruits and vegetables and mung beans.

• Furthermore, the United States had to deci de on how to implement the 50/92-programme
option under the deficiency payment program.

• The United States also needed to determin e the upland cotton acreage base for purposes
of the deficiency payment programme, which for MY 1992 represents the previous three-
year average of planted and considered planted upland cotton acreage.

• Concerning the deficiency payment program, the United States finally had to decide on
the payment rate for upland cotton.

• Concerning the marketing loan programme, the United States had to take a decision
setting the marketing loan rate for upland cotton.

• Furthermore, the United States had to establish a weekly “adjusted world price” and, thus,
the repayment rate for marketing loans determ ining the rate of marketing loan gains or
loan deficiency payments.

• Furthermore, the United States took a weekly decision in MY 1992 with respect to the
Step 2 payment rate applicable for that week.

• Regarding crop insurance, the Federal Crop Insurance Act of 1980 was the authorizing
legislation, but it was necessary to adopt d ecisions concerning individual insurance
policies that would apply to upland cotton an d to set the respective rates of premium
subsidies.

87. While Brazil does not consider this list to be exhaustive, it gives the Panel an overview on the
variety of decisions the United States had to take to make the support programme to upland cotton
operational. Brazil looks forward to the answer provided by the United States and reserves its right to
comment as appropriate.

55. Please provide a copy of the instrument in which the rate of support for upland cotton
during the marketing year 1992 was decided, indicating the date of the decision. USA

56. Could the United States please explain how support granted under legislation that dates
back to 1990 can have been support "decided during the marketing year 1992"? USA

57. If the United States decided on a rate of support for MY1992, does that not mean that it
decided on whatever budgetary outlay was required to meet that rate of support, even if the
exact amount was not known at that time? USA

58. Please comment on the argument advanced by the EC, in paragraph 17 of its oral
statement that: "Had WTO Members intended a lim itation to the support provided or granted
in 1992 the word 'for' would have been used in place of 'during'." BRA

Brazil’s Answer:

88. Brazil agrees with the EC that the word “duri ng” does not mean that all of the support need be
provided or granted within the 12-month period of marketing year 1992. Rather, the decision must
have been related to the amount of support to be granted in respect of marketing year 1992. This
interpretation is consistent with an expenditure methodology that compares expenditures for upland
cotton in respect of MY 1992 with expenditures for upland cotton in MY 1995-2003, and thereby
permits a comparison of 1992 levels of support with levels of support in marketing years 1995-2003.

89. The negotiating history cited by Brazil in its First Submission indicates that the EC is in a
special situation vis-à-vis the peace clause.
92 It apparently made the decision in marketing year 1992
to budget an amount of support for commodities fo r marketing years 1995-2000 in its CAP reform.
Brazil agrees with the EC that Article 13(b)(ii) was “intended to set up as a benchmark an amount of
support adopted by some form of decision (be it po litical, legislative or administrative) in which
support for a specific product is decided . . .” But the EC qualifies this assertion with the notion that
that decision can only be “allocated for future years.”
93 This qualification would appear to be
compelled by the EC’s particular situation. But that situation does not justify the EC’s conclusion that
its “future years” concept means that Article 13(b)(ii) “clearly is not intended to set up a comparison
between domestic support granted in 1992 and domestic support granted in a more recent period.”

90. The notion of a “decision” suggests that i ndividual Members each made some sort of a
decision with respect to the peac e clause. The United States and Brazil agree that the decision made
by the United States – whatever it may have been – related to the level of support provided to upland
cotton in MY 1992. Brazil’s argumen t with the United States concer ns the type of decision and the
methodology that can be used to account for the level of support decided during MY 1992.

59. Should the rate of support as indicated in Ar ticle 13(b)(ii) include the market price? If
so, why is it appropriate to include it in the comparison under Article 13(b)(ii)? BRA, USA

Brazil’s Answer:

91. The most natural measure of support is budge tary expenditures, and these implicitly include
market price in the sense that, fo r several US upland cotton programs, higher market prices lead to
lower budgetary outlays. The US Government paym ents under the marketing loan, deficiency and
counter-cyclical programs all decline with increasi ng market prices, as they cover the difference
between the loan rate or the target price and the ma rket price. Step 2 payments are also related to
market prices in that they cover the difference between the A-Index and the lowest-priced US quote
for upland cotton and, therefore, vary with market prices.
94 Incorporating the different degrees to
which the market price influences the support provid ed by the US Government to its upland cotton
farmers is best achieved by looking at the results in terms of budgetary outlays for the programs. This
measure of support is straightforward to apply a nd allows a ready and accurate comparison between
1992 and subsequent marketing years.

92. Under the US approach and Professor Sumner’s adaptation of the US approach, market prices
enter the calculation of the “rate of support” in the sense that the expected rate of support from the
loan rate and the target price per eligible unit of production includes revenue expected to be received
from the market (expected market price) and revenue expected from the US Government (subsidies).
The market price enters inversely in the sense that the outlay is inver sely related to the market price,
as for instance the loan rate benefits make up the difference between the loan rate and the adjusted

 93 Oral Statement of the European Communities, 24 July, para. 18.
 94 Brazil notes, however, that the relationship between market price and level of Step 2 payments by the
US Government is not as straightforward and positively correlated as for the other price-based programmes.

world price for the eligible share of production.95 The higher the market price, the higher the resulting
budgetary outlays.

93. Additionally, there is one further im portant reason why the notion of support in
Article 13(b)(ii) should include the market price. Without reference to the market price, it is
impossible to say what the rate of support means to farmers. It may be that the support is completely
irrelevant, because market prices are much higher than the loan rate or the target prices set by the US
Government. For instance, the loan rate was i rrelevant for US upland cotton producers in MY 1994-
1996,
96 because market prices were so high that no payments occurred. However, under essentially
the same program, market loan benefits amounted to 26.6 cents per pound in MY 2001. 97 Thus,
without taking market prices into account, it is impossible to translate a “rate of support” into actual
support provided and to give meaning to the term “support.”

60. Can you provide information on support decided in 1992 and the years with which you
believe it should be compared, on a per suppo rt programme / per unit of production / per
annum basis? If possible, please specify how, if at all, budget outlays may be transposed into
units of production, and which units of production are best to use. BRA, USA

Brazil’s Answer:

94. Brazil maintains that the appropriate measu re of support decided during MY 1992 is total
actual expenditures resulting from any decisions regard ing support to upland cotton. This must then
be compared to total actual expenditures for supp ort to upland cotton for MY 1999, 2000, 2001 and
2002. Presenting expenditures as a “rate of suppor t” per pound of upland cotton disguises the fact
that US expenditures for upland cotton have increase d considerably since MY 1992. This is due to
the fact that the increased US expenditures are now spread over an also increased US production.
Therefore, a “rate of support” based on budgetary ou tlays or expenditure understates the real increase
in US support to upland cotton. However, even disregarding the underestimation of the amount spent
for upland cotton by presenting the budgetary outlays in the form of support per pound of actual
upland cotton production, the data presented below show that also this measurement demonstrates that
the US support in MY 1999-2002 is higher in each year than it was in MY 1992.

95. In answering this question, and responding to the Panel’s requests, Brazil presents the support
provided by the various US support programmes for a given marketing year on a per pound of actual
upland cotton production basis. This approach ta kes into account market prices. Thus, the “support
level” from deficiency payments, from the marke ting loan programme and from counter-cyclical and
Step 2 payments no longer reflects the “target pr ice” approach favoured by the United States, but
reflects actual payments made per unit of actual production.

96. Brazil believes that the unit of production that should be used is a pound of upland cotton
actually produced in the United States for that marketing year in question. US support programmes
provide support based on actual production (mar keting loan programme, Step 2 and cottonseed
payments), actual acres planted (crop insurance) , updated historical produc tion and current prices
(deficiency payments and counter-cyclical paymen ts), historical production (PFC, market loss
assistance), and finally, updated historical production (direct payments). The most natural
comparison on a per unit basis is to use actual production. The US National Cotton Council also
calculates the support provided by all of these pr ogrammes to its upland cotton producer members in
“cents per pound” of actual production.
98 This reflects the reality that an upland cotton farmer

 95 Brazil notes that budgetary outlays have not been part of Professor Sumner’s calculation of the rate
of support provided by the marketing loan, deficiency payment and CCP payment program.
 96 Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 5-6).
 97 See Brazil’s answer to question 60.
 98Exhibit Bra-109; Exhibit Bra-111; Exhibit Bra-112.

seeking to remain in business must calculate whethe r the amount of government support plus market
revenue compensates for the cost of production incurred by producing a pound of upland cotton.

97. Brazil arrives at the figures presented in the following table by dividing the total annual
amount of budgetary outlays to upland cotton fro m a US support programme by the total amount of
production of upland cotton in the relevant marketing year.

Support Per Pound Of Upland Cotton By Year And Support Programme
1992 1999 2000 2001 2002
Year
Programme ----- cents/pound -----
Deficiency
Payments1 13.49 none none none none
PFC
Payments2 none 7.00 6.71 4.81 none
Market Loss
Assistance
Payments
3
none 6.97 7.15 6.65 none
Direct
Payments4 none none none none 6.04
Counter-
cyclical
Payments5
none none none none 12.43
Marketing loan
(Loan gains
and LDP)
6
9.86 19.75 6.72 26.63 11.85
Step 2
Payment7 2.74 5.39 2.93 2.09 3.95
Crop
Insurance8 0.35 2.17 2.00 2.79 2.42
Cottonseed
Payment9 none 1.01 2.29 none 0.62
Total 26.44 42.29 27.8 42.97 37.31
Notes
January 2003, p. 4)) to upland cotton base acres in the PFC programme (Exhibit Bra-142 (Agricultural Outlook, May 2002,
p. 50)). This adjustment is necessary because only the portion of upland cotton PFC payments that actually benefits acres
planted to upland cotton can be considered support to upland cotton. Because the latter figure is higher than the former, this
leads to a reduction in the payment rate reflecting actual production in each year. Total production is taken from Exhibit Bra-
4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4).
3 Market loss assistance payment per pound of actual production = Market loss assistance expenditure for upland cotton base
* (actual upland cotton acreage / PFC upland cotton base acreage) / (total production [bales] * 480 [pounds/per bale]). Total
market loss assistance payments to upland cotton are take n from Exhibit Bra-4 (“Fact Sheet: Upland Cotton”, USDA,
January 2003, p. 6). This amount has been adjusted by the ratio of upland cotton acres actually planted (Exhibit Bra-4 (“Fact
Sheet: Upland Cotton,” USDA, January 2003, p. 4)) to upland cotton base acres in the PFC programme (Exhibit Bra-142
(Agricultural Outlook, May 2002, p. 50)). This adjustment is necessary because only the portion of upland cotton market
loss assistance payments that actually bene fits acres planted to upland cotton can be considered support to upland cotton.
Because the latter figure is higher than the former, this leads to a reduction in the payment rate. Total production is taken
from Exhibit Bra-4 (“Fact Sheet: Upland Cotton”, USDA, January 2003, p. 4).

4 Direct payments per pound actuall y produced = total direct pa yment expenditure for upland cotton base * (actual upland
cotton acreage/direct payment upland cotton base acreage) / (tot al production [bales] * 480 [pounds /per bale]). Total direct
payments for MY 2002 have been re-estimated from the figure presented by Br azil in its First Submission, para. 59. The
new figure is based on the statutory payment rate of 6.67 cents per pound of upland cotton base multiplied by the direct
payment upland cotton base acreage of 16.3 million acres (Braz il has assumed it to be the previous 5-year average as
reported by USDA in Exhibit Bra-142 (Agricultural Outlook, Ma y 2002, p. 50)) multiplied by the direct payment yield of
604 pounds per acre (Brazil has assumed it to be the previous 5-year average as reported by USDA in Exhibit Bra-142
(Agricultural Outlook, May 2002, p. 50)). Payments are made on 85 percent of base acres. This translates into a total of
$558.17 million. This amount has been adjusted by the ratio of upland cotton acres actually planted Exhibit Bra-4 (“Fact
Sheet: Upland Cotton,” USDA, January 2003, p. 4) to upland cotton base acres in th e direct payment program. Because the
latter figure is higher than the former, this leads to a reductio n in the direct payment rate. This adjustment is necessary
because only the portion of upland cotton market loss assistance payments that actually benefits acres planted to upland
cotton can be considered support to upland cotton. Total pr oduction is taken from Exhibit Bra-4 (“Fact Sheet: Upland
Cotton”, USDA, January 2003, p. 4).
5 Counter-cyclical payments per pound actuall y produced = total counter-cyclical pa yment expenditure for upland cotton
base * (actual upland cotton acreage / c ounter-cyclical payment upland cotton base acreage) / (total production [bales] * 480
[pounds/per bale]). Total counter-cyclica l payments for MY 2002 have been re-es timated from the fi gure presented by
Brazil in its First Submission, para. 69. The new figure is based on the MY 2002 payment rate of 13.73 cents per pound of
upland cotton base multiplied by the counter-cyclical payment upland cotton base acreage of 16.3 million acres (Brazil has
assumed it to be the previous 5-year average as reporte d by USDA in Exhibit Bra-142 (Agricultural Outlook, May 2002,
p. 50)) multiplied by the counter-cyclical payment yield of 604 pounds per acre (Brazil has assumed it to be the previous 5-
year average as reported by USDA in Exhibit Bra-142 (Agric ultural Outlook, May 2002, p. 50) Brazil notes that this
underestimates the payments, as it disregards the yield update for purposes of the counter-cyclical payments). Payments are
made on 85 percent of base acres. This translates into a to tal of $1,148.98 million. This amount has been adjusted by the
ratio of upland cotton acres actually planted Exhibit Bra-4 (“ Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4) to
upland cotton base acres in the counter-cyclical payment programme. Because the latter figure is higher than the former, this
leads to a reduction in the direct payment rate. This adju stment is necessary because only the portion of upland cotton
market loss assistance payments that actu ally benefits acres planted to upland co tton can be considered support to upland
cotton. Total production is taken from Exhibit Bra-4 (“Fact Sheet: Upland Cotton”, USDA, January 2003, p. 4).
6 Marketing loan benefit per pound of actual production = total marketing loan expenditures / (total production [bales] * 480
[pounds/per bale]). Total marketing loan payments (marketing loan gains plus loan deficiency payments) are taken para.
144, 148-149 of the First Submission of Brazil. Total production is taken from Exhibit Bra-4 (“Fact Sheet: Upland Cotton”,
USDA, January 2003, p. 4).
7 Step 2 payments per pound of actual production = total Step 2 expenditures/(total production [bales] * 480 [pounds/per
bale]). Total Step 2 payments are cont ained in Exhibit Bra-4 (“Fact Sheet: Upla nd Cotton”, USDA, January 2003, p. 6).
Brazil has estimated the MY 2002 amount at note 335 in its First Submission to be $317 million. The amount of production
has been taken from Exhibit Bra-4 (“Fact Sheet: Upland Co tton”, USDA, January 2003, p. 4). Brazil notes that the
difference between 3.95 cents per pound re sulting from this calculation and 4 cent s per pound – which was the basis for
Brazil to calculate the total Step 2 payment for MY 2002 – is due to rounding effects.
8 Crop insurance payments per pound of actual production = total crop insurance expenditures / (total production [bales] *
480 [pounds/per bale]). Total crop insurance payments are taken from Exhibit Bra-57 (“Crop Year Statistics”, Federal Crop
Insurance Corporation). Total production is taken from Exhi bit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003,
p. 4).
9 Cottonseed payment per pound of actual upla nd cotton production = total cottonseed expenditures/(total production [bales]
* 480 [pounds/per bale]). Total cottonseed payments are liste d in Brazil’s answer to question 17 (see para. 9). Total
production is taken from Exhibit Bra-4 (“Fact Sheet: Upland Cotton”, USDA, January 2003, p. 4).

98. Brazil notes that also under this approach, the total US support to upland cotton in MY 1999-
2002 surpasses the support decided by the United Stat es in MY 1992. Brazil furthermore notes that
even considering the support programs (and their respective replacements)99 individually, nearly all of
them provide higher support in MY 1999-2002 than they (or their predecessors) did in MY 1992 (with
the exception of Step 2 and PFC / market loss assistance in MY 2001).

61. Does the United States consider that Article 13(b)(ii) permits a comparison on any basis
other than a per pound basis? USA

62. According to Prof. Sumner's calculat ion, the per pound support increased by
approximately 24 % from 1992 to 2002. On the other hand, the Panel understands that the

 99 The deficiency payments were replaced by PFC and market loss assistance payments in MY 1999-
2001 and by direct and counter-cyclical payments in MY 2002.

total budget outlay, according to Brazil, increased more than that. What, in Brazil's view, is the
reason for this difference in the rate of increase? BRA

Brazil’s Answer:

99. US budgetary outlays for upland cotton are a func tion of the level of price, income and other
support provided by the US support programmes. Ever ything being equal, an increase in the “rate of
support” as interpreted by the United States wo uld translate one-to-one into an increase of
expenditure. However, the “rate of support” is not the only determinant of budgetary outlays, as two
important qualifications apply. First, the most important US subsidy programmes for upland cotton
are price-based.100 For instance the marketing loan paym ent in MY 2002 guarantees a return of 52
cents per pound. With lower market prices, the ga p between the adjusted world price and the loan
rate, i.e., the basis for the calculation of the mark eting loan benefit, widens and payments per pound
increase. During the period MY 1992-2001, prices for upland cotton fell drastically. 101 For example,
average upland cotton prices received by farmers in the United States were 53.7 cents per pound in
MY 1992 and dropped to a low of 29.8 cents per pound in MY 2001. 102 Therefore, even for an
identical set of programs providing an identical “rate of support,” budgetary outlays would have
vastly increased due to the drop in prices.

100. Second, the United States increased the production of upland cotton between MY 1992 and
MY 1999-2002 from 15.7 million bales in MY 1992 to 16.3 million bales in MY 1999, 16.8 million
bales in MY 2000, 19.6 million bales in MY 2001 and 16.7 million bales in MY 2002.
103 Thus, the
increased “rate of support” was applicable to an increased production of upland cotton.

101. In sum, budgetary outlays for upland co tton increased between MY 1992 and MY 2002 for
three main reasons: first, the United States incr eased its “rate of support”, second, lower upland
cotton prices led to higher budgetary outlays per pound of upland cotton produced; and third, at times
of falling market prices, the United States expanded its upland cotton productio n so that more upland
cotton was eligible to receive the increased rate of support. All of this resulted in an increase of
budgetary outlays for upland cotton that is relativel y bigger than the increa se in the US “rate of
support”.

102. Lastly, Brazil notes that none of the figures presented by Professor Sumner
104 represent actual
payments or actual rates of support. Rather, those figures represent average or expected rates of
support in any given marketing year. They are not based on actual production or prices,
105 but solely
on expected production and prices. Therefore, they cannot easily be compared to actual payments
made by the United States in support of upland co tton. Professor Sumner chose the expected support
approach in order to match the approach suggested by the United States as closely as possible, while
correcting for its simplistic reliance on the target price that disregarded the eligibility criteria and
other features of the programmes.

63. In relation to Prof. Sumner's presentation at the first session of the first substantive
meeting, please elaborate on the reasons behind the increase in the figures (from 1992 to 2002)
concerning Loan Support and Step 2 payments. BRA

 100 These include the marke ting loan program, the deficiency payment program, the counter-cyclical
payment programme and the Step 2 programs.
 101 See First Submission of Brazil, para. 28.
 102 Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 5).
 103 Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4).
 104 See Exhibit Bra-105 (Statement of Professor Daniel Sumner at the First Meeting of the Panel).
 105 Which would only be important for the rate of Step 2 payments, as only this programme depends on
actual prices for purposes of a rate of support. The other programs reduce Government payments with
increasing prices, so that the total rate of support remains basically the same, or are not price-related.

Brazil’s Answer:

103. The support rate from the marketing loan programme calculated by Professor Sumner
represents the expected support rate from the mark eting loan programme. Concerning the marketing
loan programme, Brazil notes that the statutory lo an rate, indeed, fell from 52.35 cents per pound in
MY 1992 to 51.92 cents per pound in MY 1999-2001
106 before being slightly increased in MY 2002
to 52 cents per pound. 107 However, the somewhat higher loan rate in MY 1992 was accompanied by
strict eligibility criteria. 108 In MY 1992, only production on farmland that participated in the upland
cotton deficiency payment programme was eligible for marketing loan benefits, which restricted
eligibility to 84.7 percent of production. 109 In MY 1999-2001, only upland cotton produced on
farmland that participated in the PFC programme was eligible. Professor Sumner has conservatively
used 97 percent of upland cotton production in MY 1999-2001 as the participation rate of upland
cotton.110 Finally, in MY 2002, all US production of up land cotton was eligible to receive marketing
loan benefits. 111 Thus, taking into account the eligibility criteria for benefiting from the marketing
loan programme, the slightly higher loan rate in MY 1992 provided less support to total expected US
upland cotton production than the slightly lower loan rates in later years.

104. Concerning the difference between the expected Step 2 rate of support in MY 1992-2001 and
MY 2002, this difference stems from the fact that the United States eliminated the 1.25 cents per
pound threshold for Step 2 payments in the 2002 FSR I Act. Before MY 2002, Step 2 payments were
made in the amount of the difference between the A-Index and the lowest priced US quote for upland
cotton minus a 1.25 cents per pound threshold. Section 1207(a)(4) of the 2002 FSRI Act postpones
the application of this threshold until 1 August 2006.
112 Thus, expected Step 2 payments for MY
2002 (and through MY 2005) will be 1.25 cents per pound higher than under the 1990 and 1996 Farm
Acts, which both applied the threshold.113

64. Do the figures cited in Prof. Sumner's presentation at the first session of the first
substantive meeting indicate amount available or amount spent? Can the Panel derive amount
spent from these figures? If Article 13(b)(ii) re quires a rate of support comparison, is the rate
of support the "rate" of support available or the "rate" at which the support was spent? BRA

Brazil’s Answer:

105. The figures in Professor Sumner’s calculation do not indicate amounts spent, but were an
attempt to approximate the expected rate of support for an expected pound of upland cotton
production under the specific rules in place for each support programme in that year. The figures
attempt to represent the normal result that would have been expected by policy makers and farmers as
a result of the programme decisions taken by th e United States. They do not represent actual
expenditures per unit for any programme in any y ear because, in every year, the actual programme
payments per pound of actual production deviates fro m the expected or normal payments, because the
actual production will not exactly equal the expected production.

 106 Exhibit Bra-4 (“Fact Sheet: Upland Cotton”, USDA, January 2003, p. 5).
 107 Exhibit Bra-29 (Section 1202(a)(6) and 1202(b)(6) of the 2002 FSRI Act).
 108 See Exhibit US-3 (7 CFR 1427.4(a)(3) and 7 CFR 1413 (1992 edition)).
 109 Annex 2 to Exhibit Bra-105 (Statement of Professor Daniel Sumner at the First Meeting of the
Panel, p. 3).

110 Annex 2 to Exhibit Bra-105 (Statement of Professor Daniel Sumner at the First Meeting of the
Panel, p. 4).
 111 Exhibit Bra-29 (Section 1201(b) of the 2002 FSRI Act).
 112 Exhibit Bra-29 (Section 1207(a)(4) of the 2002 FSRI Act).
 113 See Exhibit Bra-12 (“Cotton: Background for 1995 Farm Legislation”, USDA, April 1995, p. 16)
and Exhibit Bra-46 (“Cotton: Background and Issues for Farm Legislation,” USDA, July 2001, p. 9).

106. For some of the US support programs, the support indicated can be considered – within
certain limits – as support available per pound. Howe ver, there is not a complete identity between the
“expected rate of support“ and the “support available to a pound of actual upland cotton production,”
because – as noted above – expected and actual production will vary from each other.

107. For marketing loan benefits, the loan rate can be considered the maximum support available
to eligible production in case the market price would fall to zero. Similarly, for deficiency and
counter-cyclical payments, the difference between the lo an rate and the target price can be considered
the maximum support available, albeit again only fo r the eligible production. The expected support
differs from that, as it takes into account that not all of the expected production will benefit from those
subsidies. The actual support differs again, as expe cted and actual production may not be identical.
Finally, actual US Government payments depend on market prices.

108. For PFC, market loss assistance, direct and cottonseed payments and crop insurance
subsidies, the “expected rates of support” represe nt expected expenditures per unit of expected
production. This has been calculated by usin g average budget expenditures over an appropriate
period as expected support, and by using average pr oduction as the expected production. Thus, these
payments are not maximum available “rates of support”. For example, under the crop insurance
programme the US Government pays premium subs idies. Higher per unit support would have been
available had all farms joined the programme at th e maximum subsidized rates. However, this was
not an expected or normal occurrence. Especially in MY 1992, when subsidy rates were relatively
low, many upland cotton farms were expected to forgo participation in the programme. Both
maximum available crop insurance subsidies as well as expected or normal crop insurance subsidies
increased for MY 1999 through 2002, as premium subsidies rose and more cotton acreage found the
programme attractive. For crop insurance, but al so for PFC and direct payments as well as market
loss assistance, the actual support per pound of upla nd cotton production will vary with the actual
production undertaken and actual yields achieved.

109. The actual “rate of support” from the Step 2 payments depends on the actual price differential
between the A-Index and the lowest-prices US quote. While it varies from the expected “rate of
support” with the actual realization of the price gap, it is not expected to be systematically correlated
to the actual level of prices.

110. In sum, it is not possible to derive the amount spent from the “expected rate of support”
calculated by Professor Sumner without adding additi onal information on the level of market prices
and the actual US upland cotton acreage, yield and production, among other variables. Following the
US approach, Professor Sumner has calculated an exp ected rate of support that could be characterized
as an expected guaranteed revenue. This approach is distinct from an approach looking into actual
expenditures, as favoured and advocated by Brazil. In fact, Professor Sumner applied the US
approach to a rate of support that would abstract in as far as possible from actual expenditures.

111. Brazil refers the Panel to its answers to qu estions 60 and 67 for actual expenditures by year,
by programme – both per pounds of upland cotto n production and as total expenditures for upland
cotton.

112. Should the Panel decide that the required test under Article 13(b)(ii) is a “rate of support”,
Brazil submits that the relevant rate of support is “expenditures per pound of production”, and thus the
“’rate’ at which support was spent”, as discussed in Brazil’s answer to Question 60.

65. Does Brazil consider that adjustment for inflation is relevant in the context of the
comparison under Article 13 (b)(ii) ? BRA

Brazil’s Answer:

113. Brazil does not believe that an adjustment fo r inflation is relevant in the context of the
comparison under Article 13(b)(ii). First, there is noth ing in the text of Article 13(b)(ii) that provides
for such an adjustment. Second, the only provi sion of the Agreement on Agriculture addressing
inflation is Article 18.4, which provides: “I n the review process Members should give due
consideration to the influence of excessive rates of inflation on the ability of any Member to abide by
its domestic support commitments.” The “revie w process” is the revi ew by the Committee on
Agriculture of the progress of implementation of commitments as set out in Article 18 of the
Agreement on Agriculture. The fact that negotiators explicitly opened the possibility of “giving due
consideration to the influence of excessive rates of inflation” in the review process, but not for
purposes of Article 13(b)(ii), is evidence that this omission was intentional.

114. Furthermore, at no time during the review pr ocess has the United States ever stated or made
any notifications that “excessive rates of inflation” in the US economy have negatively impacted “the
ability of [the United States] to abide by its do mestic support commitments”. Even, if it had,
Article 18.4 has no relevance for the purposes of the comparison required by Article 13(b)(ii), as it
refers to the review process only, and not to the p eace clause. Accordingly, there is no basis for the
Panel to apply any adjustment to the US level of support to upland cotton in marketing year 1992.

115. Nevertheless, if the Panel s hould decide to use such an adju stment, Brazil submits that the
appropriate index to be used is the applicable US agricultural price index. Three alternative indexes
could be used. The first and most direct is the index of prices received for cotton. Other indexes that
may be considered are the index of prices received for crops and the index of prices received for all
farm products.

 2000 2001 2002

Index of prices received for cotton 82 65 49
Index of prices received for all crops 96 99 103
Index of prices received for all farm products 96 102 99

1990 to 1992 average = 100
114

116. Thus, under none of the applicable indices is there any significant inflation to be taken into
account. To the contrary, the cotton price index fell by 51 percent, while price indices for crops and
all farm products have been stable if compared to the 1990-1992 base used by USDA.

66. Could you please comment on the relative m erits of each of the following calculation
methods for the purposes of the comparison of support to upland cotton with 1992, irrespective
of whether a particular measure should be included or excluded:

 (a) Total budgetary outlays (Brazil's approach). USA

 (b) Budgetary outlays per unit of upland cotton: Could you please calculate and
provide an estimate for the marketing years 1992 and 1999-2002, respectively,
and draw attention to any factors/qualificat ions that the Panel would need to be
aware of. BRA, USA

 114 Exhibit Bra-149 (Agricultural Outlook, August 2002, p. 38)

Brazil’s Answer:

117. Brazil has presented figures for budgetary outlays by unit of actual production in its answer to
Question 60. However, Brazil would like to add so me further considerations on the shortcomings of
this approach.

118. A significant issue in using these per unit figures to represent support rather than total
budgetary outlays is that a per-unit approach discounts the fact that some of the change in production
is itself caused by changes in the rate of support or subsidy. If support is calculated by dividing
budgetary outlays by total production, the result neglects this effect. As support rises in the
numerator, production rises in the denominator and th e ratio or per unit of an increased support rate
rises by less than total support (and may even decline).

119. The perverse effect is that the more pr oduction is stimulated by the US domestic support
programmes and, thus, the more those programmes distort trade, the smaller the per unit measure
effect of the increased subsidy. For this reason, a subsidy rate per unit of actual production should be
avoided or used with extreme caution.

 (c) Per unit rate of support (United States approach): How should changes in
acreage, eligibility and payment limitations per farm(s) (commodity certificate
programmes) be factored into this approach? BRA

Brazil’s Answer

120. The approach of the United States was simply to assert that the target price represented the
rate of support per unit in MY 1992 and the loan ra te alone represented the rate of support per unit in
MY 2002. This approach rests on several fundamental errors.

121. First, the approach left out major support progr ams in each year. For 1992, the approach left
out the Step 2 programme and crop insurance, both of which provided support to upland cotton in that
year. For 2002, the approach of the United States left out support provided by the direct payment
programme, the counter-cyclical payment programme and the cottonseed payment programme as well
as the Step 2 and crop insurance programmes.

122. Second, the United States did not account for an y factors that limited eligibility for support or
imposed costs of participation as a mandatory condition of receiving support from the US support
programmes. The failure to account for these factors in each year completely ignores the true nature
of the US support programmes for upland cotton and seriously distorts the rate of support.

123. Lastly, these two per pound numbers cannot simp ly be added together because the eligibility
criteria differ between them and, in particular, th e support from the upland cotton deficiency payment
programme was expected to apply to an even sm aller share of actual production than the support from
the marketing loan programme.

124. Professor Sumner’s calculation attempted to correct the US presentation for these serious
flaws in the implementation of the US approach. Professor Sumner added back the programmes that
provide support to upland cotton, but that have been left out by the United States. He also corrected
the rate of support for eligibility restrictions and th e cost of participation, and presented the rate of
support on the basis of expected production in orde r to be able to sum up the various “rates of
support.” At the same time, Profes sor Sumner has attempted to remain true to the approach of the
United States by avoiding the use of actual pr oduction or actual payments, and instead relying on
expected programme support per unit and expected or normal production to arrive at per unit support.
Professor Sumner’s approach also deals in detail with the question of how to account for eligibility

restrictions and costs of participation. Brazil refe rs the Panel to Annex 2 to Exhibit Bra-105 for the
details of Professor Sumner’s methodology.

125. In addition to eligibility, the Panel’s question refers specifically to pa yment limits. Payment
limits are applied on the basis of persons, including corporations, partners hips, producers and other
persons actively engaged in agriculture.
115 Typically, for larger farms, there is more than one person
actively engaged in agriculture, including spouses, and landlords on a share rental basis. In addition,
there is typically more than one legal entity per farm and under the three entity rule, a person may
receive programme payments from three entities and up to double the payment limit for that person
for one entity.116

126. Payment limits for deficiency payments in MY 1992 were $50,000. 117 Payment limits for
PFC (in MY 1999-2001) 118 were $40,000, 119 as is the case for direct payments (in MY 2002). 120
Payment limits for counter-cyclical payments are $65,000 (in MY 2002). 121 For the marketing loan
programme, a payment limitation of $75,000 per pers on applied in MY 1992. In the 1996 FAIR Act,
the payment limits for the marketing loan pr ogramme was also $75,000, but was increased to
$150,000 for MY 1999-2001 by supplemental legislation. 122 The 2002 FSRI Act limits the amount of
marketing loan gains and loan deficiency paym ents to a total of $75,000 for each producer. 123
However, the key change between MY 1992 and MY 1999-2002 was the establishment of the
certificate programme in MY 1999, 124 which effectively eliminated any payment limit for the
marketing loan programme.125

127. Brazil has no data that would allow it to factor payment limitations into the calculation of an
expected rate of support. However, Brazil notes th at with the inception of the commodity certificate
programme in MY 1999, the limitations imposed by payment limits have – if anything – been relaxed.
Additionally, Brazil notes that its approach to Artic le 13(b)(ii), by comparing total budgetary outlays,
takes the budgetary effects of payment limitations in to account. For farmers that have reached their
payment limit, the US Government incurs no furt her expenditures, and consequently, the amount of
expenditures is lower than it would be absent the payment limit. In that sense, actual expenditures
reflect the effects of payment limits.

128. Finally, Brazil notes that Professor Sumner’s calculations also do not account for the increase
in production or acreage devoted to upland cotton be tween MY 1992 and MY 2002. Taking this into
account by indexing the “expected rate of suppor t” to the level of MY 1992 production – as one

 115 Exhibit Bra-33 (7 CFR 1400.1 et seq.).
 116 Exhibit Bra-33 (7 CFR 1400.1 et seq.).
 117 Exhibit Bra-12 (“Cotton: Background for 1995 Farm Legislation,” USDA, April 1995, p. 14).
 118 Additional market loss assistance payments were made that did not count towards the PFC payment
limit.
 119 Professor Sumner has stated in his statement at the fi rst meeting of the Panel that a typical cotton
farm with 3000 acres r eceived about $300,0 00 in PFC payments per year ( see Exhibit Bra-105 (Statement of
Professor Daniel Sumner at the First Meeting of the Panel, p. 22). This amount results both from the fact that
several persons on a farm may be eligible for payment and from the fact that the three-entity rule doubled the
payment limit amount a single person could legally recei ve (for an explanation on the three-entity rule see
paragraphs 74-76 of the First Submission of Brazil).

120 Exhibit Bra-27 (Side by Side Comparison of the 1996 and 2002 Farm Act, USDA, p. 12).
 121 Exhibit Bra-27 (Side by Side Comparison of the 1996 and 2002 Farm Act, USDA, p. 12).
 122 Exhibit Bra-27 (Side by Side Comparison of the 1996 and 2002 Farm Act, USDA, p. 12).
 123 Exhibit Bra-42 (The 2002 Farm Act, Provisions and Implications for Commodity Markets,” USDA,
November 2002, p. 7).
 124 Exhibit Bra-42 (The 2002 Farm Act, Provisions and Implications for Commodity Markets,” USDA,
November 2002, p. 8); Exhibit Bra-29 (Section 1603 of the 2002 FSRI Act).
 125 The certificate programme is described in detail in paragraphs 75-76 of the First Submission of
Brazil.

possible approach to account for the increase in production – would increase the “expected rate of
support” for later marketing years, as the amount of US production of upland cotton increased.
126 The
result of the comparison of MY 1992 and MY 1999- 2002 support will, however, be the same: The
United States’ support to upland cotton in MY 1999-2002 exceeded the support to upland cotton
decided in MY 1992 and the US domestic suppor t measures fail to meet the condition in
Article 13(b)(ii) for exemption from actions under Articles 5 and 6 of the SCM Agreement and GATT
Article XVI:1.

 (d) Per unit rate of support for upland co tton (Prof. Sumner's approach at the first
session of the first substantive meeting ). USA

(67) The Panel requests the parties to calculat e and submit estimates of the AMS for upland
cotton for marketing years 1992, 1999, 2000, 2001 and 2002. For this purpose the parties are
each requested to submit AMS calculations for upland cotton (using the budgetary-outlay/non-
price gap methodology employed by the United States in respect of cotton in its DS
Notifications (e.g., G/AG/N/USA/43) and using the formats and supporting tables in document
G/AG/2) on the same basis as would be the case in calculating a product specific AMS for the
purposes of the calculation of the "Total Current AMS" in any year in accordance with the
relevant provisions, including as appropriate Article 1(a), (b) and (h), Article 6 and Annex 3 to
the Agreement. BRA, USA

Brazil’s Answer:

129. Brazil sets forth the following table that summarizes the AMS calculation for upland cotton
for marketing years 1992 and 1999-2002. Using the definition of non-product specific support
detailed in Brazil’s answer to the Panel’s Question 40, all of the programmes listed constitute non-
exempt direct payments, within the meaning of G/AG/2, providing product-specific support to upland
cotton. The table includes all support programs that should have been included in “Supporting Table
DS:6”, within the meaning of G/AG/2. To th e best of Brazil’s knowledge, no other “product-
specific” support to upland cotton has been provided by the US Government.

130. Brazil notes that the United States has notified the deficiency payments using the price gap
methodology provided for in Annex 3.
127 Brazil considers it appropriate to follow the US decision
and will, therefore, calculate the amount of s upport to upland cotton provided by the deficiency
payment programme by using the “price gap” approach detailed in Annex 3, paragraph 10 and 11.
Brazil notes that US budgetary expenditures for MY 1992 for the deficiency programme were
$1,017.4 million.
128

 126 Exhibit Bra-4 (“Fact Sheet, Upland Cotton,” USDA, January 2003, p. 4)
 127 Exhibit Bra-150 (G/AG/N/USA/10)
 128 Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 6).

AMS For Upland Cotton By Year And Support Programme
1992 1999 2000 2001 2002 Year
Programme ----- $ million -----
Deficiency
Payments1 812.1 none none none none
PFC
Payments2 none 547.8 541.3 453 none
Market Loss
Assistance
Payments
3
none 545.1 576.2 625.7 none
Direct
Payments4 none none none none 485.1
Counter-
cyclical
Payments
5
none none none none 998.6
Marketing loan
(Loan gains
and LDP)6
743.8 1,545 542 2,506 952
Step 2
Payment7 206.7 421.6 236.1 196.3 317
Crop
Insurance8 26.6 169.6 161.7 262.9 194.1
Cottonseed
Payment9 none 79 184.7 none 50
Total 1,789.2 3,308.1 2,242.0 4,043.9 2,996.8
Notes
January 2003, p. 5). Therefore, Brazil uses that figure. The external reference price has been notified by the United States to
be $1,275.741 per ton. Paragraph 11 of AoA Annex 3 specifies that the extern al reference price is based on 1986-1988
averages that have not changed between MY 1992 and MY 1995. Thus, Brazil bases the price-related direct payments from
the deficiency payment programme in MY 1992 on the difference between $1,607.169 per ton and $1,275.741 per ton
($331.428 per ton) multiplied by the eligible production, whic h results from multiplying the eligible upland cotton base
acreage and the payment yield. Professor Sumner has calcula ted the eligible upland cotton ba se acreage for MY 1992 to be
10.17 million acres, while the payment yield is 531 pounds per acres (Exhibit Bra-105 (Annex 2 to Statement of Professor
Daniel Sumner at the First Meeting of the Panel, p. 5-6). Thus, the eligible production is 5,400,270,000 pounds or 2,450,213
metric tons (2204 pounds equal one metric ton). Thus, the amount of deficiency payments in that enters the calculation of
total AMS for MY 1992 is 2,450,213 metric tons * $331.428 per ton = $812.069 million.
2 PFC payment expenditure for upland cotton = total PFC paym ent expenditure for upland co tton base * (actual upland
cotton acreage / PFC upland cotton base acreage). Total PFC payment expenditure for upland cotton is taken from Exhibit
Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 6). This amount has been adjusted by the ratio of upland
cotton acres actually planted (Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4)) to upland cotton base
acres in the PFC programme (Exhibit Bra-142 (Agricultural Ou tlook, May 2002, p. 50)). This adjustment is necessary
because only the portion of upland cotton PFC payments that actually benefits acres planted to upland cotton can be
considered support to upland cotton.
3 Market loss assistance expenditure for upland cotton = total market loss assistance expenditure for upland cotton base *
(actual upland cotton acreage / market loss assistance (i.e., PFC) upland cotton base acreage). Total market loss assistance
expenditures for upland cotton is taken fro m Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 6). This
amount has been adjusted by the ratio of upland cotton acres actually planted (Exhibit Bra-4 (“Fact Sheet: Upland Cotton,”
USDA, January 2003, p. 4)) to upland cotto n base acres in the market loss assist ance (i.e., PFC) programme (Exhibit Bra-
142 (Agricultural Outlook, May 2002, p. 50)). This adjustment is necessary because only the portion of upland cotton
market loss assistance payments that actu ally benefits acres planted to upland co tton can be considered support to upland
cotton.
4 Direct payments = total direct payment expenditure for upla nd cotton base * (actual upland cotton acreage / direct payment
upland cotton base acreage). Total direct payments for MY 2002 have been re-estimated from the figure presented by Brazil
in its First Submission, para. 59. The new figure is based on the statutory paymen t rate of 6.67 cents per pound of upland

cotton base multiplied by the direct payment upland cotton base acreage of 16.3 million acres (Brazil has assumed it to be
the previous 5-year average as reported by USDA in Exhibit Bra-142 (Agricultural Outlook, May 2002, p. 50)) multiplied by
the direct payment yield of 604 pounds per acre (Brazil has assu med it to be the previous 5-year average as reported by
USDA in Exhibit Bra-142 (Agricultural Outlook, May 2002, p. 50)). Payments are made on 85 percent of base acres. This
translates into a total of $558.17 million. This amount has been adjusted by the ratio of upland cotton acres actually planted
Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 4) to upland co tton base acres in the direct payment
program. This adjustment is necessary because only the portion of upland cotton market loss assistance payments that
actually benefits acres planted to upland cotton can be considered support to upland cotton.
5 Counter-cyclical payments = total count er-cyclical payment expenditure for upl and cotton base * (actual upland cotton
acreage / counter-cyclical payment upland cotton base acreage). Total counter-cyclical payments for MY 2002 have been re-
estimated from the figure presented by Br azil in its First Submission, para. 69. The new figure is based on the MY 2002
payment rate of 13.73 cents per pound of upland cotton base mu ltiplied by the counter-cyclical payment upland cotton base
acreage of 16.3 million acres (Brazil has assumed it to be the previous 5-year average as reported by USDA in Exhibit Bra-
142 (Agricultural Outlook, May 2002, p. 50)) multiplied by the counter-cyclical payment yield of 604 pounds per acre
(Brazil has assumed it to be the previous 5-year average as reported by USDA in Exhibit Bra-142 (Agricultural Outlook,
May 2002, p. 50) Brazil notes that this underestimates the pa yments, as it disregards the yield update for purposes of the
counter-cyclical payments). Payments are made on 85 percent of base acres. This translates into a total of $1148.98 million.
This amount has been adjusted by the ratio of upland cotton acres actually planted Exhibit Bra-4 (“Fact Sheet: Upland
Cotton,” USDA, January 2003, p. 4) to upla nd cotton base acres in the counter-cycli cal payment program. This adjustment
is necessary because only the portion of upland cotton market loss assistance payments that actually benefits acres planted to
upland cotton can be considered support to upland cotton.
6 Total marketing loan payments (marketing loan gains plus loan deficiency payments) are taken para. 144, 148-149 of the
First Submission of Brazil.
7 Total Step 2 payments are contained in Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 6). Brazil has
estimated the MY 2002 amount at note 335 in its First Submission to be $317 million.
8 Total crop insurance payments are taken from Exhibit Br a-57 (“Crop Year Statistics,” Federal Crop Insurance
Corporation).
9 Total cottonseed payments are listed in Brazil’s answer to question 17 (see para. 9).

131. The figures presented above indicate that, usi ng the AMS approach, the US level of support
for MY 1992 is lower than in each of the marketing years between 1999 and 2002.

132. Brazil also notes that – as explained in the notes on the sources and methodology for arriving
at the reported figures – the AMS figures for MY 1999-2002 reflect revised amounts of budgetary
expenditures that should replace those listed in Brazil’s First Submission at paragraphs 148-149.
129
These revised (and somewhat smaller) expenditures reflect new information collected by Brazil and
more accurately tabulate support to upland cotton in MY 1999-2002. Brazil notes that none of these
revisions results in any significant change to the total support to upland cotton, and that expenditures
decided in MY 1992 are still well below expenditures related to MY 1999-2002.

68. Could you please clarify the result of the calc ulations of, and the meaning of the title, in
Appendix Table 1 "Estimated per unit Subsidy Ra tes by Programme and Year" in Annex 2 to
Exhibit BRA-105, page 12. Why are the numbers calculated for marketing loans considered to
be subsidies? Could the Panel, for example, read the "total level of support" (bottom line of
the table) as the effective support price for upl and cotton or the maximum rate of support for
upland cotton? BRA, USA

Brazil’s Answer:

133. The Appendix Table 1 in Annex 2 to Exhibit Bra-105 should have been titled, “Estimated per
unit Support Rates by Programme and Year”. Brazil apologizes for any confusion caused by mis-
titling this table.

134. The marketing loan programme support listed in Table 1 of Annex 2 to Exhibit Bra-105 is a
“support rate” and not an actual loan deficiency payment or marketing loan gain. It does not represent
a subsidy amount. The loan deficiency payment or marketing loan gain is calculated as the difference
between the loan rate and the adju sted world price (AWP). When th e AWP falls, the loan benefit per

 129 No such revision is necessary for MY 1992.

unit of eligible production rises to offset the fa ll in the AWP. In the US “rate of support”
methodology, because the AWP is expected to be positively related to the price received by individual
farmers in the United States, the loan rate of 52.35 cents per pound in MY 1992 can be considered an
approximate rate of support per unit of eligible production.

135. The deficiency payment rate of support is si milar to the marketing lo an rate of support and
represents the maximum rate of support per eligible unit, where eligibility is measured by the rules
applicable in 1992. By contrast, actual support payments under Brazil’s expenditure methodology are
calculated as the difference between the higher of th e average price received by farmers and the loan
rate.

136. The other programmes listed in Table 1 provi de support per unit of eligible production to
upland cotton in addition to the loan rate and deficiency payment target price. These other
programmes are calculated as the estimated expect ed support rates. These rates are not maximum
rates of support but rather normal or expected ra tes of support. The other domestic support measures
are not equivalent in overall effect to a price support, but they are calculated on a per unit basis and
are added across programmes to give a total support rate.

137. The production and trade distorting effects of these subsidies are each different and are also
different from a support price.
130 Brazil will discuss the adverse effects caused by each of those
subsidies in its Further Submission, scheduled for 9 September 2003. The variety of the support
programmes employed by the United States precludes interpreting the sum of the various support
contributions as a “support price.” However, their sum can be read as an expected guaranteed income
that results from market revenue and US Government payments. Marketing loan benefits, deficiency
payments and counter-cyclical payments will incr ease with falling market prices. Other support
programs are relatively decoupled from market prices, and provide an expected rate of support, that
can be added to the loan rate and target price est ablished by the marketing loan, the deficiency and
counter-cyclical payments.

69. Can the United States confirm that the "mar keting year" for upland cotton is 1 August
to 31 July ? Can the United States confirm th e Panel's understanding that USDA data for the
"crop year" corresponds to the "marketing year"? USA

E. EXPORT CREDIT GUA RANTEE PROGRAMMES

70. How does Brazil respond to the United States' assertion that Brazil is trying to realize
through litigation what it could not achieve in past negotiations? BRA

Brazil’s Answer:

138. In WTO dispute settlement, there is only one way to determine what was achieved in past
negotiations – to interpret those provisions actually concluded according to the customary rules of
interpretation included in the Vienna Convention. In paragraphs 100-115 of Brazil’s Statement at the
First Panel Meeting, Brazil demonstrated that it is not in fact attempting “to realize through litigation
what it could not achieve in past negotiations.” In those paragraphs, Brazil demonstrated that under
the ordinary meaning of Article 10.2 of the Agreemen t on Agriculture, in its context and according to
the object and purpose of Article 10 and the Ag reement on Agriculture overall, export credit
guarantees are subject to the general export subsid y disciplines in the Agreement on Agriculture.
Brazil will not repeat those arguments here, but si mply notes that by ignoring an interpretation of
Article 10.2 according to the Vienna Convention rules, it is the United States that is trying to escape
what was in fact achieved in the Uruguay Round negotiations. Other participants in those

 130 See Exhibit Bra-105 (Statement by Professor Daniel Sumner at the First Meeting of the Panel, paras
20-39) for a summary of the economic impacts of these various support programs.

negotiations who are third parties in this dispute and who in fact use export credits – Canada, the
European Communities and New Zealand – agree with Brazil.

71. (a) Is an export credit guarantee a financia l contribution in the form of a "potential
direct transfer of funds or liabilities (e.g. loan guarantee)" within the meaning of
Article 1.1(a)(1)(i) of the SCM Agreement? Why or why not? Does it confer a
benefit within the meaning of Article 1.1(b)? Why or why not? If so, to whom?
USA

Brazil’s Comment:

139. In paragraphs 287-289 of its First Submission, and again at paragraph 116 of its Statement at
the First Panel Meeting, Brazil demonstrated that CCC export credit guarantees are expressly included
as “financial contributions” within the meaning of Article 1.1(a)(1)(i) of the SCM Agreement.
Although export credit guarantees do not automatically confer benefits, CCC export credit guarantees
confer “benefits” within the meaning of Article 1.1(b) because they are extended at premium rates and
on repayment terms that are not available and in fact do not exist on the market. In its comments and
answers to Questions 75 and 82 below, Brazil discusses passages from the GSM 102, GSM 103 and
SCGP regulations and materials from USDA’s Fore ign Agricultural Service (FAS) concerning the
programmes, which demonstrate that GSM 102, GSM 103 and SCGP confer “benefits”.

140. Brazil notes that a number of agents benef it from the subsidy provided by the guarantees.
The US financial institutions and the foreign bank enter into lucrative contracts they would not
otherwise have, the importer also gets financing th at would not otherwise have be available in the
market, but the US Government ultimately designed the programs to provide a benefit to US farmers
and exporters. On the FAS website “What Ever y Exporter Should Know About The GSM-102 and
GSM-103 Programmes” it stated that the “USDA will consider announcing, for a specific country or
region, the availability of guarantees for any US co mmercial commodity, if the market for US exports
will be expanded or maintained as a result” (emphasis added).
131 Brazil also notes that it is the US
exporter who applies for the guarantee and who trig gers the process of obtaining coverage for each
particular transaction.

 (b) How, if at all, would these elements be relevant to the claims of Brazil, and the
United States response thereto? BRA, USA

Brazil’s Answer:

141. Brazil notes that because CCC export credit guarantees constitute subsidies per se , and
because they are, further, de jure contingent on export, the GSM 102, GSM 103 and SCGP
programmes constitute export subsidies within the mean ing of Article 3.1(a) of the SCM Agreement.
According to the reasoning of the Appellate Body in US – FSC,
132 this means that those programs are
also export subsidies within the meaning of the Ag reement on Agriculture. In paragraphs 295-304 of
its First Submission, Brazil then demonstrated that those programs threaten to lead to circumvention
of the United States’ export subsidy commitments (both with respect to scheduled and unscheduled
commodities), in violation of Article 10.1 of the Ag reement on Agriculture and, as a consequence, of
Article 8 of that Agreement. Having established a vi olation of Part V of the Agriculture Agreement,
Brazil’s claims under Article 3.1(a) of the SCM Agreement against the CCC export credit guarantee
programmes are not exempt from action by Article 13(c)(ii) of the Agreement on Agriculture.

 131 Exhibit Bra-151 (“US Export Cr edit Guarantee Programs: What Every Exporter Should Know
About The GSM-102 and GSM-103 Programmes”, USDA, November 1996).
 132 Appellate Body Report, US – FSC, WT/DS108/AB/R. para. 139-141.

142. Articles 1.1(a)(1)(i) and 1.1(b) of the SCM Ag reement are relevant fo r a number of reasons,
including for the purposes of Article 10.3 of the Agreement on Agriculture. As demonstrated in
paragraphs 263-268 of Brazil’s First Submission, the United States has surpassed its export quantity
commitment levels for commod ities eligible for GSM 102, GSM 103 and SCGP support. Under
Article 10.3, the burden now lies with the United Stat es to prove that its exports in excess of these
commitments did not benefit from export subsidies, including export credit guarantees. United States
will, inter alia, have to prove that those progr ams do not grant “benefits” within the meaning of
Article 1.1(b) of the SCM Agreement.133

72. Could Brazil expand on why, as indicated in paragraph 118 of its oral statement, it does
"not agree" with the United States arguments relating to the viability of an a contrario
interpretation of item (j) of the Illustrative List of Export Subsidies in Annex 1 of the SCM
Agreement? BRA

Brazil’s Answer

143. As the Panel is aware, Brazil was earlier i nvolved in a dispute (Brazil – Aircraft) that
addressed the question whether certain items in the I llustrative List of Export Subsidies admit of an a
contrario defense. Although, as the United States not es, Brazil argued in that dispute that a contrario
interpretations of certain items included in the Illu strative List (in particular the first paragraph of
item (k)) are enabled by footnote 5 to the SCM Agreement, the panel disagreed.

144. Footnote 5 provides that “Measures referred to in Annex I as not constituting export subsidies
shall not be prohibited under this or any other provision of this Agreement.” The first Article 21.5
panel in Brazil – Aircraft concluded as follows with respect to footnote 5:134

6.36 In its ordinary meaning, footnote 5 relates to situations where a measure is
referred to as not constituting an export s ubsidy. Thus, one example of a measure
that clearly falls within the scope of fo otnote 5 involves export credit practices that
are in conformity with the interest rate provisions of the Arrangement on Guidelines
for Officially Supported Export Credits (“ Arrangement”). The second paragraph of
item (k) provides that such measures “shall not be considered an export subsidy
prohibited by this Agreement”. Arguably, f ootnote 5 in its ordinary meaning could
extend more broadly to cover cases where the Illustrative List contains some other
form of affirmative statement that a measure is not subject to the Article 3.1(a)
prohibition, that it is not prohibited, or that it is allowed, such as, for example, the
first and last sentences of footnote 59
34 and the proviso clauses of items (h) 35 and (i)36
of the Illustrative List.37
6.37 The first paragraph of item (k), however, does not contain any affirmative
statement that a measure is not an export subsidy nor that measures not satisfying the
conditions of that item are not prohibited. To the contrary, the first paragraph of item
(k) on its face simply identifies measures that are prohibited export subsidies. Thus,
the first paragraph of item (k) on its face do es not in our view fall within the scope of
footnote 5 read in conformity with its ordinary meaning.
Illustrative List does not deal with all possible fina ncial contributions, but for those it does deal with,
it establishes, by virtue of footnote 5, a dispositiv e legal standard insofar as prohibited subsidies are
concerned’”.135 While the panel agreed that “an illustrativ e list could in principle operate in such a
manner”, it concluded that because of footnote 5, the Illustrative List of Export Subsidies annexed to
the SCM Agreement did not operate in that manner. 136 According to the panel, “if the drafters had
intended the meaning which the United States attributes to footnote 5, they could certainly have found
appropriate language to do so”.137

146. The panel noted that the first paragraph of item (k) has effect even if it does not admit of an a
contrario interpretation. The pane l likened the Illustrative List to “a list of per se violations”.
138
According to the panel, even if a measure does not fulfill the elements of one of the items in the
Illustrative List and therefore does not constitute a per se violation, it could still be deemed prohibited
if the complaining party demonstrates that it fulf ills the elements of Articles 1 and 3 of the SCM
Agreement.139

147. In dicta, the Appellate Body suggested that the first paragraph of item (k) may indeed admit
of an a contrario interpretation. 140 In Brazil’s view, however, this suggestion is limited to the first
paragraph of item (k), and at least does not exte nd to item (j). Although the Appellate Body
emphasized in the initial appeal in Brazil – Aircraft that the term “material advantage” in item (k) had
to be given meaning independent of the term “benefit” in Article 1.1(b)141, it found that the difference
between the two terms is the qualification in item (k) that the advantage conferred relative to the
market must additionally be “material”. 142 In other words, proving “material advantage” includes a
showing that a “benefit” is conferred, but also requires something more. While disproving the
existence of a “material advantage” may mean th at, in some narrow circumstances, a benefit may
nevertheless still exist, the first paragraph of item (k) at least still relies on an analysis whether a
“material advantage” is conferred to the recipient, as compared to some market benchmark. This “to
the recipient” standard does not undercut and in fact complements the market benchmark “to the
recipient” standard included in Article 1.1(b). An a contrario reading of item (k), therefore, does not
read out the market benchmark “to the recipient” st andard from the test applicable to export credits,
but simply gives it a particular meaning in the context of export credits.

 135 Panel Report, Brazil – Aircraft (21.5), WT/DS46/RW, paras. 6.32, 6.38.
 136 Panel Report, Brazil – Aircraft (21.5), WT/DS46/RW, para. 6.38.
 137 Panel Report, Brazil – Aircraft (21.5), WT/DS46/RW, para. 6.38.
 138 Panel Report, Brazil – Aircraft (21.5), WT/DS46/RW, para. 6.42.
 139 Panel Report, Brazil – Aircraft (21.5), WT/DS46/RW, para. 6.42.
 140 Appellate Body Report, Brazil – Aircraft (21.5) , WT/DS46/AB/RW (adopted 4 August 2000),
para. 80 (“If Brazil had demonstrated that the paymen ts made under the revised PROEX were not ‘used to
secure a material advantage in the field of export cred it terms’, and that such payments were ‘payments’ by
Brazil of ‘all or part of the costs incurred by exporters or financial institutions in obtaining credits’, then we
would have been prepared to find that the payments made under the revised PROEX are justified under item (k)
of the Illustrative List.”).

141 Appellate Body Report, Brazil – Aircraft, WT/DS46/AB/R, para. 179.
 142 Appellate Body Report, Brazil – Aircraft, WT/DS46/AB/R, para. 177.

148. In contrast, the evidence required to meet the elements of item (j) are completely unrelated to
the evidence necessary to establish th at a guarantee programme confers a benefit “to the recipient” of
a loan guarantee. Whether the premia collected under an export credit guarantee programme meet the
long-term operating costs and losses of the progra mme is completely irrelevant to the question
whether a benefit “to the recipient” of the expor t credit guarantee is conferred. Consequently,
allowing an a contrario reading of item (j) that pr ovides, as the United States argues, “a dispositive
legal standard”
143 for determining whether guarantees are pr ohibited, would suggest that the “to the
recipient” market benchmark standard does not a pply to guarantees. This cannot be true, since
guarantees are expressly included in Article 1.1 (and Article 14(c)) as “financial contributions” that
can confer “benefits” to a recipient relative to a market benchmark.

149. The conclusion that item (j) does not admit of an a contrario defense is relevant for a number
of reasons, including for the purposes of Article 10.3 of the Agreement on Agriculture. As
demonstrated in paragraphs 263-268 of Brazil’s Fi rst Submission, the United States has surpassed its
export quantity commitment levels for commod ities eligible for GSM 102, GSM 103 and SCGP
support. Under Article 10.3, the burden now lies with the United States to prove that its exports in
excess of these commitments did not benefit from export subsidies, including export credit
guarantees. Even if the United States is able to demonstrate that premia for the GSM 102, GSM 103
and SCGP programs meet long-term operating costs a nd losses, it will also have to prove that those
programs do not grant “benefits” within the meaning of Article 1.1(b) of the SCM Agreement. Since
item (j) does not admit of an a contrario interpretatio n, disproving the elements of item (j) will not be
sufficient to remove the programs from the definition of “export subsidy.”

73. The Panel could arguably take the view that Articles 1 and 3 of the SCM Agreement
were relevant in assessing the WTO-consistency of United States export credit guarantees. The
United States has yet to submit any evidence or argumentation on this point, either as potential
context for interpretation of the terms in Arti cle 10 of the Agreement on Agriculture or in
relation to Brazil's claims under the SCM Agreement. The Panel would therefore appreciate
United States views in respect of this situation, and invites the United States to submit relevant
argumentation and evidence. USA

74. If the Panel decides to refer to provisi ons of the SCM Agreement for contextual
guidance in the interpretation of the terms in Article 10 of the Agreement on Agriculture,
should the Panel refer to item (j) or Articles 1 and 3 of the SCM Agreement or both? BRA, USA

Brazil’s Answer:

150. In determining what constitutes an export subs idy within the meaning of Article 10.1 of the
Agreement on Agriculture, Brazil considers that the Panel should refer to contextual guidance
included in Articles 1 and 3 of the SCM Agreement, a nd in item (j) of the Illustrative List of Export
Subsidies annexed to the SCM Agreement. As discussed in paragraphs 258-261 of Brazil’s First
Submission, this is consistent with th e Appellate Body’s decisions in US – FSC 144 and Canada –
Dairy.145 As a factual matter, Brazil has demons trated that the GSM 102, GSM 103 and SCGP
programmes constitute export subsid ies under Articles 1.1 and 3.1(a) of the SCM Agreement, and
under item (j) of the Illustrative Li st (as well as under Articles 1(e) and 10.1 of the Agreement on
Agriculture.

75. The Panel's attention has been drawn to Ar ticle 14(c) of the SCM Agreement (see e.g.
written third party submission of Canada) and to the panel report in DS 222 Canada- Export
Credits and Loan Guarantees. How and to what extent are Article 14(c) of the SCM

 143 Panel Report, Brazil – Aircraft (21.5), WT/DS46/RW, para. 6.32
 144 Appellate Body Report, US – FSC, WT/DS108/AB/R, para. 136-140.
 145 Appellate Body Report, Canada – Dairy, WT/DS103/AB/R and WT/DS113/AB/R, para. 87-90.

Agreement, and the cited panel report, relevant to the issue of whether or not the United States
export credit guarantee programmes confer a "b enefit"? What would be the appropriate
market benchmark to use for any comparison? Please cite any other relevant material. BRA,
USA

Brazil’s Answer:

151. As one way of demonstrating that the GSM 102, GSM 103 and SCGP programs constitute
export subsidies within the meaning of Article 10.1 of the Agreement on Agriculture, Brazil has
demonstrated that those programmes constitute financ ial contributions that confer benefits and that
are contingent on export, within the meaning of Articles 1.1 and 3.1(a) of the SCM Agreement.
Brazil recalls that as discussed above in response to Question 72, Article 10.3 of the Agreement on
Agriculture in fact places the burden on the United States to prove that export quantities in excess of
its export commitments have not benefited from export subsidies.

152. In any event, Brazil has demonstrated th at the CCC guarantee programs confer “benefits”
within the meaning of Article 1.1(b) because they are extended at premium rates and on repayment
terms that are not available on the market. In fact, the CCC programmes are unique financing
vehicles for agricultural commodity transactions that are not available on the commercial market.

153. Brazil notes that the United States has argued in Canada – Aircraft II that where there is no
comparable financial product on the market, a programme confers benefits per se. It stated:

If the commercial market does not offer a pa rticular borrower the exact terms offered
by a government, then the government is providing a benefit to the recipient
whenever those terms are more favorable th an the terms that are available in the
market. A government entity “operating on commercial principles” is still a
government entity. It is not the commercial market.
146
154. Brazil agrees with the United States. This interpretation is, in fact, consistent with the
benchmark established by Article 14( c) of the SCM Agreement. In relevant part, Article 14 provides
as follows:

For the purposes of Part V, any method u sed by the investigating authority to
calculate the benefit to the recipient … shall be transparent and adequately explained.
Furthermore, any such method shall be consistent with the following guidelines:
 …

(c) a loan guarantee by a government shall not be considered as
conferring a benefit, unless there is a difference between the amount
that the firm receiving the guarantee pays on a loan guaranteed by the
government and the amount that the firm would pay on a comparable
commercial loan absent the government guarantee. In this case the
benefit shall be the difference between these two amounts adjusted
for any differences in fees.
155. Brazil first draws the Panel’s attention to the fact that Article 14 was specifically conceived
for the purposes of Part V of the SCM Agreement only. It should be referred to exclusively as context
to determine whether a benefit exists when a par ticular transaction is backed by a government export
credit guarantee. Secondly, Brazil observes that subparagraph (c) of Article 14 is simply a

 146 Panel Report, Canada – Aircraft II, WT/DS222/R, Annex C-2 (para. 7).

“guideline”, not the sole method of calculating the be nefit to the recipient. Other methods may be
applied as long as they are “consistent” with the guideline set out in subparagraph (c).

156. There is no market benchmark in the case of the GSM 102, GSM 103 and SCGP
programmes, since there are no financial products available on the market on the terms provided by
the programmes. As discussed in response to Qu estion 82, the regulations regarding the GSM 102
and GSM 103 programmes, as well as regarding th e SCGP programme note that “[t]he programs
operate in cases where credit is necessa ry to increase or maintain US exports to a foreign market and
where US financial institutions would be unwilling to provide financing without CCC’s guarantee”.
147
Moreover, the regulations state that “[t]he progr ams are targeted towards those countries where the
guarantee is necessary to secure financing of the export but which have sufficient financial strength so
that foreign exchange will be available for scheduled payments.” 148 These passages prove that
without a CCC guarantee, a borrower would not be able to secure financing at all – not just financing
on less attractive terms than could be secured with the CCC guarantee (or on terms that would
constitute a benefit under Article 14(c) of the SC M Agreement) – but no financing at all. The
regulations also emphasize that the CCC guarantee is necessary – a commercial guarantee would not
be sufficient.

157. Moreover, as the FAS website e xplains, “[t]he reduction of risk to financial institutions in the
United States … may make possible financing that would otherwise be unavailable”.
149 The FAS
further clarifies that “a CCC guarantee can encour age extension of credit in cases where financial
institutions might otherwise be unwilli ng to finance export on credit terms”. 150 In addition, the FAS
points out that such guarantees would “facilitate cr edit to foreign banks in larger amounts and on
more favorable commercial terms than would otherwise be available”. 151 Whatever the meaning of
Article 14(c), the provision by CCC of guarantees that do not exist on the market entails the provision
of a benefit per se. The benefit to the recipient, under the benchmark established by Article 14(c),
would be the total amount of the loan backed by the guarantee, since there would be no “comparable
commercial loan absent the government guarantee”.

76. How does the United States respond to Braz il's statement that : "...export credit
guarantees for exports of agricultural exports [sic] are not available on the marketplace by
commercial lenders"? USA

77. How does the United States interpretation of "long term operating costs and losses" in
item (j) as claims paid give meaning to both "costs" and "losses"? Do claims paid represent
"losses" or "costs" or both? If claims paid is represented by "losses", what would go into the
"cost" element of item (j)? Could the United States expand on why it disagrees with the items
which Brazil identifies for inclusion in the examination to be conducted under item (j)? USA

Brazil’s Comment:

158. Brazil may wish to comment in its rebutta l submission on the response the United States
ultimately provides to this question. In the me antime, however, Brazil would like to comment on US
criticisms of the initial formula Brazil constructed to determine whether the GSM 102, GSM 103 and
SCGP programmes fail to meet their long-term ope rating costs and losses, within the meaning of

 147 Exhibit Bra-38 (7 CFR 1493.10(a)(2)) and Exhibit Bra-38 (7 CFR 1493.400(a)(2)).
 148 Exhibit Bra-38 (7 CFR 1493.10(a)(2)) and Exhibit Bra-38 (7 CFR 1493.400(a)(2)).
 149 Exhibit Bra-151 (“US Export Cr edit Guarantee Programs: What Every Exporter Should Know
About The GSM-102 and GSM-103 Programs,” USDA, November 1996).
 150 Exhibit Bra-151 (“US Export Cr edit Guarantee Programs: What Every Exporter Should Know
About The GSM-102 and GSM-103 Programs,” USDA, November 1996).
 151 Exhibit Bra-151 (“US Export Cr edit Guarantee Programs: What Every Exporter Should Know
About The GSM-102 and GSM-103 Programs,” USDA, November 1996).

item (j). The Panel will recall that Brazil’s initial formula, which was included in paragraph 281 and
Figure 20 of its First Submission, can be stated as follows:

 Premiums collected – (Administrative expe nses + Default claims + Interest expenses)

159. Where this formula yields a negative num ber over a period constituting the “long term”,
Brazil argued that loan guarantees are provided “at premium rates which are inadequate to cover the
long-term operating costs and losses of the programme”, within the meaning of item (j).
152 Applying
this formula to data for the period 1994-2003, Braz il demonstrated that premiums collected for the
CCC guarantee programmes were indeed inadequate to cover operating costs and losses for the
programmes.

160. To correct for alleged errors in Brazil’s in itial constructed formula, which was included in
paragraph 281 and Figure 20 of its First Submissi on, the United States adopted its own alternative
formula, in paragraph 173 of its First Submission, which can be stated as follows:

(Fees + Claims recovered + Claims rescheduled) – Claims paid

161. Where this formula yields a positive number over a period constituting the “long term,” the
United States asserts that loan guarantees are provided at premium rates that are adequate to cover the
long-term operating costs and losses of the program, within the meaning of item (j).

162. Brazil made several criticisms of the US form ula. In paragraph 123 of its Statement at the
First Panel Meeting, Brazil demonstrated that the failure to account for interest paid by the CCC to the
Treasury Department leads to artificially low accounti ng of operating costs. In paragraph 122, Brazil
additionally demonstrated that it is incorrect to treat rescheduled debt as a recovery of a default claim.
Brazil notes that rescheduling can in fact have the effect of increasing the costs incurred by the
government, rather than reducing those costs. In its budget documents, the US Government treats
Paris Club rescheduling of imminent defaults as “work-outs.”
153 According to the US Office of
Management and Budget (“OMB”), work-outs can eith er have a negative or a positive effect on cash
flow.154 The U. General Accounting Office (“GAO”) has in fact stated that historically, the majority
of GSM support that is rescheduled is “in arrears.”155 If anything, this increases CCC’s cost.

 152 Revenue for “premiums collected ” is recorded in the “Financi ng Account” section of the CCC
budget, in the row titled “Loan origination fee” (line 88.40). See the US budget documents included as Exhibits
Bra-88 to Bra-95. “Administrative expenses” are reco rded in the “Programme Account” section of the CCC
budget, in the row titled “Administr ative expenses” (line 00.09). See the US budget documents included as
Exhibits Bra-88 to Bra-95. Expenses for “default clai ms” are recorded in the “Financing Account” section of
the CCC budget, in the row titled “Default claims” (line 00.01). See the US budget documents included as
Exhibits Bra-88 to Bra-95. “Inter est expenses” are recorded in the “F inancing Account” section of the CCC
budget, in the row titled “Interest on debt to Treasury” (line 00.02). See the US budget documents included as
Exhibits Bra-88 to Bra-95.
 153 Exhibit Bra-121 (US General Accounting Office (“GAO”), Report to Congressional Committees,
Credit Reform: US Needs Better Method for Estimating Cost of Foreign Loans and Guarantees ,
GAO/NSIAD/GGD-95-31, December 1994, p. 63) (“GAO/NSIAD/GGD-95-31”).
 154 Exhibit Bra-116 (Executive Office of the Presiden t, Office of Management and Budget, Circular
No. A-11, Part 5, Federal Credit Programs (June 2002), p. 185-13) (“OMB Circular A-11”)).
 155 Exhibit Bra-152 (GAO, Statement of Allan I. Mendelowitz, Director, Trade, Energy and Finance
Issues, National Security and International Affairs Divisi on, before the Task Force on Urgent Fiscal Issues of
the Committee on Budget of the US House of Representatives, Status Report on GAO’s Reviews of the Targeted
Export Assistance Program, the Export Enhancement Programme, and the GSM-102/103 Export Credit
Guarantee Programmes, GAO/T-NSIAD-90-53, 28 June 1990, p. 14).

163. The United States’ formula did correct for one shortcoming of Braz il’s initial constructed
formula, however. The United States is correct that Brazil’s formula did not include recoveries. 156
Brazil therefore introduces a revised constructed form ula that accounts for recoveries and interest on
those recoveries, as recorded in the “Principal collections” and “Interest collections” rows157 of the US
budget. It also accounts for the interest accruing to the CCC on balances maintained in its so-called
“financing account” for the purposes of potential claims, 158 as recorded in the “Interest on uninvested
funds” row of the US budget documents. 159 Brazil’s revised constructed formula can be stated as
follows (including references to the specific budget lines involved):

(Premiums collected + Recovered principal and interest (Line 88.40) + Interest revenue (Line 88.25)) –
(Administrative expenses (Line 00.09) + Default claims (Line 00.01) + Interest expense (Line 00.02))

164. Brazil emphasizes that it does not intend for this revised constructed formula to replace the
formula used by the US government itself to track the costs of the CCC guarantee programs, pursuant
to the US Federal Credit Reform Act (“FCRA”). In paragraphs 124-133 of its Statement at the First
Panel Meeting, Brazil discussed the FCRA cost formul a in considerable detail. The chart included at
paragraph 132 of Brazil’s Statement demonstrates that under the FCRA cost formula, CCC’s export
credit guarantee programs are offered at premium rat es that are inadequate to cover their long-term
operating costs and losses. Brazil believes that the FCRA cost formula is one very useful way to
determine the performance of the CCC guarantee programs relative to the elements of item (j).
However, if the Panel would like to confirm the resu lts of the FCRA cost formula, or refer to an
alternative formula, Brazil offers its revised constructed formula for these purposes.

165. Where Brazil’s revised constructed formula i ndicates a net cost over a period constituting the
“long term”, export credit guarantees are provided “at premium rates which are inadequate to cover
the long-term operating costs and losses of the pr ogramme”, within the meaning of item (j). The
following chart demonstrates that during the ten-year period FY 1993-2002, premiums for GSM 102,
GSM 103 and SCGP export credit guarantees have been inadequate to c over long-term operating
costs and losses. Net costs for the programmes duri ng this period total more than $1 billion as set
forth below:

Fiscal
year
Premiums collected (88.40) + Recovered
principal and interest (88.40) + Interest
revenue (88.25)
Admin. expenses (00.09) + Default claims
(00.01) + Interest expense (00.02)
1993 $27,608,000 + $12,793,000 +
$15,672,000160 = $56,073,000
$3.320,000161 + $570,000,000 162+ $0163 =
$573,320,000
1994 $20,893,000 + $458,954,000 + $0 164 =
$479,847,000
$3,381,000165 + $422,363,000166 + $0167 =
$425,744,000

 156 First Submission of the United States, para. 173.
 157 In combination with loan origination fees, these rows are collectively recorded as line 88.40 in the
US budget documents.
 158 Exhibit Bra-116 (OMB Circular A-11, p. 185-51). See also Exhibit Bra-118 (Federal Accounting
Standards Advisory Board, Statement of Federal Financial Accounting Standards No. 19, Technical
Amendments to Accounting Standards for Direct Loans and Loan Guarantees in S TATEMENT OF FEDERAL
FINANCIAL ACCOUNTING STANDARDS NO. 2, March 2001, p. 16 (para. 37)).
 159 This row is recorded as line 88.25 in the US budget documents. The payment of interest to an
agency for uninvested balances in financing accounts is addressed in Exhibit Bra-117 (2 U.S.C. § 661d(c)).
 160 Exhibit Bra-126 (US budget for FY 1995, p. 156).
 161 Exhibit Bra-126 (US budget for FY 1995, p. 156).
 162 Exhibit Bra-126 (US budget for FY 1995, p. 156).
 163 No budget line Exhibit Bra-126 (US budget for FY 1995, p. 156).
 164 Exhibit Bra-95 (US budget for FY 1996, p. 162).
 165 Exhibit Bra-95 (US budget for FY 1996, p. 161).
 166 Exhibit Bra-95 (US budget for FY 1996, p. 162).

1995 $18,000,000 + $62,000,000 + $0
168 =
$80,000,000
$3,000,000 + $551,000,000 +
$10,000,000169 = $564,000,000
1996 $20,000,000 + $68,000,000 +
$26,000,000170 = $114,000,000
$3,000,000171 + $202,000,000 172 +
$61,000,000173 = $266,000,000
1997 $14,000,000 + $104,000,000 +
$26,000,000174 = $144,000,000
$4,000,000175 + $11,000,000 176 +
$62,000,000177 = $77,000,000
1998 $17,000,000 + $81,000,000 +
$54,000,000178 = $152,000,000
$4,000,000179 + $72,000,000 180 +
$62,000,000181 = $138,000,000
1999 $14,000,000 + $58,000,000 + $0 182 =
$72,000,000
$4,000,000183 + $244,000,000 +
$62,000,000184 = $310,000,000
2000 $16,000,000 + $100,000,000 +
$99,000,000185 = $215,000,000
$4,000,000186 + $208,000,000 187 +
$62,000,000188 = $274,000,000
2001 $18,000,000 + $149,000,000 +
$125,000,000189 = $292,000,000
$4,000,000190 + $52,000,000 191 +
$104,000,000192 = $160,000,000
2002 $21,000,000 + $155,000,000 +
$61,000,000193 = $237,000,000
$4,000,000194 + $40,000,000 195 +
$93,000,000196 = $137,000,000
Total $1,841,920,000 $2,925,064,000
Long-term
Net Cost $1,083,144,000

166. To arrive at this result, Brazil notes that it did not rely on “estimates” of the programmes’
costs.197 The annual US budget documents upon which Brazil relied track CCC data for three
consecutive years – the prior year, the current year and the budget year. The 2004 budget, for
example, which is completed in 2003, includes da ta for 2002, 2003 and 2004. Budget year data is

 167 Exhibit Bra-95 (US budget for FY 1996, p. 162).
 168 Exhibit Bra-94 (US budget for FY 1997, p. 176).
 169 Exhibit Bra-94 (US budget for FY 1997, p. 175).
 170 Exhibit Bra-93 (US budget for FY 1998, p. 175).
 171 Exhibit Bra-93 (US budget for FY 1998, p. 174).
 172 Exhibit Bra-93 (US budget for FY 1998, p. 175).
 173 Exhibit Bra-93 (US budget for FY 1998, p. 175).
 174 Exhibit Bra-92 (US budget for FY 1999, p. 106).
 175 Exhibit Bra-92 (US budget for FY 1999, p. 105).
 176 Exhibit Bra-92 (US budget for FY 1999, p. 106).
 177 Exhibit Bra-92 (US budget for FY 1999, p. 106).
 178 Exhibit Bra-91 (US budget for FY 2000, p. 112).
 179 Exhibit Bra-91 (US budget for FY 2000, p. 111).
 180 Exhibit Bra-91 (US budget for FY 2000, p. 112).
 181 Exhibit Bra-91 (US budget for FY 2000, p. 112).
 182 Exhibit Bra-90 (US budget for FY 2001, p. 112).
 183 Exhibit Bra-90 (US budget for FY 2001, p. 110).
 184 Exhibit Bra-90 (US budget for FY 2001, p. 111).
 185 Exhibit Bra-89 (US budget for FY 2002, p. 118).
 186 Exhibit Bra-89 (US budget for FY 2002, p. 116).
 187 Exhibit Bra-89 (US budget for FY 2002, p. 117).
 188 Exhibit Bra-89 (US budget for FY 2002, p. 117).
 189 Exhibit Bra-88 (US budget for FY 2003, p. 120).
 190 Exhibit Bra-88 (US budget for FY 2003, p. 118).
 191 Exhibit Bra-88 (US budget for FY 2003, p. 119).
 192 Exhibit Bra-88 (US budget for FY 2003, p. 120).
 193 Exhibit Bra-127 (US budget for FY 2004, p. 109).
 194 Exhibit Bra-127 (US budget for FY 2004, p. 107).
 195 Exhibit Bra-127 (US budget for FY 2004, p. 108).
 196 Exhibit Bra-127 (US budget for FY 2004, p. 108).
 197 First Submission of the United States, paras. 175-178.

indeed based on estimates. Current year data is revised to account for any change to the cost or
revenue item at issue. Since the current year is not yet complete when the b udget is issued, however,
current year data remains, at least in part, based on estimates. Prior year data, however, is based on
actual costs and revenues. In applying its formula, Brazil used the data in the prior year column, and
therefore used actual costs and revenues, rather than estimates.
198

167. Several other factors corroborate the fact that the CCC export guarantee programmes do not
charge premia that allow them to meet their long-term operating costs and losses.

• First, in audit reports of the CCC’s fiscal year 2000 and 2001 financial statements, the US
Department of Agriculture’s Office of the Inspector General noted that “the fees CCC charges for
its GSM-102 and GSM-103 export credit guarantee pr ograms have not been changed in 7 years
and may not be reflecting current costs.”
199 While Brazil does not have fee schedules for the
entire period 1993-2002, it provides for the Pane l’s review fee schedules for GSM 102 and GSM
103 from November 1994, 4 September 2001 and 24 September 2002. 200 According to CCC’s
website, the latter is the fee schedule that is curre ntly in force. The Panel will note that between
November 1994 and 23 September 2002, CCC made onl y one change in its fee schedule for GSM
102: while the fee for a 12-month guarantee w ith semi-annual repayment intervals was $0.209
per $100 of coverage in November 1994, by 4 Se ptember 2001 it had changed to $0.229 per $100
of coverage. On 24 September 2002, one additio nal change was made: borrowers were offered
the additional option of 30 and 60 day guarantees, at the same fee charged for 90-day and 4-, 6-
and 7-month guarantees.

• Second, US Department of Agriculture Under Secr etary August Schumacher testified to Congress
in 1998 that the GSM 102 programme suffered ne arly $2 billion in losses as a result of Iraqi
defaults, and an additional nearly $2 billion resulting from Polish defaults.
201 GAO stated that
liabilities on the Iraqi debt accrued over the period 1990-1997, as the guaranteed Iraqi borrowings
came due.202 As noted by Brazil in paragraph 284 of its First Submission, however, the maximum
in GSM 102 premiums the United States could ha ve generated from all export credit guarantees
provided during the lifetime of the programmes up to 1998 – had it applied the highest possible

 198 Of the 1994-2003 period tracked in Figure 20 to Brazil’s First Submission, the only figures that
reflected estimates were those for the year 2003, since actua l data is not yet available for that year. To correct
this, and to ensure that the data is still sufficient to reveal whether the CCC export credit guarantee programmes
incur “long term” operating costs and losses, the chart above tracks CCC guarantees for the period 1993-2002.
 199 Exhibit Bra-153 (US Department of Agriculture Office of Inspector General Financial and IT
Operations Audit Report of the Commodity Credit Corporation’s Financial Statements for Fiscal Year 2000,
Audit Report No. 06401-14-FM (June 2001), p. 31). See also Exhibit Bra-154 (US Department of Agriculture
Office of Inspector General Great Plains Region Audit Report of the Commodity Credit Corporation’s Financial
Statements for Fiscal Year 2001, Audit Report No. 06401-4-KC (February 2002), p. 49 (“[T]he fees CCC
charged for its GSM-102 and GSM-103 export credit guarantee programmes have not been changed for many
years and may not be reflecting current costs.”).

200 Exhibit Bra-155 (US Department of Agriculture Foreign Agricultural Service, Notice to GSM-102
and GSM-103 Programme Participants , 24 September 2002); Exhibit Bra-98 (US Department of Agriculture
Foreign Agricultural Service, Notice to GSM-102 & GSM-103 Programme Participants , 4 September 2001);
Exhibit Bra-156 (US Export-Import Bank, Comparison of Major Features of Programmes Offered by Ex-Im
Bank and Commodity Credit Corporation for Support of Bulk Agricultural Commodities , available at
http://www.exim.gov/pub/ins/pdf/eib99-13.pdf). Brazil was unable to locate from public sources other fee
schedules from the period 1993-2002.
 201 Exhibit Bra-87 (“Testimony of August Schumacher Jr., Under Secretary, Farm and Foreign
Agricultural Service, USDA, before the Subcommittee on General Farm Commodities, Hearing on the Asian
Financial Crisis, 4 February 1998”, p. 10-11).
 202 Exhibit Bra-157 (US General Accounting Office, R EPORT TO THE CHAIRMAN, TASK FORCE ON
URGENT FISCAL ISSUES, COMMITTEE ON THE BUDGET, HOUSE OF REPRESENTATIVES, International Trade:
Iraq’s Participation in US Agricultural Export Programs , GAO/NSIAD-91-76 (November 1990), p. 27
(Table IV.2)).

premium rate to all guarantees – is $358.54 million.
203 The total amount of received applications
for GSM 102 export credit guarantees for the pe riod 1999-2002 was $11.77 billion, resulting in a
theoretical additional maximum premium of $78.08 million for that period. 204 Thus, the highest
amount of premiums the United States could ha ve generated under this programme from its
inception through 2002 would amount to $436.62 million. 205 This does not come close to
covering the programme’s losses from the Iraqi and Polish defaults alone.

• Third, CCC financial statements for fiscal y ear 2002 report that uncollectible amounts on post-
1991 CCC guarantees total $770 million. 206 As noted in the chart above at paragraph 165, CCC
collected premiums of $222.641 million for GS M 102, GSM 103 and SCGP during the period
1992-2002.207 Thus, even without accounting for other operating costs, or for receivables that
CCC hopes to collect but may not, losses for the CCC export credit guarantee programmes
outpace premiums during the period 1992-2002 by nearly $550 million.

• Fourth, CCC’s 2002 financials also report uncoll ectible amounts on pre-1992 CCC guarantees of
$2.567 billion.208 While actual data concerning premiu ms during the period 1981-1991 (from the
first year GSM 102 was available until the last y ear before credit reform was introduced with the
Federal Credit Reform Act) is not publicly ava ilable, Brazil has applied a proxy based on the
average annual fees collected during the period 1992-2002 ($20.24 million). Multiplying $20.24
million by the 11 years included in the 1981-1991 peri od results in total fees of $222.64 million.
Thus, even without accounting for other operating costs, or for receivables that CCC hopes to
collect but does not, losses for the CCC expor t credit guarantee programs outpace premiums
during the period 1981-1991 by more than $2.3 billion.

• Finally, the US General Accounting Office (“ GAO”) estimated in 1992 that if GSM 102 and
GSM 103 continued until 2007, costs for the programs would reach $7.6 billion.
209 Premium fees

 203 See Exhibit Bra-73 (“Summary of Export Credit Gu arantee Programme Activity”, USDA, covering
GSM 102, GSM 103 and SCGP for US fiscal years 1999-2003) for the total amounts of allocations. These have
been multiplied by 0.663 percent to obtain the theoretical maximum premium.

204 Exhibit Bra-73 (“Summary of Export Credit Guarantee Programme Activ ity”, USDA, covering
GSM 102, GSM 103 and SCGP for US fiscal years 1999-2003).
 205 This amount is a substantial overstatement, as premiums for periods of coverage shorter than 3 years
will yield substantially lower premiums of as low as 15.3 cents per $100 as compared to 66.3 cents for a 3-year
coverage. Exhibit Bra-98 (“Guarantee Fee Rate Schedule Under GSM 102 and GSM 103”).
 206 Exhibit Bra-158 (US Department of Agriculture, Office of Inspector General, Financial and IT
Operations, Audit Report, Commodity Credit Corporation’s Financial Statements for Fiscal Year 2002 , Audit
Report No. 06401-15-FM (December 2002), Notes to the Financial Statements, p. 14). This figure theoretically
includes not only uncollectible amounts for the GSM 102, GSM 103 and SCGP programs, but also uncollectible
amounts for CCC’s Facility Guarantee Programme (“FGP”). Brazil has not challenged the FGP in this dispute.
Brazil notes, however, that in fiscal years 1999-2003 (for which programme activity data is available on CCC’s
website, at http://www.fas.usda.gov/excredits/Monthly/ecg.html
), exporter applications were only received for a
total of $4.8 million in coverage under the FGP. Thus, defaults on FGP guarantees, if any, would contribute
only negligibly to the $770 million figure discussed above.
 207 The chart in paragraph 165 does not include premiums for 1992. Those premiums totalled $36.14
million. See Exhibit Bra-125 (US budget for FY 1994, p. 383). According to US budget documents, premiums
for the FGP are included in the budget line item for fees on the GSM and SCGP programs.
 208 Exhibit Bra-158 (US Department of Agriculture, Office of Inspector General, Financial and IT
Operations, Audit Report, Commodity Credit Corporation’s Financial Statements for Fiscal Year 2002 , Audit
Report No. 06401-15-FM (December 2002), Notes to the Fi nancial Statements, p. 14). The FGP did not exist
during this period, and thus is not a factor.
 209 Exhibit Bra-159 (US General Accounting Office, R EPORT TO CONGRESSIONAL REQUESTERS, Loan
Guarantees: Export Credit Guarantee Programmes’ Costs are High, GAO/GGD-93-45 (December 1992), p.4).
See also Exhibit Bra-115 (US General Accounting Office, Report to the Chairman, Subcommittee on Criminal
Justice, US House of Representativ es Committee on the Judiciary, “Loan Guarantees: Export Credit Guarantee
Programmes’ Long Run Costs are High,” GAO/NSIAD-91-180, 19 April 1991, p. 2-3) (“We estimate that the

for the period 1992-2007 (assuming current rates) would only reach $323.84, 210 demonstrating
that fees for the programme do not meet costs.

In sum, CCC financials state that during the pe riod 1981-2002, costs and losses for CCC export credit
guarantee programmes exceeded premiums collected.

78. Can the United States provide supporting documentation for data used relating to
"costs and losses" in paragraph 173? Could the United States confirm that the figures cited in
paragraph 173 of its first written submission relate to the SCGP? Why did the United States cite
these figures after stating that it is not po ssible to make any assessment of the long-term
operating costs and losses of this programme? USA

79. In respect of what time periods does Arti cle 13(c) require an assessment of conformity
with Part V of the Agreement on Agriculture? How does this affect, if at all, your interpretation
of Article 13(b)? BRA, USA

Brazil’s Answer:

168. Part V of the Agreement on Agriculture re quires that Members grant export subsidies in
conformity with that agreement and with that Member’s export subsidy reduction commitments.
These commitments are made on a commodity specific basis.
211 The relevant section of the US
Schedule of Concessions (Part IV, Section II) clarifies that the US export subsidy commitments are to
be assessed on a US fiscal year basis. 212 A Member’s export subsidy reduction commitments cover
annual budgetary outlays and quantita tive reduction commitments – in the US case on a fiscal year
basis.213 It follows that the US compliance with its export subsidy reduction commitments must be
assessed on the basis of specific agricultural products and fiscal years.

169. Thus, similar to domestic support measures, th e conformity of a Member’s export subsidies
with Part V of the Agreement on Agriculture mu st be assessed by comparing the amounts actually
granted (both in term of budgetary outlays as well as in terms of quantities of specific agricultural
products benefiting from export subsidies) with a be nchmark, i.e., with a Member’s export subsidy
reduction commitments.

170. According to Article 3.3 of the Agreemen t on Agriculture, for agricultural products not
included in Part IV, Section II of a Member’s Schedule (i.e. unscheduled products) any export subsidy
granted leads to a violation of Part V of the Agreem ent on Agriculture. Brazil’s claims against Step 2
export subsidies and against ETI Ac t subsidies benefiting upland cotton fall in this category, as the
United States does not have an export s ubsidy reduction commitment for upland cotton. 214
Furthermore, Brazil’s claims concerning export credit guarantee programs fall in this category, in as
far as export credit guarantees are available for unscheduled agricultural products.

GSM programmes will cost the Corporation about $6.7 billion in the long run . . . This estimate assumes that the
outstanding loans and guarantees remain at the same level for about 16 years and that their average risk remains
unchanged as new guarantees replace old ones).
 210 This has been calculated based on actual fees fo r 1992-2002 and using average 1992-2002 fees as
expected fees for the remainder of the time period (2003-2007).
 211 See Brazil’s answer to Question 7.
 212 Exhibit Bra-83 (Schedule XX of the United States of America, Part IV, Section II entitled Export
Subsidies: Budgetary Outlays and Quantitative Reduction Commitments).
 213 Exhibit Bra-83 (Schedule XX of the United States of America, Part IV, Section II entitled Export
Subsidies: Budgetary Outlays and Quantitative Reduction Commitments).
 214 Exhibit Bra-83 (Schedule XX of the United States of America, Part IV, Section II entitled Export
Subsidies: Budgetary Outlays and Quantitative Reduction Commitments).

171. For scheduled agricultural products, the Pa nel needs to determine whether the export
subsidies for a particular scheduled agricultural pr oduct are in excess of the export subsidy reduction
commitment levels for that agricultural product in th e year in question, or whether the application of
the export subsidies threatens to l ead to circumvention of the expo rt subsidy reduction commitments.
More specifically, in this dispute, the Panel need s to assess whether the CCC export credit guarantee
programmes threaten to circumvent the export s ubsidy reduction commitments of the United States
for scheduled agricultural products.

80. In Brazil's view, why did the drafters of the Agreement on Agriculture not include
export credit guarantees in Article 9.1? BRA

Brazil’s Answer:

172. The negotiating history of the Agreement on Ag riculture does not reveal why the drafters did
not include export credits guarantees in Article 9.1, just as it does not reveal why the drafters did not
include well-known and widely-used export subsid ies like the United States’ FSC regime in
Article 9.1. Yet, the Appellate Body concluded that the FSC regime constitutes an export subsidy and
is subject to the general export subsidy discip lines in the Agreement on Agriculture, including
Article 10.1 thereto. As Brazil has previously noted, Article 1(e) defines export subsidies as
“including” those listed in Article 9.1 of the Agr eement on Agriculture, and Article 10.1 refers to a
universe of export subsidies “not listed in” Article 9. 1. As the Appellate Body’s report in US – FSC
illustrates, if a measure meets the definition of “expo rt subsidy”, it is subject to Article 10.1, even
though it is not included in Article 9.1.

173. Under the Vienna Convention rules, Articl es 9.1 and 10.1, as well as Article 10.2 of the
Agreement on Agriculture, are to be interpreted accordi ng to their ordinary meaning, in their context,
and according to the object and purpose of the Ag reement on Agriculture. Brazil has demonstrated
that the CCC export credit guarantee programs fulf ill the definition of “export subsidy” in the
Agreement on Agriculture and the SCM Agreement, and that export credit guarantees are not, under a
Vienna Convention interpretation of Article 10.2, excluded from the general export subsidy
disciplines in Article 10.1.

81. How does the United States respond to th e following in Brazil's oral statement: USA

(a) paragraph 122 (rescheduled guarantees)
(b) paragraph 123 (interest on debt to Treasury)
(c) paragraphs 125 ff. (guaranteed loan subsidy)
(d) paragraphs 127-129 (re-estimates, etc.)
(e) Exhibits BRA-125-127
(f) the chart on page 53 of Brazil's oral statement at the first session of the first Panel
meeting relating to "Guaranteed Loan Subsidy and Administrative Expenses of US
Export Credit Guarantee Programs GSM-102 GSM 103 and SCGP"?
(g) In respect of (a)-(f) above, how and to wh at extent do the information and data
presented for the export guarantee programmes concerning "program" and
"financing", "summary of loan levels", "subsidy budget authority", "outlay levels",
etc., in particular in Exhibits BRA-125-127, reflect "actual costs and losses" of the
GSM-102, GSM-102 and SCGP export credit guarantee programmes(see e.g. Brazil's
closing oral statement at the first session of the first substantive meeting,
paragraph 24)? USA

Brazil’s Comment on Question 81(g):

174. Brazil may wish to comment in its rebutta l submission on the response the United States
ultimately provides to this and the other sub-parts of question 81. In the meantime, however, Brazil
would like to comment on the distinction between actual and estimated costs and losses.

175. As noted above in comments on Question 77, Br azil has used data from the prior year column
of the US budget. This column is titled “actual,” since it reflects reconciled data for a full fiscal year.
Data reported in the prior year column of the “g uaranteed loan subsidy” row of the US budget is
“actual” in this sense. Brazil explained in paragr aph 127 of its Statement at the First Panel Meeting
that the FCRA calls for the CCC to make annual “reest imates” to the cost calculation and thus to the
“guaranteed loan subsidy” line in the budget. Reestimates “take into account all factors that may have
affected the estimate of each component of th e cash flows, including prepayments, defaults,
delinquencies, and recoveries,”
215 to the extent that those factors have changed since the initial
estimate was made for purposes of the budget year column of the budget.

176. The results of the reestimate process are cap tured in the US budget and in CCC’s financial
statements.216 Reestimates made in a given fiscal year ar e netted and recorded in the “reestimates of
subsidy” (line 00.07) and “interest on reestimate” (line 00.08) lines of the US budget. In the 2002
column of the 2004 budget, for example, “reestimat es of subsidy” were recorded in the amount of
$118 million, and “interest on reestimate” was recorded as $8 million. 217 In the 2002 column of the
2004 budget, the United States in fact aggregates these two amounts with the “guaranteed loan
subsidy” amount of $97 million and the “administrative expenses” of $4 million to arrive at a total
subsidy of $227 million (which is in turn deducted from the budgetary resources available to the CCC
in line 23.95 of the budget). 218 While Brazil could have followed this same convention to accentuate
the amount by which the CCC guarantee programmes’ costs and losses outstrip revenue by even more
than that listed in the chart included in paragraph 132 of Brazil’s Statement to the First Panel Meeting,
it chose to be conservative and did not do so.

177. The results of the reestimate process are also captured in a cumulative, “running tally” of the
FCRA subsidy figure included in CCC’s annual financial statements. CCC’s fiscal year 2002
financial statements track the “credit guarantee liability” for post-1991 guarantees disbursed under the
CCC export guarantee programmes. “Credit guarantee liability” is defined in the CCC financials as
representing “the estimated net cash outflows (loss) of the guarantees on a net present value basis.”
219
The Panel will recall that the “guaranteed loan subs idy” line in the US budget similarly tracks the net
present value of payments to and from the government for CCC export guarantees, although only with
respect to guarantees disbursed in one particul ar year. The 2002 financial statement provides a
cumulative subsidy figure for all post-1991 guara ntees under the CCC programmes. The analysis
included in the 2002 financial statement begins with the credit guarantee liability included in the 2001

 215 Exhibit Bra-118 (Federal Accounting Standards Advisory Board, “Statement of Federal Financial
Accounting Standards No. 19, Technical Amendments to Accounting Standards for Direct Loans and Loan
Guarantees” in STATEMENT OF FEDERAL FINANCING ACCOUNTING STANDARDS NO. 2, March 2001, p. 15 (para.
32)). See also Exhibit Bra-160 (US Department of Agriculture, Office of the Chief Financial Officer, Credit,
Travel, and Accounting Division, Agriculture Financial Standards Manual (May 2003), p. 80, 117, 199);
Exhibit Bra-161 (US Federal Accounting Standards Advisory Board, F EDERAL FINANCIAL ACCOUNTING AND
AUDITING TECHNICAL RELEASE 3, Preparing and Auditing Direct Loan and Loan Guarantee Subsidies under
the Federal Credit Reform Act (31 July 1999), p. 17-21).
 216 According to OMB, reestimates ar e to be recorded in the budget. Exhibit Bra-116 (OMB Circular
A-11, p. 185-4).
 217 Exhibit Bra-127 (US budget for FY 2004, p. 107).
 218 Exhibit Bra-127 (US budget for FY 2004, p. 107).
 219 Exhibit Bra-158 (US Department of Agriculture, Office of Inspector General, Financial and IT
Operations, Audit Report, Commodity Credit Corporation’s Financial Statements for Fiscal Year 2002 , Audit
Report No. 06401-15-FM (December 2002), Notes to the Financial Statements, p. 4).

financial statement, makes adjustme nts for defaults, fees and reestimates undertaken in fiscal year
2002 with respect to all post-1991 guarantees, and resu lts in a new subsidy figure of $411 million for
those post-1991 guarantees.
220 This positive net present value means that CCC has “los[t] money”
during the period 1992-2002.221

178. While Brazil has demonstrated that the r eestimation process applied to the FCRA formula
does in fact track actual data and does in fact account for actual performance of CCC export credit
guarantees, Brazil notes that a certain degree of estimated data would be perfectly acceptable in an
analysis of the costs and losses of guarantee progr ams under item (j). The purpose of the FCRA and
its cost formula was, after all, “to measure more accurately the costs of Federal credit programmes,”
including contingent liabilities like export credit guarantees.
222 As the United States evidently agrees,
accounting for the costs of contingent liabilities like guarantees on a cash basis is not appropriate,
since it masks the real costs of those guarantees. Even if the FCRA cost formula does entail the use of
some estimated data, the US Congress and the President consider that that formula is the most
accurate way of tracking costs.

179. Brazil notes, finally, that it is not entirely accura te to call the data used to arrive at initial
estimates of the “guaranteed loan subsidy” figur e “estimated” data. The US Federal Accounting
Standards Advisory Board, the Government-Wide Audited Financial Statements Task Force on Credit
Reform, the Office of Management and Budget a nd the Department of Agriculture itself have
emphasized that “[m]ethods of estimating future cash flows for existing credit programs need to take
account of past experience,”
223 that “[a]ctual historical experience of the performance of a risk
category is a primary factor upon which an estimation of default cost is based”, 224 and that the
technical assumptions underlying subsidy calculati ons reflect “historical cash reports and loan
performance”.225 This demonstrates that “estimates” of the subsidy cost of CCC guarantees are
informed by actual historical experience with borrowers.

180. Brazil also notes that a number of factors involved in setting the FCRA subsidy cost are
“explicit” and not “forecast”. The Office of Management and Budget identifies contract terms such as
maturity, borrower’s interest rate, fees and grace periods as “explicit,” and therefore not
“estimated”.
226 Moreover, as the Panel is well aware, none of the “reestimates” at issue is Brazil’s.
They are all estimates by official agencies of the United States.

 220 Exhibit Bra-158 (US Department of Agriculture, Office of Inspector General, Financial and IT
Operations, Audit Report, Commodity Credit Corporation’s Financial Statements for Fiscal Year 2002 , Audit
Report No. 06401-15-FM (December 2002), Notes to the Financial Statements, p. 19). As noted above in
Brazil’s comments on Question 77, while this figure theoretically includes CCC’s Facility Guarantee
Programme (“FGP”), activity under that programme is virtually non-existent.
 221 Exhibit Bra-121 (US General Accounting Office (“GAO”), Report to Congressional Committees,
“Credit Reform: US Needs Better Method for Esti mating Cost of Foreign Loans and Guarantees,”
GAO/NSIAD/GGD-95-31, December 1994, p. 20).

222 Exhibit Bra-117 (2 U.S.C. § 661(1)).
 223 Exhibit Bra-162 (Government-Wide Audited Financial Statements Task Force on Credit Reform,
ISSUE PAPER, Model Credit Programme methods and Documentation for Estimating Subsidy Rates and the
Model Information Store, 96-CR-7 (1 May 1996), p. 2).
 224 Exhibit Bra-118 (Federal Accounting Standards Advisory Board, S TATEMENT OF FEDERAL
FINANCIAL ACCOUNTING STANDARDS NO. 19, Technical Amendments to Accounting Standards for Direct Loans
and Loan Guarantees in Statement of Federal Financial Accounting Standards No. 2 (March 2001), p. 16 (para.
36)). See also Exhibit Bra-160 (US Department of Agriculture, Office of the Chief Financial Officer, Credit,
Travel, and Accounting Division, Agriculture Financial Standards Manual (May 2003), p. 120 (“In estimating
default costs, the following risk factors are considered: (1) loan performance experience; . . .”)).
 225 Exhibit Bra-163 (Office of Management and Budget Annual Training, Introduction to Federal
Credit Budgeting, 24 June 2002, p. 9).
 226 Exhibit Bra-163 (Office of Management and Budget Annual Training, Introduction to Federal
Credit Budgeting, 24 June 2002, p. 9).

82. Please explain each of the following statemen ts and any possible significance it may have
in respect of Brazil's claims about GSM-102 and GSM-103 (7 CFR 1493.10(a)(2), Exhibit BRA-
38): BRA, USA

Brazil’s Answer:

181. As discussed below, these passages corrobor ate evidence provided by Brazil to demonstrate
that the CCC guarantee programmes constitute export subsidies within the meaning of Articles 1.1
and 3.1(a) of the SCM Agriculture, and thus within the meaning of Articles 1(e), 10.1 and 8 of the
Agreement on Agriculture.

 (a) "The programmes operate in cases where credit is necessary to increase or
maintain US exports to a foreign mark et and where US financial institutions
would be unwilling to provide financing without CCC's guarantee. (7 CFR
1493.10(a)(2) Exhibit BRA-38)

Brazil’s Answer:

182. The passage cited by the Panel provides co rroborating evidence that CCC guarantees provide
“benefits”, within the meaning of Article 1.1(b) of the SCM Agreement. Specifically, the passage
states that the CCC programmes “operate in cases . . . where US financial institutions would be
unwilling to provide financing without CCC’s guarantee”. This demonstrates at least two things.
First, it establishes that the CCC guarantee programs are used in situations where, without a CCC
guarantee, a borrower could not secure financing at all – not just financing on less attractive terms
than could be secured with the CCC guarantee (o r on terms that would constitute a benefit under
Article 14(c) of the SCM Agreement), but no financ ing at all. Second, it establishes that financing
could not be secured without a CCC guarantee – a commercial guarantee would not do. This
corroborates Brazil’s assertion that CCC provides something that has no equivalent on the commercial
market.

183. Brazil notes that the regulations for the SCGP programme contain an identical provision, in 7
CFR 1493.400(a)(2). That section states that “[t] he SCGP operates in cases where credit is necessary
to increase or maintain US exports to a foreign market and where private US exporters would be
unwilling to provide financing without CCC’s guarantee”.
227

184. Moreover, in its Annual Performance Plans for fiscal years 2000, 2001 and 2002, the US
Department of Agriculture’s Foreign Agricultural Se rvice similarly stated that the SCGP programme
“was created to expand high-value product exports by facilitating credit for such purchases in foreign
markets lacking sufficient liquidity to purchase openly on the commercial market”.
228 T h i s
demonstrates that the SCGP programme extends “ben efits,” since it facilitates credit for the purchase
of US agricultural commodities in circumstances where credit would not otherwise be available at all.

 (b) "The programmes are operated in a manner intended not to interfere with
markets for cash sales. The programs are targeted toward those countries
where the guarantee is necessary to secu re financing of the exports but which
have sufficient financial strength so that foreign exchange will be available for
scheduled payments." (7 CFR 1493.10(a)(2) Exhibit BRA-38)

 227 Exhibit Bra-38 (7 CFR 1493.400 et seq.).
 228 Exhibit Bra-164 (US Department of Agriculture, Foreign Agricultural Service, Revised FY 2001 and
FY 2002 Annual Performance Plan , p. 11); Exhibit Bra-165 (US Department of Agriculture, Foreign
Agricultural Service, Revised FY 2000 and FY 2001 Annual Performance Plan, p. 17).

Brazil’s Answer:

185. This passage also demonstrates that CCC gua rantees confer “benefits”. Specifically, the
passage states that “[t]he programmes are target ed toward those countries where the guarantee is
necessary to secure financing of the exports . . .”. Like the passage included in 82(a), this passage
establishes at least two things. First, that wit hout a CCC guarantee, a borrower would not be able to
secure financing at all – not just financing on less attractive terms than could be secured with the CCC
guarantee (or on terms that would constitute a benefit under Article 14(c) of the SCM Agreement), but
no financing at all. Second, that the CCC guara ntee is necessary – a commercial guarantee would not
be sufficient.

186. Brazil notes that the regulations for the SCGP programme contain an identical provision, in 7
CFR 1493.400(a)(2). That section states that “The programme is operated in a manner intended not to
interfere with markets for cash sales. The progra mme is targeted toward those countries where the
guarantees are necessary to secure financing of th e exports but which have sufficient financial
strength so that foreign exchange will be available for scheduled payments.”
229

 (c) "In providing this credit guaran tee facility, CCC seeks to expand market
opportunities for US agricultural expo rters and assist long-term market
development for US agricultural commodities." (7 CFR 1493.10(a)(2) Exhibit
BRA-38)

Brazil’s Answer:

187. This passage demonstrates that the CCC gua rantee programmes are contingent on export,
within the meaning of Article 3.1(a) of the SCM Agreement. Specifically, the passage establishes that
the CCC guarantee programs are for use by “US agricultu ral exporters”. It also confirms that the
programmes operate to the benefit of US exporters, who with the help of the programmes are able to
expand their market share.

188. Brazil notes that the regulations for the SCGP programme contain an identical provision, in 7
CFR 1493.400(a)(2). That section states that “[i]n providing this credit guarantee facility, CCC seeks
to expand market opportunities for US agricultural exporters and assist long-term market development
for US agricultural commodities.”
230

83. Could Brazil explain how the procedure in Annex V of the SCM Agreement would be
relevant to its claims concerning agricultural export subsidies, prohibited subsidies and
agricultural domestic support? (e.g. note 301 in Brazil's first submission and paragraph 4 of
Brazil's oral statement at the first session of the first substantive meeting). BRA

Brazil’s Answer:

189. The United States failed to respond to Braz il’s questions and document requests during the
Annex V procedures. Indeed, the United States refu sed to participate in any way in the Annex V
procedures mandated by Brazil’s invocation of Annex V in its request for establishment of this Panel.
This refusal to participate has consequences under the express terms of Annex V. The list of Annex V
questions provided to the United States by Brazil is included in Exhibit Bra-49. As directed by
paragraph 6 of Annex V, given the United States’ failure to cooperate in the Annex V information-
gathering process, Brazil has and will present its case regarding peace clause issues and serious
prejudice claims based on evidence available to it. If there are gaps in th e evidence provided to the
Panel by Brazil in support of its prima facie case, and those gaps are due to the United States’ failure

 229 Exhibit Bra-38 (7 CFR 1493.400 et seq.).
 230 Exhibit Bra-38 (7 CFR 1493.400 et seq.).

to cooperate with and participat e in the Annex V process, Annex V, paragraph 6 provides that “the
panel may complete the record as necessary relying on best information otherwise available”.

190. As a final note, Brazil’s Annex V questions to the United States included questions
concerning US agricultural export subsidies and do mestic content subsidi es because these are also
“actionable” subsidies that cause serious prejudice to Brazil’s interests.

84. Is the Panel correct in understanding that, under the GSM-102 and GSM-103
programmes, the exporter pays a fee calculated on the dollar amount guaranteed, based on a
schedule of rates applicable to different credit periods? How and on what basis are the fee rates
fixed? Do the fee rates ever change? If so, how and for what reason? Would it be necessary to
amend the legislation and/or regulations in order to adjust the fee rates? USA

Brazil’s Comment:

191. The Panel is correct in stating that fees for GSM 102 and GSM 103 guarantees vary only
according to the dollar value of the transaction a nd the length of the guarantee. GSM 102 and GSM
103 fees do not otherwise vary and are charged according to a fee schedule that does not account for
the country risk involved or the credit rating of th e borrower. Brazil attaches news releases from the
US Department of Agriculture’s Foreign Agri cultural Service announcing GSM 102 and GSM 103
guarantees to Dominican Republic, Morocco, Gh ana, South Korea, Vietnam and Algeria.
231 T h e
Panel will note that the fees do not vary, and ar e based on the standard GSM 102 and GSM 103 fee
schedule included as Exhibit Bra-155.232

192. As noted above in Brazil’s comment on Ques tion 77, the US Department of Agriculture’s
Office of the Inspector General has noted in June 2001 that “the fees CCC charges for its GSM-102
and GSM-103 export credit guarantee programmes have not been changed in 7 years and may not be
reflecting current costs”.
233 It repeated this statement in February 2002. 234 Thus, GSM 102 and GSM
103 fees remained virtually unchanged from at le ast 1994 until February 2002. The current fee
schedule demonstrates that this trend continues to the present.235

193. In reviewing the historical fee schedules available from public sources,
236 Brazil notes that
from at least 1994 until the present, CCC made two ch anges in its fee schedule for GSM 102. First, it

 231 Exhibit Bra-166 (US Department of Agriculture Foreign Agricultural Service, News Releases
regarding extension of GSM 102 and GSM 103 guarantees to Dominican Republic, Morocco, Ghana, South
Korea, Vietnam and Algeria).
 232 Exhibit Bra-155 (US Department of Agriculture Foreign Agricultural Service, Notice to GSM-102
and GSM-103 Programme Participants, 24 September 2002).
 233 Exhibit Bra-153 (US Department of Agriculture Office of Inspector General Financial and IT
Operations Audit Report of the Commodity Credit Corporation’s Financial Statements for Fiscal Year 2000,
Audit Report No. 06401-14-FM (June 2001), p. 31).

234 Exhibit Bra-154 (US Department of Agriculture Office of Inspector General Great Plains Region
Audit Report of the Commodity Credit Corporation’s Fina ncial Statements for Fiscal Year 2001, Audit Report
No. 06401-4-KC (February 2002), p. 49 (“[T]he fees CCC charged for its GSM-102 and GSM-103 export credit
guarantee programmes have not been changed for many years and may not be reflecting current costs.”).
 235 Exhibit Bra-155 (US Department of Agriculture Foreign Agricultural Service, Notice to GSM-102
and GSM-103 Programme Participants, 24 September 2002).
 236 Exhibit Bra-155 (US Department of Agriculture Foreign Agricultural Service, Notice to GSM-102
and GSM-103 Programme Participants , 24 September 2002); Exhibit Bra-98 (US Department of Agriculture
Foreign Agricultural Service, Notice to GSM-102 and GSM-103 Programme Participants , 4 September 2001);
Exhibit Bra-156 (US Export-Import Bank, Comparison of Major Features of Programmes Offered by Ex-Im
Bank and Commodity Credit Corporation for Support of Bulk Agricultural Commodities , available at
http://www.exim.gov/pub/ins/pdf/eib99-13.pdf). Brazil was unable to locate from public sources other fee
schedules from the period 1993-2002.

changed the fee for a 12-month guarantee with semi-annual repayment intervals from $0.209 per $100
of coverage to $0.229 pe r $100 of coverage. Second, it decide d to offer borrowers the additional
option of 30- and 60-day guarantees, at the same fee charged for 90-day and 4-, 6- and 7-month
guarantees.

85. Is the Panel correct in understanding that , under the SCGP, the exporter pays a fee for
the guarantee calculated on the guaranteed portion of the value of the export sales? How and on
what basis are the fee rates fixed? Do the f ee rates ever change? If so, how and for what
reason? Would it be necessary to amend the legislation and/or regulations in order to adjust the
fee rates? Please explain any "risk" assessment involved in the programme. USA

Brazil’s Comment:

194. The Panel is correct in stating that fees fo r SCGP guarantees vary only according to the dollar
value of the transaction and the length of the guar antee. SCGP fees do not otherwise vary and are
charged according to a fee schedule that does not account for the country risk involved or the credit
rating of the borrower. For SCGP guarantees of up to 90 days, the fee is $0.45 per $100 of coverage,
and for SCGP guarantees from 90-180 days, th e fee is $0.90 per $100 of coverage.
237 Brazil attaches
news releases from the US Department of Agri culture’s Foreign Agricultural Service announcing
SCGP guarantees to Tunisia, Azerbaijan, Vietnam, South Korea, Japan and Nigeria. 238 The Panel will
note that the fees do not vary.

86. Is there a risk categorization in relatio n to three export credit guarantee programmes
(GSM-102, GSM-103 and SCGP)? Does this have any impact on premiums payable and the
ability of the CCC to on-sell the guarantees ? USA

Brazil’s Comment:

195. Fees for GSM 102, GSM 103 and SCGP guarant ees do not vary depending upon the credit
rating of the borrower. As noted in Brazil’s co mments on Questions 84 an d 85, guarantee fees for
these three programs vary only according to the dollar value of the transaction and the length of the
guarantee. Fees do not otherwise vary and are charged according to a fee schedule that does not
account for the country risk involved or the credit rating of the borrower.

196. In calculating the “subsidy cost” for the purpo ses of the Federal Credit Reform Act, agencies
like the CCC account for country risk. According to the narrative description included in the US
budget,

[t]he subsidy estimates for the GSM-102 and GSM-103 programs are determined in
large part by the obligor’s sovereign or non-sovereign country risk grade. These
grades are developed annually by the Inte rnational Credit Risk Assessment System
Committee (ICRAS). . . . The default estimates for GSM guarantees are determined
in large part by the risk premia assigned for each risk grade.
239
197. According to the GAO, “OMB requires executiv e branch agencies to cal culate the costs of
foreign loans and guarantees usi ng annually updated ICRAS ratings a nd . . . country risk interest
premiums when foreign loans or guarantees are budgeted, authorized, disbursed, or modified. . . .”240

 237 Exhibit Bra-167 (12 Steps to Participating in the USDA Supplier Credit Guarantee Programme,
Step 5).
 238 Exhibit Bra-168 (US Department of Agriculture Foreign Agricultural Service, News Releases
regarding extension of SCGP guarantees to Tunisia, Azerbaijan, Vietnam, South Korea, Japan and Nigeria).
 239 Exhibit Bra-127 (US budget for FY 2004, p. 108).
 240 Exhibit Bra-121 (GAO/NSIAD/GGD-95-31, p. 7).

198. Thus, while CCC fees for GSM 102, GSM 103 and SCGP fees do not account for country risk
or the credit risk of the borrower, the “guaranteed loan subsidy” line in the US budget and the subsidy
figures in the CCC’s financial statements do take account of country risk.

87. What proportion of CCC (export-related and total) long term operating costs and losses
are represented by GSM-102, GSM-103 and SCGP programmes? USA

88. (a) Is the Panel correct in understanding that the United States' argument is that, at
present, by virtue of Article 10.2 of th e Agreement on Agriculture, there are no
disciplines on agricultural export credit guarantees under the Agreement on Agriculture
(or the SCM Agreement)? USA

 (b) Does the United States agree with the following proposition: a WTO Member
may therefore extend agricultural export credit guarantees without charging a
premium, and for an indefinite period, in addition to any other terms and
conditions it may wish? How would this reconcile with the title of Article 10 of
the Agreement on Agriculture ("Preven tion of Circumvention on Export
Subsidy Commitments"), and with other commitments contained in the
Agreement on Agriculture? Please cite any relevant material, including any past
WTO dispute settlement cases. How would this reconcile with the United States'
own statement, at paragraph 21 of its closing oral statement that "of course, the
United States may not provide subsidies without any limit". USA

 (c) If, as the United States argues, there are no disciplines on export credit
guarantees in the Agreement on Agriculture, how could export credit guarantees
"conform fully to the provisions of Part V" of the Agreement on Agriculture
within the meaning of Article 13 (how can you assess "conformity" or non-
conformity when there are allegedly no disciplines against which such an
assessment could occur)? USA

Brazil’s Comment:

199. As the Panel’s question suggests, if the Pa nel determines that export credit guarantees are not
subject to the export subsidy disciplines in th e Agreement on Agriculture, the United States is
nevertheless not entitled to the protection afforded by Article 13(c). Article 13(c) provides an
exemption from action for those export subsidies that “conform fully to the provisions of Part V” of
the Agriculture Agreement. If, as the United Stat es argues, export credit guarantees are not subject to
Part V, then they cannot “conform fully to the pr ovisions of Part V,” and are not entitled to the safe
haven in Article 13(c).

200. The panel in Canada – Aircraft (21.5) took a similar approach with respect to the safe haven
included in the second paragraph of item (k) to the Illustrative List of Export Subsidies appended to
the SCM Agreement.
241 The second paragraph of item (k) provides as follows:

Provided, however, that if a Member is a party to an international undertaking on
official export credits to which at least tw elve original Members to this Agreement
are parties as of 1 January 1979 (or a successor undertaking which has been adopted
by those original Members), or if in pr actice a Member applies the interest rates
provisions of the relevant undertaking, an export credit practice which is in
conformity with those provisions shall not be considered an export subsidy prohibited
by this Agreement.

The “international undertaking on official export cred its” cited in this provision is the Organization
for Economic Co-operation and Development’s Arra ngement on Guidelines for Officially Supported
Export Credits (“OECD Arrangement”).
242

201. To determine whether a particular Canadian measure could benefit from the safe haven in the
second paragraph of item (k), the Panel first revi ewed which types of “export credit practices” could
potentially be “in conformity with” the “interes t rates provisions” of the OECD Arrangement.
According to the Panel, it could only “determine th e conformity of a given export credit practice with
those interest rate provisions . . . [if] it is of the ty pe that conceptually could be subject to, and thus in
conformity with, those provisions”.
243 Similarly, if the United States is correct that CCC export credit
guarantees are not subject to the disciplines in Pa rt V of the Agriculture Agreement, then CCC
guarantees cannot logically “conform fully to the provisions of Part V” and trigger the exemption
from action provided for in Article 13(c).

 (d) Is the United States advocating the view that its own export credit guarantee
programmes, which pre-dated the Uruguay Round, are effectively
"grandfathered" so as to benefit from some sort of exemption from the export
subsidy disciplines of the Agreement on Agriculture? How, if at all, is it relevant
that the SCGP did not, according to the United States, become relevant for
upland cotton until the late 1990's (i.e. after the entry into force of the WTO
Agreement)? USA

F. STEP 2 PAYMENTS

89. Does the United States confirm Brazil's statement in paragraph 331 of its first
submission that "The conditions and require ments for Step 2 domestic payments remain
unchanged with the passage of the 2002 FSRI Act"? What is the relevance of this, if any, to this
dispute? USA

90. Does the United States confirm Brazil's statement in paragraph 235 of its first
submission that the changes concerning Step 2 export payments from the 1996 FAIR Act to the
2002 FSRI Act are: increase in the amount of the subsidy by 1.25 cents per pound and the
removal of any budgetary limits that applied under the 1996 FAIR Act? What is the relevance
of this, if any, to this dispute? USA

91. What is the significance of the elimin ation of the 1.25 cent threshold payment in the
2002 FSRI Act pertaining to Step 2 payments? USA

92. Does the United States confirm that Exhi bit BRA-65 represents a sample contract for
exporters of eligible upland cotton to conclude with the CCC under the FSRI 2002, and that an
application form (Exhibit BRA-66) needs to be filled out with data on weekly exports and
submitted to the USDA FAS. Is Exhibit BRA-66 - Form CCC 1045-2 – also a valid example? If
not, please identify any differences or distinctions. USA

 242 Available at http://www.oecd.org/dataoecd/52/3/2763846.pdf.
 243 WT/DS70/RW, para. 5.93. The Panel concluded that “the only forms of export credit practices”
subject to the interest rate provisions of the OECD Arrangement are “direct credits/financing, refinancing and
interest rate support,” since only those forms of official financing support are subject to the Arrangement’s
commercial interest reference rates (“CIRR”) – “the only existing systems of minimum interest rates under the
Arrangement.” Id., paras. 5.98, 5.101 (emphasis in original). Since the CIRR are only expressed as fixed rates,
the Panel concluded that they could only be applied to fixed (and not floating) interest rate transactions. Id.,
para. 5.102. Nor could the CIRR be applied to official support with a shorter maturity than two years (the
minimum term expressly listed in the OECD Arrangement), or to guarantees or insurance. Id., para. 5.106.

Brazil’s Comment:

202. Brazil includes a new version of the cu rrent “Upland Cotton Domestic User/Exporter
Agreement” (Revision 7, in effect as of 1 A ugust 2003 and issued on 17 June 2003), which replaces
Revision 6 that Brazil has included as Exhibit Bra-65 to its First Submission.

93. Please elaborate why the United States deems that Step 2 payments upon submission of
proof of export are not subsidies contingent upon export. Is it the US contention that, in order
to be contingent on export, exportation must be the exclusive condition for receipt of the
payment? USA

94. Is the Panel correct in understanding that Brazil alleges an inconsistency with
Article 3.1(b) of the SCM Agreement only with respect to Step 2 domestic payments? BRA

Brazil’s Answer:

203. Yes.

95. Do the criteria in 7 CFR 1427.103(c)(2) (Exhibit BRA-37) that Step 2 "eligible upland
cotton" must be "not imported cotton" apply to both domestic and export payments? USA

96. Is a domestic sale a "use" for the purposes of Step 2 payments? Is a sale for export, or
export, considered a "use"? USA

97. How does the United States respond to Braz il's assertion, at paragraph 70 of Brazil's
oral statement at the first session of the first substantive meeting, that "It is obvious that a
single bale of cotton cannot be both exported and used domestically." Is this a relevant
consideration? USA

98. How many Step 2 payments are received if a bale of upland cotton is exported, and then
opened by a domestic user in the United States, or vice versa? USA

99. How does the United States respond to Brazil's arguments in paragraphs 71-75 of
Brazil's oral statement at the first session of the first Panel meeting concerning the relevance of
the Appellate Body Report in US-FSC (21.5). USA

100. How does Brazil respond to the statement in note 119 of the United States' first written
submission that "...to the extent a consumer that had intended to export instead opens the bale,
then that consumer could still obtain the Step 2 payment upon submission of the requisite
documentation". The Panel notes that Step 2 payments all involve upland cotton produced in
the United States. What are the two distinct factual situations that Step 2 payments involve?
Other than the panel report in Canada-Dairy and the findings of the Appellate Body in US-FSC
(21.5)
244, do any other dispute settlement reports offer guidance on this issue? For example,
how, if at all is the Appellate Body's report in Canada-Aircraft relevant here?245 BRA

 244 "We recall that the ETI measure grants a tax exemp tion in two different sets of circumstances: (a)
where property is produced within the United States and held for use outside the United States; and (b) where
property is produced outside the United States and held for use outside the United States. Our conclusion that
the ETI measure grants subsidies that are export contingent in the first set of circumstances is not affected by the
fact that the subsidy can also be obtained in the second set of circumstances. The fact that the subsidies granted
in the second set of circumstances might not be export contingent does not dissolve the export contingency
arising in the first set of circumstances. 244 Conversely, the export contingenc y arising in these circumstances
has no bearing on whether there is an export contingent subsidy in the second set of circumstances. Where a
United States taxpayer is simultaneously producing property within and outside the United States, for direct use

Brazil’s Answer:

204. The applicable regulations (7 CFR 1427.104)
246 define eligible domestic users and exporters
of upland cotton. 247 To receive a Step 2 export payment, a person (including a cotton producer or a
cooperative) must be “regularly engaged in selling eligible [US] upl and cotton for export”. 248 T o
receive a domestic payment, a person must be “regul arly engaged in the business of opening bales of
eligible [US] upland cotton to manufacture US upland cotton into cotton products in the
United States”.249 The only actor who can be indiffere nt whether they export or use cotton
domestically is a hypothetical domestic US cotton product manufacturer regularly engaged in opening
US bales for domestic US manufacture that also regu larly engages in exporting US cotton. In that
situation, if a bale of cotton is opened by mistake instead of being exported, the exporter who is also
the US cotton product manufacturer will receive a St ep 2 domestic payment for that bale if the
company has already entered into a contract with CC C for Step 2 payments, and subject to proof that
bale is in fact used for manufacturing cotton pro ducts in the United States. But even if that
hypothetical situation were to occur, then the paym ent would be contingent upon the domestic use of
only US upland cotton (prohibited by Article 3.1(b) of the SCM Agreement). And if the bale were
exported, the US exporter would receive the Step 2 payments subject to proof of export of US (not
foreign) upland cotton (prohibited by Article 3.1(a) of the SCM Agreement).

205. It follows that the “two distinct factual situ ations” resulting in the payment of Step 2 subsidies
are (1) the domestic “use” of eligible US upland cotton by a manufacturer of cotton products regularly
engaged in opening bales; and (2) the “export” of eligible US cotton by exporters regularly engaged in
selling US upland cotton. The United States argues that this case is distinguishable from US – FSC
(21.5) because in that case one situation involved property produced within the United States and held
for use outside the United States, and the other situation involved property produced outside the
United States and held for use outside the United States.
250 This is irrelevant.

206. The point of the distinction by the Appellate Body in US – FSC (21.5) was not the geographic
location of the property at issue, but rather wh ether one portion of payment under a programME was
export contingent. In fact, in US – FSC (21.5), the products found to be subject to the export
contingency were those produced within the United St ates and held for use outside the United States.
This is exactly the situation with Step 2 e xport payments. Upland cotton produced in the
United States receives Step 2 payment upon proof of export (“held for use outside the United States”)
outside the United States. As in US – FSC (21. 5), the fact that subsidies available under the
programme are also granted in a second situation, i.e., when upland cotton produced within the United
States is used within the United States “does not dissolve the export contingency arising in the first set
of circumstances”.
251

outside the United States, subsidies may be granted under the ETI measure in respect of both sets of property.
The subsidy granted with respect to th e property produced within the United St ates, and exported from there, is
export contingent within the mean ing of Article 3.1(a) of the SCM Agreement , irrespective of whether the
subsidy given in respect of property produced outside the United States is also export contingent."
245 There, the Appellate Body stated that,
"the fact that some of TPC's contributions, in some industry sectors, are not contingent upon export
performance, does not necessarily mean that the same is true for all of TPC's contributions. It is
enough to show that one or some of TPC's contri butions do constitute subsidies "contingent ... in
fact … upon export performance".
 246 Exhibit Bra-37 (7 CFR 1427.104).
 247 First Submission of Brazil, paras 92, 98.
 248 Exhibit Bra-37 (7 CFR 1427.104(a)(2)).
 249 Exhibit Bra-37 (7 CFR 1427.104(a)(1)).
 250 First Oral Statement of the United States, paras. 21-22.
 251 Appellate Body Report, US – FSC (21.5), para. 119.

207. Concerning other relevant dispute settlement reports, Brazil believes that the Canada –
Aircraft decision is useful precedent. In that case, Canada argued that Technology Partnership
Canada (TPC) was a funding mechanism providi ng “support to a broad base of sectors and
technologies” “that result in a high technology product or process for sale in domestic and export
markets”.252 Canada claimed that “Brazil has not adduced any evidence to show that TPC
contributions are contingent on export performance, in the sense that the contributions would not be
paid unless exports took place, that there would be rewards if exports took place. . .”. 253 T h e
Appellate Body affirmed the pane l’s finding of export contingency, noting that “it is enough to show
that one or some of TPC’s contributions do constitute subsidies ‘contingent . . . in fact . . . upon export
performance.’”254 This finding is consistent with the A ppellate Body’s later decision in US – FSC
(21.5). It stands for the proposition that where a programme makes some payments contingent upon
export of products, the fact that other payments under the programme are made for domestic use does
not eliminate the export contingency of the programmes.

101. How does Brazil respond to the United St ates' assertion at paragraph 22 of its oral
statement that the programme involves "eligible users" who constitute the "entire universe" of
potential purchasers of upland cotton? BRA

Brazil’s Answer:

208. Brazil considers that the United States’ statem ent is not correct. As noted in the previous
answer, an “eligible” user cannot include firms that are not “regularly engaged in” opening bales of
upland cotton for manufacturing upland cotton products in the United States or exporting upland
cotton from the United States.
255 The eligible domestic user criteria exclude all firms that are
domestic cotton brokers or simple resellers. Nor would “eligible domestic users” include firms that
have not entered into CCC contracts or who open ba les but do not use them in the manufacture of
upland cotton products or who only occasionally ope n bales of upland cotton for manufacture of
upland cotton products. Similarly, the regulations for eligible “exporters” do not include persons who
occasionally export and who are, thus, not considered to be persons “regularly engaged” in exporting
upland cotton. 256 Furthermore, the regulations do not cove r exporters who have not entered into a
CCC contract as exporters eligible for payment.257

102. How does Brazil respond to the United States' assertion at paragraph 129 of its first
written submission, that "[t]he programme is indi fferent to whether recipients of the benefit of
this programme are exporters or parties that op en bales for the processing of manufacturing
raw cotton into cotton products in the United States." BRA

Brazil’s Answer:

209. Brazil notes that the same “programme indiffe rence” argument could have been made by the
United States in the US – FSC (21.5) case (tax deferr ed whether products produced within or outside
the United States) or by Canada in the Canada – Aircraft case (TPC payments made whether products
consumed or used domestically or exported). Th ese two Appellate Body decisions clarify that what
matters is whether one segment of the programme is contingent upon e xport. This is consistent with
the Article 3.1(a) text that the export contingency be “solely or as one of several other conditions”.
Step 2 export payments are clearly contingent upon proof of export of US upland cotton by eligible
exporters. The fact that another class of persons in a different situation (domestic users) also may

 252 WT/DS70/R, paras. 6.231, 6.235
 253 WT/DS70/R, para. 6.248.
 254 Canada – Aircraft, WT/DS70/AB/R, para. 179.
 255 Exhibit Bra-37 (7 CFR 1427.104(a)(1)).
 256 Exhibit Bra-37 (7 CFR 1427.104(a)(2) and (b)).
 257 Exhibit Bra-37 (7 CFR 1427.104(a)(2) and (b)).

receive the payment does not remove this export con tingency. Additionally, Brazil notes that Step 2
domestic payments violate Article 3.1(b).

103. Is the Step 2 programme fund a unified fund that is available for either domestic users
or exporters, without a specific amount earmar ked for either domestic users or exporters?
Please substantiate your response, including by reference to any applicable statutory or
regulatory provisions. USA

104. How does the United States respond to th e data presented in Exhibit BRA-69? Is it
accurate? Please substantiate. USA

105. Why is the Step 2 program me separated into "domestic users" and "exporters"? Apart
from differentiating between exporters and domestic users, with consequential differentiation as
to the forms that must be filled out and certain other conditions that must be fulfilled, are the
eligibility criteria for Step 2 payments identical? Are the form and rate of payment, as well as
the actual payment made, identical? USA

106. With respect to paragraph 139 of the United States' first written submission, are Step 2
export payments included in the annual reducti on commitments of the United States? If so,
why? USA

107. Please comment on any relevance, to Brazil' s de jure claims of inconsistency with the
provisions of the Agreement on Agriculture, of Exhibit BRA-69, which shows Step 2 payments
made to (i) domestic users and (ii) exporters. This Exhibit shows that, from FY 91/92 through
02, the Step 2 payments for exporters exceeded tho se for domestic users in FY 94; FY 95; FY 96
(in fact there were no domestic payments in FY 96); and FY 02. In the other years, the domestic
payments are greater than export payments. BRA, USA

Brazil’s Answer:

210. This document is not relevant for either Braz il’s Article 3.1(a) or Article 3.1(b) claims under
the SCM Agreement. Even if the Step 2 export paymen ts were zero in certain years (which they have
never been), it would not remove the export contingenc y. Similarly, the fact that Step 2 domestic
payments were not made in one time period does not resolve their contingency upon use of domestic
over imported upland cotton. Brazil’s claims are th at whenever a Step 2 payment for exported or
domestically used upland cotton takes place, this payment is required to be made in a manner
inconsistent with Articles 3.1(a) or 3.1(b) of th e SCM Agreement and with Articles 3.3 and 8 of the
Agreement on Agriculture in the case of Step 2 export payments.

108. At paragraph 135 of its first written submission, the United States states : "[T]he
subsidy is not contingent upon export performan ce..." (emphasis added). Again, in the course
of the first Panel meeting, the United States admitted that the Step 2 payments were
"subsidies". Does the United States thus concede that Step 2 payments constitute a "subsidy"
within the meaning of the WTO Agreement? USA

109. How does the United States respo nd to Brazil's arguments concerning a
mandatory/discretionary distinction and the alle gation that certain United States measures
(including s.1207(a) of the 2002 FSRI Act) are manda tory? (This is referred to, for example, in
paragraph 28 of Brazil's first written submi ssion). Does the United States agree with the
assertion that (subject to the availability of funds) the payment by the Secretary of Step 2
payments is mandatory under section 1207(a) FSRI upon fulfilment by a domestic user or
exporter of the conditions set out in the legislatio n and regulations? If not, then why not? To
what extent is this relevant here? What determines the "availability of funds"? Please cite any

other relevant measures or provisions which you consider should guide the Panel in respect of
this issue. USA

110. Section 1207(a) of the 2002 FSRI Act provides that during the period beginning on the
date of the enactment of the FSRI Act through July 31 2008, " .. the Secretary shall issue
marketing certificates or cash payments, at the option of the recipient, to domestic users and
exporters for documented purchases by domestic users and sales for export by exporters...".
The Panel notes that Brazil does not appear to distinguish between the treatment of (i) cash
payments and (ii) marketing certificates in terms of the issue of whether or not a "subsidy"
exists. The United States refers to "benefits" and "payments" and "program" in asserting that
Step 2 is not export contingent (paragraphs 127-135 of the United States' first written
submission).

 (a) Do the parties thus agree that there is no need to draw any distinction between
the treatment of (i) cash payments and ( ii) marketing certificates in terms of the
issue of whether or not a "subsidy" exis ts for the purposes of the Agreement on
Agriculture? BRA, USA

Brazil’s Answer:

211. Brazil agrees there is no need to draw any distinction between cash payments and
“commodity certificates”. The Step 2 regulations indicate that Step 2 payments “shall be made
available in the form of commodity certificates issu ed under part 1401 of this Chapter, or in cash, at
the option of the programme participants”.
258 Part 1401 of the regulations indicated that commodity
certificates may be exchanged for cash.259

 (b) Why would a domestic user or an exporter select to receive a marketing
certificate over a cash payment? What is the proportion of cash payments vs.
marketing certificates granted under the programme? USA

111. Does the United States maintain its argument that actions based on Article 3.1(b) of the
SCM Agreement are conditionally "exempt from ac tions" due to the operation of Article 13 of
the Agreement on Agriculture? USA

112. In the event that the Panel finds that Article 6.3 of the Agreement on Agriculture does
not preclude an examination of Brazil's claims under Article 3.1 of the SCM Agreement and
Article III:4 of GATT 1994, how does the United St ates respond to the merits of Brazil's claims
relating to Step 2 payments under those provisions? USA

113. Is it necessary for measures directed at agricultural processors included in AMS to
discriminate on the basis of the origin of goods? USA

114. With respect to the last sentence of paragr aph 22 of Brazil's closing oral statement,
could Brazil elaborate on the circumstances in wh ich a local content subsidy would comply with
Article 3.1(b) of the SCM Agreement? BRA

Brazil’s Answer:

212. Brazil believes the Panel is referring to para graph 21 of the final “as delivered” version of
Brazil’s Closing Statement on 24 July 2003. The text of this sentence reads as follows: “There is also
no conflict between Article 3.1(b) of the SCM Ag reement and Agriculture Agreement Article 6 or

 258 Exhibit Bra-37 (7 CFR 1427.106).
 259 Exhibit Bra-34 (7 CFR 1401.4(a)).

Annex 3, paragraph 7, because there are two types of domestic subsidies – those that comply with
Article 3.1(b) of the SCM Agreement and those th at do not.” Paragraph 85 of Brazil’s First Oral
Statement of 22 July 2003 was more precise in focu sing on the relevant type of support, i.e., support
provided to processors of agricultural products, stati ng that “[t]here are two types of ‘non-green box’
support to processors that could benefit producers of agricultural goods: support that violates ASCM
Article 3.1(b) and GATT Article III:4 and support that does not.”

213. There are no circumstances in which a “local content subsidy” would comply with
Article 3.1(b) of the SCM Agreement.

115. What is the meaning and relevance (if any) to Brazil's claims under Article 3 of the
SCM Agreement and Article III:4 of GATT 1994 of the phrase "measures directed at
agricultural processors shall be included to the ex tent that such measures benefit the producers
of the basic agricultural products" in the Agreement on Agriculture? BRA, USA

Brazil’s Answer:

214. The phrase from Annex 3, paragraph 7 of th e Agriculture Agreement cited by the Panel
requires Members to tabulate and include as part of AMS to individual products an amount of benefit
provided to producers of basic agricultural products resulting from “measures directed at agricultural
processors. . . ”. The obligations of Members to comply with reduction commitments tied to AMS,
and the obligations of Members under SCM Article 3 and GATT Article III, all apply cumulatively
and simultaneously. This phrase recognizes that subs idies to processors of agricultural products may
benefit producers of the basic agricultural product a nd, thus, must be included within total AMS.
However, as Brazil has argued, this phrase does not provide an exemption from the SCM Agreement
or GATT Article III for such subsidies, and no such exemption can be interpolated into the text.
260
The cumulative nature of the obligations in curred under the WTO Agreement results in the
prohibition of certain “measures directed at agricu ltural processors” that otherwise would be included
in the AMS calculation, namely those that are c ontingent upon the use of domestic over imported
agricultural products contrary to Article 3.1(b) of the SCM Agreement.

116. With respect to paragraph 32 of the oral st atement of the EC, are subsidies contingent
on the use of domestic goods consistent with the Agreement on Agriculture? Does the phrase
"provide support in favour of domestic producers" in Article 3.2 of the Agreement on
Agriculture refer to, and/or permit such subsidies? BRA, USA

Brazil’s Answer:

215. Brazil agrees with the EC that Articles 1(a), 3.2, 6.3 of the Agreement on Agriculture include
the phrase “domestic support in favour of agricultural producers”. And Brazil further recognizes that
all types of “domestic support in favour of agricu ltural producers” must be tabulated for the purposes
of setting and enforcing a Member’s domestic s upport reduction commitments (Total AMS). But
Brazil notes that neither the EC nor the United States can point to any inherent conflict between these
provisions and the prohibition of local content subs idies under Article 3.1(b) of the SCM Agreement
for the reasons set forth in Brazil’s First Oral Statement and in Brazil’s answer to the Panel’s Question
114.261

216. The EC and the United States fail to acknow ledge that there can be subsidies/domestic
support measures provided to processors of the basic agricultural product that can be consistent with
Article 3.1(b) of the SCM Agreement and that also “provide support in favour of domestic
producers”. The EC appears to assume that al l support to processors of a basic agricultural

 260 First Oral Statement of Brazil, paras. 81-86.
 261 First Oral Statement of Brazil, paras. 81-86.

commodity violates Article 3.1(b) of the SCM Agreement. That is simply not correct. Yet, without
this assumption, there is no inherent conflict between the SCM Agreement and the Agreement on
Agriculture. The absence of any conflict coupled with the absence of any explicit exemption for local
content subsidies in Article 13(b) or anywhere else in the Agreement on Agriculture supports the
conclusion that local content subsidies related to agricultural goods violate Article 3.1(b) of the SCM
Agreement.

117. What is the relationship between Step 2 payments to exporters and the marketing loan
payments, both of which appear to compensate for the price differences relative to the Liverpool
A-Index? For example, is there double compensati on? Or is one of the explanations that these
export-related price compensatory payments are paid to different operators (namely, the
producer, on the one hand under the marketing loan arrangements, and the processor/users
(Step 2 programme) arrangements on the other? USA

118. Can the United States confirm that it does not rely on Article III:8 of GATT 1994? USA

G. ETI ACT

119. How does the United States respond to Brazil's reference to the panel report in India -
Patents (EC) (at paragraph 138 of its oral statem ent at the first session of the first substantive
meeting)?262 How, if at all, should the Panel take this report into account in considering the
issues raised by Brazil's claims relating to the ETI Act? USA

120. Concerning its claims on the ETI Act, Braz il relies on the US – FSC case. However, it
appears that the United States did not raise the issue of the Peace Clause in that case, nor did
the United States appear to invoke Article 6 of the Agreement on Agriculture. If the Panel's
understanding is correct, how, if at all, are th ese differences relevant here? Could you direct the
Panel to any relevant findings or conclusions by the panel or Appellate Body in that case? BRA

Brazil’s Answer:

217. Brazil is not aware that there are any differe nces between the US position regarding the peace
clause in the US – FSC case and the present case. Ther e is no reference in the entire record of that
dispute that the United States ever asserted that th e EC’s claims regarding the ETI Act were exempt
by the peace clause. Also in this dispute, Brazil is not aware that the United States has ever asserted
that Brazil’s claims regarding the ETI Act were ex empted by the peace clause. In this regard, the
United States has taken a consistent approach in the present case and in US – FSC.

218. Because the United States never raised the peace clause as a defense in US – FSC, there were
no findings by the panel or the Appellate Body rega rding the peace clause. And neither the panel nor
the Appellate Body held that the EC was require d to demonstrate that the United States was not
entitled to peace clause protection before proceeding to the substance of the EC’s claims against the
ETI Act. In any event, the Unite d States has been unable to establish that the ETI Act is consistent

 262 That panel stated: "It can thus be concluded that panels are not bound by previous decisions of
panels or the Appellate Body even if the subject-matter is the same. In examining dispute WT/DS79 we are not
legally bound by the conclusions of the Panel in dispute WT/DS50 as modified by the Appellate Body report.
However, in the course of "normal dispute settleme nt procedures" required under Article 10.4 of the DSU, we
will take into account the conclusions and reasoning in the Pane l and Appellate Body reports in WT/DS50.
Moreover, in our examination, we believe that we should give significant weight to both Article 3.2 of the DSU,
which stresses the role of the WTO dispute settlement system in providing security and predictability to the
multilateral trading system, and to the need to avoid inconsistent rulings (which concern has been referred to by
both parties). In our view, these considerations form the basis of the requirement of the referral to the "original
panel" wherever possible under Article 10.4 of the DSU." (footnote omitted)

with Part V of the Agreement on Agriculture. Therefore, the United States does not enjoy peace
clause exemption under Article 13(c) of the Agreement on Agriculture.

121. How do you respond to the reference in pa ragraph 43 of EC third party oral statement
with respect to the relevance of Article 17.14 of th e DSU, and, in particular, the phrase "a final
resolution to that dispute" (emphasis added)? Please explain the use, and relevance (if any) of
the term "disputes" in Articles 9.3 and 12 and Appendix 3 of the DSU, and please cite any other
provisions you consider relevant. USA, BRA

Brazil’s Answer:

219. Brazil is of the view that DSU Article 17.14 requires that following the adoption of an
Appellate Body report, the parties to the dispute, i.e., the defending and complaining Member, are
unconditionally bound by the results of that report. This interpretation is consistent with the
Appellate Body decisions in US – Shrimps (21.5)
263 and EC – Bed Linen (21.5), 264 both confirming
that panel and Appellate Body reports adopted by the Dispute Settlement Body must be considered
final resolutions to a dispute between the parties to that dispute. There is no precedent in the WTO or
GATT that would require the Panel to find that th e United States alone is bound in this case. It is
difficult to imagine, however, how the United Stat es could take a different position in defending
against Brazil’s ETI claims in this case, in light of the adoption by the DSB of the Appellate Body and
panel reports in US – FSC (21.5), and the recomm endation by the DSB that the United States bring
the ETI Act into conformity with the Agreement on Agriculture and the SCM Agreement.

220. In this case, Brazil challenges exactly the same measure as that found by the panel and the
Appellate Body in US – FSC (21.5) to viol ate the Agreement on Agriculture and the SCM
Agreement. There have been no changes to the ETI Act since the adoption of the panel and Appellate
Body reports by the WTO Dispute Settlement Body.
265 Brazil challenges the ETI Act with exactly the
same rationale as the EC. Thus, there is a comp lete identity between the “measure” and the “claims”
in this case and the US – FSC (21.5) dispute (noti ng that upland cotton is a sub-set of all the products
covered by the ETI Act). Under these circumstances, it is appropriate for the Panel to make similar
findings of fact, conclusions of law, and recomme ndations as the panel and A ppellate Body in US –
FSC (21.5).266

221. Brazil does not consider any of the other provisi ons cited by the Panel to be relevant to this
particular question. Should the Panel wish Brazil to elaborate on any of provisions more specifically,
Brazil will be pleased to do so.

 263 Appellate Body Report, US – Shrimps (21.5), para. 97.
 264 Appellate Body Report, EC – Bed Linen (21.5), para. 90-96.
 265 The United States has indicated in its First Submission (para. 189) that both branches of Congress
are considering legislative proposals that would repeal the ETI Act. However, Brazil notes that it has been over
18 months since 29 January 2002, the date on which the panel and Appellate Body reports on the ETI Act were
adopted by the DSB.

266 First Oral Statement of Brazil, paras. 138-39.

ANNEX I-2

ANSWERS OF THE UNITED STATES TO THE QUESTIONS FROM
THE PANEL TO THE PARTIES FOLLOWING THE FIRST SESSION
OF THE FIRST SUBSTANTIVE PANEL MEETING

(11 August 2003)

UPLAND COTTON

1. Please confirm that all information and data that you have provided to the Panel
relating to "cotton" in fact relates to upland cotton only. BRA, USA

1. The United States can confirm that, with the exception of export credit guarantees, all of the
information and data we have provided to-date rela tes to upland cotton only. With respect to export
credit guarantees, the Commodity Credit Corporation does not maintain data to distinguish
transactions involving different types of cotton (for example, upland cotton versus extra-long staple
(ELS) cotton). However, the United States has no r eason to believe that types of cotton other than
upland cotton constitute a material percentage of such transactions.

PRELIMINARY ISSUES

Product scope of Panel's terms of reference relating to Brazil's export credit guarantee claims

3. If the request for consultations in this di spute omitted certain products in relation to
export credit guarantees, on what basis is it argued that it failed to identify the measures
at issue in accordance with Article 4.4 of the DSU? USA

2. The only export credit guarantee measures id entified in the Brazilian consultation request
were those in respect of upland cotton. The requ est for consultations did not identify export credit
guarantee measures for any other agricultural commodities.

3. The request for consultations identified the measures subject to consultations in a single
sentence:
1

The measures that are the subject of th is request are prohibited and actionable
subsidies provided to US producers, users and/or exporters of upland cotton 1, as well
as legislation, regulations, statutory instruments and amendments thereto providing
such subsidies (including export credits), gr ants, and any other assistance to the US
producers, users and exporters of upland cotton (“US upland cotton industry”).

Another sentence followed this one, setting out (in a page and a half) a listing of measures that were
included within the identification in the first sentence.

4. Apart from the footnote, the first two lines of the sentence quoted in the previous paragraph
address “subsidies provided to US producers, users and/or exporters of uplan d cotton”; thus, apart

1WT/DS267/1, at 1.

from the footnote, it is clear that subsidies pr ovided to US producers of, say, soybeans are not
included within the scope of the request. Equally, apart from the footnote, it is clear that subsidies
provided to, say, banks that finance US cotton expor ts (but do not produce, use or export cotton) are
not included within the scope of the request. To give an example from another part of the request,
Brazil’s consultation request identified “[e]xport subsidies provided to exporters of US upland cotton
under the FSC Repeal and Extraterritorial Income Exclusion Act of 2000” as a challenged measure.
Having identified that measure at issue for pur poses of DSU Article 4.4 as subsidies provided to
upland cotton exporters under that legislation, Brazil could not then have included in its panel request
such subsidies provided to exporters of all agricultural commodities or all industrial goods.

5. Brazil, however, contends that “[t]he footnote clarifies that Brazil’s request with respect to
export credit guarantees is not limited to upland cotton.”
2 Brazil’s contention is incorrect. The
footnote does nothing more than direct the reader of the consultation request to look “below” for an
explanation. The footnote by itself does not contain any “identification of [a] measure at issue” as
required by DSU Article 4.4, and therefore cannot itself bring any additional measures within the
scope of the consultation request. Any such a dditional measures would have to be found -- if
anywhere -- in an explanation “below.”

6. However, as described in the first US subm ission, no such explanation or identification of
additional measures ever appears. In fact, though Brazil devoted several paragraphs to this issue in its
oral statement, it has never pointed to any explanation of any kind -- or any other identification of
additional measures -- “below.”

7. In addition, the statement of evidence attached to Brazil’s consultation request did not include
any evidence related to measures othe r than those for upland cotton. For Brazil to now argue that its
consultation request was broader than its statemen t of evidence is for Brazil to admit that its
consultation request was in breach of Article 7.2 of the Subsidies Agreement. Brazil cannot have it
both ways.
3

8. In summary, while Brazil’s consultation request did identify measures at issue for purposes of
DSU Article 4.4, the measures it actually iden tified did not include export credit guarantees for
agricultural commodities other than cotton. Thus, the latter measures were not within the scope of
consultations, were not consulted upon, and could not have been included in Brazil’s panel request.

4. Is it argued that the export credit gu arantee programmes concerning upland cotton are
each a separate or independent measure, in that they operate independently? USA

9. The CCC export credit guarantee programme (G SM-102), the CCC intermediate export credit
guarantee programme (GSM-103), and the Suppli er Credit Guarantee Programme (SCGP) each
constitute separate programmes. The distinct opera tion of the programmes themselves is manifested
in both the terms of the particular programmes as well as in the nature of the obligation guaranteed.
The GSM-102 and GSM-103 programmes guarantee obliga tions of banks. SCGP extends exclusively
to obligations of importers. Obligations guaranteed under the GSM-102 programme may not extend
beyond three years. SCGP guarantees a far lower percentage of principal (65 per cent).

10. Within each programme, allocations are ma de by country, by commodity, and by amount.
4
Thus, discrete programming decisions are made in connection with each such country, commodity,

3In light of the Panel’s intended finding on the scop e of Brazil’s consultation request with respect to
export credit guarantees, the United States will be making a request for a preliminary ruling on this point.
4See 7 C.F.R. §§ 1493.4, 1493.5 (setting forth allocati on criteria). These criteria also apply to SCGP.
7 C.F.R. § 1493.400.

programme, and amounts (in terms of a guarantee value). 5 As a result, for the last 10 fiscal years, for
example, as described in the First Written Submi ssion of the United States, no cotton transactions
occurred under the GSM-103 programme.

11. Furthermore, each export credit guarantee issu ed is a separate measure. Under DSU Article
4.4, it is incumbent upon Brazil to identify in its consultation request “the measures at issue.” Here,
Brazil identified the measure as “export credit guara ntees . . . to facilitate the export of US upland
cotton,” and the United States may, and did, rely on that consultation request (including the attached
statement of evidence) for notice.

5. Is there a specification in any legislation or regulation (or any other official government
document) which limit or restrict the export credit guarantee programmes at issue
exclusively to upland cotton? USA

12. Programme announcements issued pursuant to applicable programme regulations (7 C.F.R.
§§ 1493.10(d), 1493.400( d)) serve to limit the availability of CCC export credit guarantees. These
limitations are expressed in terms of one or more of the following criteria: commodities, total
guarantee value for individual commodities, destinati on, and time within which export must occur.
Examples of such programme announcements are included as Exhibit US-12. Thus, export credit
guarantee offerings through programme announcements may be limited to cotton, pursuant to the
authority of programme regulations.

6. For the purposes of the Panel's examinatio n of Brazil's claims relating to GSM-102,
GSM-103 and SCGP under the Agreement on Agriculture and the SCM Agreement, is
accurate data and information available with respect to these export credit guarantee
programmes concerning upland cotton alone (e.g . with respect to "long-term operating
costs and losses")? In this respect, the Pane l also directs the parties' attention to the
specific questions below relating to the programmes. USA

13. The United States endeavoured to provide precisel y such data with respect to cotton alone in
paragraph 173, and associated tables, in its First Written Submission.

7. Are commitments with respect to export subsidies under the Agreement on Agriculture
commodity-specific? How, if at all, is this relevant? BRA, USA

14. Export subsidy commitments under the Agri culture Agreement are, indeed, commodity
specific. Each Member may have a schedule of reduction commitments with respect to specified
commodities. To illustrate, the export subsidy re duction commitment schedule of the United States is
attached as Exhibit US-13. As reflected in that schedule, for each of the 12 scheduled commodities,
the United States has a reduction commitment with respect to both budget outlays and subsidized
quantities. Other Members have similar schedul es involving different commodities and reduction
commitments. In all cases, however, the budgeta ry and quantitative commitments are unique to each
commodity on each Member’s respective schedule of export subsidy reduction commitments.

15. An individual Member, therefore, could appl y an export subsidy programme with respect to
all commodities for which it has undertaken reduction commitments. By operation of such an export
subsidy programme, however, a Member may be in conformity with none, some, or all of its
commodity-specific reduction commitments. So long as a Member applies such export programme in
a given year in accordance with the commodity-s pecific reduction commitment for each year, such
export subsidy programme is permitted with respect to each commodity and conforms fully with
respect to Part V of the Agreement on Agriculture. The fact that commitments are taken on a product-

5See Exhibit US-12.

specific basis confirms that alleged export subs idy measures can be defi ned on a product-specific
basis – and that is exactly what Brazil did here.

16. In contrast, for those specific commodities fo r which such Member does not have a reduction
commitment, then such Member may not provide e xport subsidies at all in connection with such
specific commodities. As a result, the same pr ogramme that, as applied, may be entirely in
conformity with that Member’s reduction commitme nt vis-à-vis one commodity may be a prohibited
subsidy with respect to another commodity.

8. Does the United States confirm that the qu estions referred to by Brazil in paragraph 92
of Brazil's oral statement were posed to the United States in the consultations? USA

17. Yes. When Brazil posed them during the consultations, the United States immediately
objected to questions about commodities other th an cotton as being outside the scope of the
consultations (as paragraph 94 of Brazil's oral statement acknowledges).

9. How does the United States respond to pa ragraph 94 of Brazil's oral statement? USA

18. It is incumbent on the complaining party to identify the specific measure at issue, and it
should not fall to the responding party to intuit that measures not specified in the request for
consultations are considered included by the complaining party. This deprives the responding party of
an opportunity to understand the measures that are at issue and to enjoy the benefit of appropriate
consultations. In the final analysis, Brazil essen tially argues that its consultation questions and
statement at consultations could expand the scope of the measures at issue as identified in its
consultation request beyond “export credit guarantees . . . to facilitate the export of US upland
cotton.” This is not the case. (For further information, please refer to the US answer to Question 3.)

10. What actual prejudice, if any, has the United States suffered as a result of the alleged
omission of products other than upland cotton from the request for consultations? USA

19. The issue of prejudice is not relevant to th e question of whether a measure not consulted upon
may be the subject of panel proceedings. The requi rement of consultations at the beginning of a
dispute is a central characteristic of the dispute settlement system, and is reflected throughout DSU
Article 4. Consultations serve a number of im portant functions, including helping the parties to
understand each others’ concerns and aiding in effort s to resolve the dispute. The DSU affirms the
importance of consultations and requires that a Member cannot proceed to a panel unless the Member
has consulted on that measure.

20. Article 4.4 delimits the scope of the cons ultations through its requirement that the
complaining Member identify the measures at issue. In light of the jurisdictional nature of the
consultation requirement, Article 4. 4’s explicit requirement that the measures be identified serves the
useful role of establishing a bright line as to the matters which are within the scope of the
consultations and the dispute. Any resort to an an alysis of what topics were actually discussed at the
consultations – beyond conflicting with the DSU Arti cle 4.6 requirement that consultations “shall be
confidential,” designed to facilitate the resolution of the dispute – would invite litigation over the
unverifiable recollections of each party.

21. The United States notes that in past disputes in which the scope of the dispute was at issue, it
was accepted as a given that the consultation request defined the scope of the consultations. For
example, in the US – Import Measures dispute, the European Communities did not assert that US
actions taken on 19 April 1999 were the subject of consultations even though consultations took place
two days later, on 21 April 1999. Instead, accep ting that its 4 March 1999, consultation request
delimited the scope of the consu ltations, and could not have covere d measures taken after that time,

the EC argued (unsuccessfully) that the April 19 actions were the same measure as that identified in
the 4 March consultation request.6

22. Brazil’s consultation request identified e xport credit guarantees on upland cotton as the sole
export credit guarantee measures within the scope of the consultations and, hence, the dispute. Had it
wished to include export credit guarantees with resp ect to other products within the scope of the
consultations, Brazil could have re -filed its consultation request to include these guarantees, much as
other Members have re-filed consu ltation requests when they have wished to expand the scope of the
dispute.
7 Brazil chose not to, instead apparently hoping to be relieved of the procedural requirements
of the DSU, requirements enforced with respect to, and taken seriously by, other Members.8

23. While prejudice is not relevant to whether th e scope of this dispute includes export credit
guarantees for products other than upland cotton, the United States observes that, not only has it
suffered prejudice as a result of Brazil’s omission of allegations concerning products other than
upland cotton, but more importantly, the United States will suffer even further prejudice if it is
compelled to respond to allegations that Brazil never properly included in its request for consultations.
The United States has suffered an inability to prepare, respond, and consult with respect to allegations
on measures never presented to the United States in accordance with the DSU. The United States was
entitled to rely on the measures identified by Brazil in its request for consultations and also rely on
that which Brazil declined to put at issue by its fa ilure to so state in its request. This justifiable
reliance is furthered by Brazil’s failure to amend its request for cons ultations after ample notice from
the United States of its reasonable understanding of Brazil’s request.

24. Consequently, the US has not had proper opportunity to consult with respect to the
application of the three separate export credit guara ntee programmes and their specific application to
the myriad of commodities exported in connection with these programmes nor with respect to the
conformity of the WTO obligations of the United St ates with the application of such programmes to
such commodities. If export credit guarantees with respect to other eligible commodities were now
included in this dispute, the United States will suffe r the prejudice of having to prepare and defend its
actions in a severely compressed time frame without the benefit of any consultations whatsoever.

11. Does the United States agree that Brazil's request for establishment of the Panel can be
understood to indicate that Brazil's export cred it guarantee claims relates to products
other than upland cotton? How, if at all, is this relevant? USA

25. Brazil’s panel request change d the language relating to export credit guarantees to include the
words “other eligible agricultural commodities.” However, Brazil may not unilaterally alter the scope
of the “measures at issue” in its panel request si mply by adding measures not previously identified.
Thus, while Brazil would have been free to add additional claims in its panel request, it was not free
to broaden the scope of the challenged measures.

26. Indeed, Brazil and at least one third party have argued that in two SPS disputes between the
United States and Japan panels found that a complain ing party may introduce new claims in its panel

6 Appellate Body report, United States - Import Measures on Certain Products of the European
Communities, WT/DS165/AB/R, adopted 10 January 2001, para.70.
7 See, e.g., WT/DS204/1& WT/DS204/1/Add.1 (consultation request supplemented to add measures);
WT/DS174/1 & WT/DS174/1/Add.1 (consultation request to add consultations under additional covered
agreement).
8 The United States refers the Panel to the preliminary ruling of the panel in the Canada Wheat Board
dispute, WT/DS276/12, which necessitated the refiling of the US panel request and establishment of a second
panel. Likewise, the United States refers the panel to India’s refiling of its panel request in the US Rules of
Origin dispute (WT/DS243/5/Rev.1) when made aware of de ficiencies in that request at the DSB meeting at
which the request was considered. See also WT/DS210/2 & WT/DS210/2/Rev.1.

request that were not included in its consultation request. In both of these cases, Japan argued that the
United States could not introduce new claims (cite to new legal provisions) not in its consultation
request. The United States argued, and both panels agreed, that every legal claim need not be
included in the consultation request. However, these disputes are not relevant here because they did
not involve identifying a new measure in the panel request. As noted in the 3d party oral statement of
Benin, “claims” and “measures” are distinct concep ts; indeed, the distinction between “claims” and
“measures” is fundamental.
9

12. Please address issues and submit eviden ce regarding the three export credit guarantee
programmes concerned relating to upland cotton and other eligible agricultural
commodities in your answers to questions and rebuttal submissions. BRA, USA

27. In light of the Panel's preliminary ruling and without prejudice to the US position that these
measures are not within the scope of this dispute, the United States will respond to Brazil's arguments
in the US submissions.

13. Please include any argumentation and evidence to support your statement during the
Panel meeting that the inclusion of such other eligible agricultural commodities would
create additional "work" for the Panel wi th respect to each of these commodities under
Article 13 of the Agreement on Agriculture. USA

28. Article 10.2 defers disciplines on, inter alia , export credit guarantees until such time as
internationally agreed disciplines are reached – as Members hope to do in the Doha Development
Round. Therefore, export credit guarantees are not export subsidies within the meaning of the
Agriculture Agreement, and Article 13(c) does not apply. However, for purposes of argument, we
note that Article 13(c)(ii) of the Agreement on Agriculture provides that:

(c) export subsidies that conform fully to th e provisions of Part V of this Agreement,
as reflected in each Member’s schedule, shall be:

(ii) exempt from actions based on Articl e XVI of GATT 1994 or Articles 3, 5, and 6
of the Subsidies Agreement.
Pursuant to Article 13(c)(ii), to the extent a Member is providing export subsidies in conformity with
its reduction commitments under Part V of the Ag reement on Agriculture, such export subsidies are
exempt from action under Article XVI of the GATT and Articles 3, 5, and 6 of the SCM Agreement.

29. Article 13(c) is not relevant with respect to export subsidies granted in connection with
commodities not subject to reduction commitments in the applicable schedule of the Member. For
example, the United States does not have a reducti on commitment with respect to upland cotton.
Therefore, the United States may not provide any export subsidy for upland cotton. The Peace Clause
protection of Article 13(c) therefore cannot apply to any theoretical export subsidy of the United
States for upland cotton.

30. In contrast, however, the United States has reduction commitments for 12 commodities.
(Please refer to the response of the United States to Question 7 for a description of how the export
subsidy reduction commitments – and therefore expor t subsidy obligations – of the United States and
all other members are, therefore, commodity speci fic.) Because such commitments are commodity
specific, the extent to which Article 13(c)(ii) ma y apply to export subsidy measures of the United

9See, e.g. , Appellate Body Report, Guatemala – Anti-Dumping Investigation Regarding Portland
Cement from Mexico, WT/DS60/AB/R, adopted 25 November 1998, para. 72.

States is also commodity specific. Conformity w ith WTO obligations and the application of Article
13(c)(ii) to export credit guarantees with respect to those twelve commodities could only be evaluated
by an examination of each commodity subject to reduction commitments.

Expired measures

14. Please submit evidence regarding th e programmes under the 1996 FAIR Act, in
particular, production flexibility contract payments and market loss assistance
payments, to the extent that they would be relevant to the Panel's determination under
Article 13 of the Agreement on Agriculture in your answers to questions and rebuttal
submission. USA

31. The United States will present evidence a nd arguments regarding payments under the 1996
Act as may be relevant to the Panel’s Peace Clause analysis with respect to those measures.

15. Do the parties agree that it is beyond a Panel's power to recommend a remedy for an
expired measure? Could the Panel could be required to examine "expired measures" in
order to conduct its assessment of the matter before it? How, if at all, is Article 7.8 of
the SCM Agreement relevant to these matters? BRA, USA

32. The United States agrees that it is beyond a pa nel’s power to recommend that a Member bring
into conformity a measure that no longer exists.
10 However, more fundamentally, the issue is whether
the expired measures in this dispute could have b een measures affecting the operation of any covered
agreement within the meaning of DSU Article 4.2 or “measures at issue” within the meaning of DSU
Article 6.2. Because the production flexibility contract payments and market loss assistance payments
were completed, the programmes terminated, and the statutory instruments providing them superseded
before Brazil’s consultation and/or panel requests we re filed, they could not have been “measures at
issue,” and they could not properly have been consulted upon or brought within the terms of reference
of the Panel. This is a broader concern than whether the Panel may recommend a remedy since
findings cannot be made with respect to such expired measures.

33. To determine whether past subsidies may current ly be challenged, it is useful to distinguish
between recurring and non-recurring subsidies. A n on-recurring subsidy is a measure that continues
in existence for the duration of the a llocation of the subsidy to production.
11 For example, a subsidy
to acquire capital stock to be used in future production would be non-recurring and allocated over the
useful life of the stock. Where a subsidy is non-recurring and is allocated to future production 12, the
measure (subsidy) may continue to be actionable even if the authorizing programme or legislation has
expired. For example, in the Indonesia – Autos dispute, where a non-recurring subsidy was provided,
the panel deemed the measure to continue even though the subsidy programme had allegedly been
terminated (and it is worth noting that the termin ation allegedly occurred well after the panel and
consultation requests– in fact, after the second panel meeting).

34. In contrast, a recurring subsidy is typically prov ided year-after-year and is made in respect of
current rather than future production. Once production has occurred and the measure been replaced or

10Appellate Body Report, United States – Import Measures on Certain Products from the European
Communities, WT/DS165/AB/R, adopted 10 January 2001, para. 81.
11See, e.g., Report by the Informal Group of Experts to the Committee on Subsidies and Countervailing
Measures, G/SCM/W/415, para. 12 (25 July 1997) (“Whether a subsidy is oriented towards production in future
periods, consists of equity, or is carried forward in th e recipient’s accounts were viewed as related to the
question whether its benefits persist beyond a single period, and hence whether it should be allocated to future
periods.”).
12Subsidies Agreement, Annex IV, para. 7 (referring to “[s]ubsidies . . . the benefits of which are
allocated to future production).

superseded, there would no longer be any measure in existence to challenge. Accordingly, a Report
by the Informal Group of Experts to the Co mmittee on Subsidies and Countervailing Measures
suggested that recurring subsidies – such as grants for purposes other than the purchase of fixed assets
and price support payments – should be expensed, or attributed to a single year, rather than allocated
over some multi-year period.
13

35. In the case of production flexibility contract payments and market loss assistance payments,
these measures were subsidies allocated to a part icular crop or fiscal year by the respective
authorizing legislation. Pursuant to the 1996 Act, the last production flexibility contract payment was
made for fiscal year 2002 (1 October 2001 – 30 September 2002) “not la ter than” 30 September
2002.14 Pursuant to legislation enacted on 13 A ugust 2001, the last market loss assistance payment
was for the 2001 marketing year (1 August 2001 – 31 July 2002), that is, for market conditions
prevailing in that year. 15 Once the relevant fiscal year and marketing year, respectively, had been
completed, these measures would no longer exist. T hus, by the time of Braz il’s consultation and/or
panel requests, there were no measures to consult upon nor to be at issue under the DSU; production
flexibility contracts and market loss assistance paymen ts therefore do not fall within the Panel’s terms
of reference.

Agricultural Assistance Act of 2003

16. What, if any, prejudice in terms of the presentation of its case does the United States
allege, should the Panel proceed to consid er the measures constituting the cottonseed
payments under the Agricultural Assistance Act of 2003? USA

36. It has been a fundamental characteris tic of both the GATT 1947 and the WTO dispute
settlement systems that proposed measures may not be the subject of dispute settlement. This has
meant that dispute settlement proceedings, including consultations, could not begin until the measure
at issue actually came into existe nce. In seeking to bring into the scope of this dispute the
Agricultural Assistance Act of 2003, Brazil is seeki ng to fundamentally expand and change the nature
of WTO dispute settlement. This issue goes we ll beyond the question of whether a particular
responding party is prejudiced in a particular dis pute and cannot be resolved on the basis of whether
such prejudice has occurred. The reasons that th e United States would be prejudiced if the Panel
considered any measure under the Agricultural Assistance Act of 2003, including a cottonseed
payment under that Act, are the reasons that the di spute settlement system has been organized to only
allow proceedings on actual, not proposed, measures. First, the responding party would have lost the
benefit of consultations on these measures. Cons ultations serve a number of important functions,
including helping the parties to understand each others ’ concerns and aiding in efforts to resolve the
dispute. The DSU affirms the importance of consultations and requires that a Member cannot
proceed to a panel unless the Member has consulted on that measure. Likewise, the DSU requires that
the “measures at issue” be identified in the panel request, and non-existent measures quite simply are
not measures at all.

37. Apart from reflecting the importance Members have placed on consultations, the DSU’s
requirement that a measure exist before it can be the subject of dispute settlement proceedings avoids
a waste of resources since anticipated measures may never come into effect, or may, when enacted, be
in substantially changed form. Further, allowing challenges to measures not yet in existence would

13G/SCM/W/415, paras. 1-12; id., Recommendation 1, at 26-27.
14Federal Agriculture Improvement and Reform Act of 1996, § 112(d)(1), Public Law No. 104-127
(4 April 1996); 7 US Code § 7212(d)(1).
15Public Law No. 107-25, § 1(a) (23 Aug. 2001) (“The Secretary of Agriculture . . . shall, to the
maximum extent practicable, use $4,622,240,000 of fu nds of the Commodity Credit Corporation to make a
market loss assistance payment to owners and producers on a farm that are eligible for a final payment for fiscal
year 2001 under a production flexibility contract for the farm under the Agriculture Market Transition Act.”).

effectively authorize panels to issue advisory opini ons. Should Members desire to expand the scope
of the dispute settlement system in this manner, they may do so – indeed could only do so – through
amendment of the DSU. The DSU now requires the existence of a measure before consultations may
be requested or a panel established.

38. Finally, were the issue of the specific prejudice to the United States relevant in deciding
whether a panel’s terms of reference could incl ude a measure not in existence at the time of
consultations or the panel request, the United States notes that this dispute is already complex, with
multiple measures at issue involving multiple claims. To require the United States to address Brazil’s
allegations on the Agricultural Assistance Act of 2003 would detract from the time and resources
available to respond to questions and make arguments relating to those measures that are properly
within the terms of reference.

17. (a) What is the relationship of the Ag ricultural Assistance Act of 2003 to other
legislation in the request for establishment of the Panel? BRA, USA

 (b) Do the legal instruments follow directly one after another, or are there temporal
gaps? Are payments authorized under a broad legislative authority or are they
specific to each legal instrument? BRA, USA

 (c) Please provide any implementing regulations. Do these implementing
regulations resemble those relating to previous programmes or payments? Are
payments made retrospectively? How if at all is this relevant? BRA, USA

39. (a) The Agricultural Assistance Act of 2003
16 was part of a large piece of legislation covering
a diverse range of topics. The Act had several disaster provisions including some relief for sugar
interests and more generalized relief for persons who lost other crops. One of the provisions provided
for a cottonseed payment to be applied to the 2002 cotton crop (the crop that was harvested in that
calendar year):

Sec. 206. COTTONSEED. The Secretary shall use $50,000,000 of funds of the
Commodity Credit Corporation to provide assistance to producers and first-handlers
of the 2002 crop of cottonseed.
No law compelled or authorized the cottonseed payment for the 2002 crop except for the 2003 Act,
which bears no relation to other legislation cited by Brazil.

40. There was no cottonseed payment authorized in either 2002 or 2001 for the 2001 crop.
Cottonseed payments were made for the 1999 and 2000 crops. Of the three pieces of legislation
authorizing cottonseed payments for the 1999 and 2 000 crops, only one arguably may be found in
Brazil’s consultation and panel requests. Braz il identifies the “Crop Year 2001 Agricultural
Economic Assistance Act (August 2001)” as a chal lenged measure. The Emergency Agricultural
Assistance Act, Public Law No. 107-25 (13 Augus t 2001), authorized a cottonseed payment of $85
million. In addition, Section 2 04(e) of Public Law No. 106-224, enacted 20 June 2000, directed the
Secretary to use $100 million of Commodity Credit Co rporation (CCC) funds to provide assistance to
producers and first handlers of the 2000 crop of co ttonseed. Finally, the co ttonseed payment for the
1999 crop was authorized by section 104(a) of Public Law No. 106-113, enacted 19 Nov. 1999; $79
million in residual funds were used for the 1999 crop programme.

41. (b) The temporal gaps between the various cottonseed payments are indicated in the answer
to (a), above. That is, no cottonseed payments were made in 2001 or 2002 for the 2001 crop (nor

16Public Law No. 108-7 (Feb. 23, 2003).

prior to 1999). This gap serves to emphasize that these payments are ad hoc , and there was no
legislative guarantee that there would be a payment for any of the years involved until the payment
was actually authorized. Thus, what Brazil h as termed the “cottonseed programme” is readily
distinguished from those programmes under the 2002 Act that recur for ea ch crop harvested from
2002 through 2007.
17 In contrast, the legal authority fo r each cottonseed payment was separate and
distinct; no underlying piece of legislation mandated that cottonseed payments be made.

42. (c) We note that each time a cottonseed paymen t is authorized, new rules must be issued to
disburse the funds because there is no ongoing cott onseed “programme”; thus, when new rules are
issued, the old rules are either removed at the same time or had been removed previously. That is,
there is no publication that included rules for all three programmes.

43. The cottonseed payment under the 2003 Agricultu ral Assistance Act is not related to the other
cottonseed payments except by subject matter. As indicated at the panel hearing, the text in the
Agricultural Assistance Act (quoted above) is broad and simple, leaving much to the Department of
Agriculture. Because of the discretion vested in the Secretary to disburse the 2002 crop cottonseed
payment, and for reasons of administrative c onvenience, the 2003 regulations borrow from the
regulations that implemented the cottonseed payments for the 2000 crop and for the 1999 crop. On 25
April 2003, the Department published regulations at 68 Federal Register 20331 to disburse funds in
respect of the 2002 crop.
18 The regulations to disburse th e 2000 crop cottonseed payment were
published at 65 Federal Regi ster 65718 (2 November 2000). 19 The regulations to disburse the 1999
crop cottonseed payment were published on 8 June 2000 at 65 Federal Register 36550.20

ARTICLE 13(B): DOMESTIC SUPPORT MEASURES

"exempt from actions"

20. In paragraph 8 of its initial brief (dated 5 June, 2003), the United States argued that the
word "actions" as used in the phrase "exempt from actions" in Article 13 of the
Agreement on Agriculture includes the "bring ing of a case" and consultations. In
paragraph 36 of its first written submission (dated 11 July, 2003), the United States
stated as follows:

 "[P]rior to this point in the process, the DSU rules did not afford the United States any
opportunity to prevent the dispute from proceeding through consultations and panel
establishment automatically, regardless of the US insistence that its measures conform
to the Peace Clause."

 Is it the United States' understanding that the drafters used the phrase "exempt from
actions" knowing that under the DSU it would not be possible fully to exempt "actions",
as the United States interprets that term? USA

44. There is a difference between a commitment to exempt from action and the mechanism to
enforce that commitment, just as there is a diffe rence between rights and obligations under the WTO
and the mechanism to enforce those rights and obligations. For example, where one Member

17Farm Bills are initiated by Agricultural Committees of the US Congress and recur every 5 or 6 years.
Programmes provided for in a Farm Bill are generally not tied to finite amounts of money but rather make use of
the funds of the Commodity Credit Corporation (CCC), which has borrowing authority in the US Treasury. See
15 US Code § 713 a-11 et seq. As a result, no appropriation is needed. By contrast, cottonseed payments
(similar to other disaster payments) are ad hoc with targeted monies.
18Exhibit US-14.
19Exhibit US-15.
20Exhibit US-16.

breaches a tariff binding, another Member will need to resort to dispute settleme nt in order to resolve
the issue. This does not mean that it is not possibl e to fully obligate the Member to observe its tariff
bindings. The similar situation arises with respect to procedural obligations as well.

45. When responding Members have been confronted by situations in which they considered that
complaining parties did not meet requirements for invoking dispute settlement procedures, those
responding Members can voice their objections at cons ultations and the DSB meetings at which panel
establishment has been considered, but then must accept that the i ssue will ultimately be decided by
the panel. For example, notwithstanding that th e DSU requires consultations on a measure before a
panel may be established, there is no mechanism available to address a complaining party’s failure to
consult absent resolution by a panel.

46. Responding Members have allowed jurisdictional issues to go to the panel for resolution as a
practical way forward that offers sufficient protec tion for their interests while also protecting the
integrity of the dispute settlement system. This does not mean that responding Members in any way
lost their rights, for example, to consult on the measures at issue before being subject to panel
proceedings; it has simply been practical to allow the issue to be decided by panels.

47. Likewise, in this dispute, the fact that Brazil has attempted improperly to invoke dispute
settlement procedures notwithstanding the Peace Cl ause – and the fact that the United States has
accepted that the issue should be resolved by the Pa nel – does not and cannot diminish the right of the
United States to be exempt from Brazil’s action. The fact that Members may disregard their
obligations, or act based on a misunderstanding of the facts or obligations, does not affect those
obligations. In this case, Brazil considers that the Peace Clause is inapplicable. As our argumentation
to date indicates, we disagree and consider that, b ased on a correct reading of the law and facts, the
Peace Clause is applicable, and Brazil was obliged not to bring this dispute. Upon making a finding
on this issue in our favour, the Panel would eff ectively be concluding that Brazil’s invocation of
dispute settlement was improper – even if undertaken in good faith – just as panels have in the past
concluded that complaining parties have improperl y included measures that were not consulted upon
in their panel requests or claims that were not within the panel’s terms of reference in their
argumentation.

21. In US - FSC and US - FSC (21.5) the Appellate Body made findings under the SCM
Agreement relating to export subsidies in respect of agricultural products without
making a finding in respect of Article 13 of the Agreement on Agriculture. How is this
relevant to the United States' interpretation of the phrase "exempt from actions" as
used in Article 13? USA

48. The FSC findings are not relevant since they do not address the Peace Clause issue. The issue
was not raised by either party, and so neither the panel nor the Appellate Body made any finding with
respect to Article 13, nor did they offer any reasoni ng on this issue. Indeed, in the absence of any
party raising or arguing this issue, it would be di fficult to see how the panel or Appellate Body could
have made any findings concer ning Article 13. Those DSB recommendations and rulings thus
provide no guidance for purposes of this dispute.

"such measures" and Annex 2 of the Agreement on Agriculture

22. Please explain the difference, if any, between the meaning of "defined" and the meaning
of "fixed" in the phrase "a defined and fixed base period" in paragraph 6(a) of Annex 2
of the Agreement on Agriculture. BRA, USA

49. These terms should be interpreted according to th e customary rules of interpretation of public
international law. The ordinary meaning of “d efined” is “clearly marked, definite” and “set out

precisely.”
21 “Fixed” means “stationary or unchanging in relative position.” 22 Thus, as used in
paragraph 6(a), a “defined and fixed base period” means a base period that is “set out precisely” and
“stationary or unchanging in relative position.” Th at is, the “definite” base period must not be
“changing in relative position”; for example, th e “base period” for purposes of determining “base
acres” for the deficiency payments under the 1990 Ac t was a farm’s average acreage over the three
most recent years23, and so, was not a “fixed” base period but a moving one. On the other hand, US
direct payments satisfy this criterion because eligib ility is determined by historical production of any
of a number of crops (including up land cotton) in a base period that is “definite” (set out in the 2002
Act) and “stationary or unchanging in a relative pos ition” (does not change in relative position for the
duration of the 2002 Act).

23. Please explain the meaning of "a" in "a defined and fixed base period" in paragraph
6(a) of Annex 2 of the Agreement on Agriculture, the meaning of "the" in "the base
period" in paragraphs 6(b), (c) and (d), and the difference between these and the phrase
"based on the years 1986-88" in Annex 3. BRA, USA

50. Paragraph 6(a) establishes that eligibilit y for payments under a decoupled income support
measure shall be determined by clearly-defined criteria in “ a defined and fixed base period.” That is,
paragraph 6(a) does not mandate that any particul ar base period be used for a decoupled income
support measure and does not mandate that the same base period be used for all decoupled income
support measures. This contrasts with the use of the phrase “the base period” in paragraph 9 of Annex
3, which is defined in that same paragraph as “the years 1986 to 1988.”
24

51. Paragraphs 6(b), (c), and (d) use the term “ the base period.” As these subparagraphs all
follow paragraph 6(a), in which eligibility is set in “a” defined and fixed base period, the later
references to “the base period” should be read to refer to the base period used for eligibility under
paragraph 6(a). Again, because paragraph 6(a) do es not mandate that any particular base period be
used (as opposed to paragraph 9 of Annex 3), “the base period” for paragraphs 6(b), (c), and (d) will
be the “defined and fixed base period” used for purposes of eligibility under the decoupled income
support measure. The definite article “the” is commonly used to refer back to a member of a
indefinite set identified by the indefinite article “a.” For example, it would be common grammatically
to say: “A Member may take action if the Member makes the appropriate notification to the WTO.”

24. How often can a Member define and fix a base period in accordance with paragraph 6
of Annex 2 of the Agreement on Agriculture? BRA, USA

52. Paragraph 6 establishes policy-specific criteria applying to a decoupled income support
measure. Under paragraph 6(a), eligibility for paym ents under such a measure shall be determined by
criteria “in a defined and fixed base period.” Other policy-specific criteria under paragraph 6
establish that the amount of payments under a deco upled income support measure shall not be related
to or based on the type or volume of production, the prices, or the factors of production employed in
any year after the base period used for purposes of determining eligibility under paragraph 6(a).

21The New Shorter Oxford English Dictionary, vol. 1, at 618 (1993 ed.).
22The New Shorter Oxford English Dictionary, vol. 1, at 962 (1993 ed.).
23See US First Written Submission, para. 101 n. 92.
24Agriculture Agreement, Annex 3, paragra ph 9 (“The fixed external reference price shall be based on
the years 1986 to 1988 and shall generally be the average f.o.b. unit value for the basic agricultural product
concerned in a net exporting country and the average c.i.f. unit value for the basic agricultural product
concerned in a net importing country in the base period.”) (emphasis added). See also id., Annex 3, paragraph 5
(“The AMS calculated as outlined below for the base period shall constitute the base level for the
implementation of the reduction commitment on domestic support.”) (emphasis added). Appellate Body Report,
Korea - Measures Affecting Imports of Fresh, Chilled and Frozen Beef , WT/DS161/AB/R - WT/DS169/AB/R,
adopted 10 January 2001, paras. 115-16.

Thus, with respect to a decoupled income support measure, the base period used must be “defined and
fixed.”

53. There is no requirement in paragraph 6 that a particular base period be used for a decoupled
income support measure nor that the same base period be used for purposes of every decoupled
income support measure. Thus, so long as the base period for a particular measure is “defined and
fixed,” this element of the policy-specific criteria in paragraph 6 will be met.

54. For purposes of this dispute, the base peri od for US direct payments under the 2002 Act is
defined by the 2002 Act and fixed for the duration of the 2002 Act – that is, for marketing years 2002-
2007. Thus, one “defined and fixed base period” applies for payments under the US direct payment
programme for the six-year period to which the 2002 Act applies.

25. Does the United States consider that there is any ambiguity in the term "type of
production" as used in paragraph 6(b) of Annex 2 of the Agreement on Agriculture?
USA

55. When read according to the customary rules of interpretation of public international law, the
United States does not consider that the meaning of the term “type . . . of production” as used in
paragraph 6(b) is ambiguous or ob scure. This paragraph establishes that the amount of decoupled
income support payments may not be “based on, or linked to, the type or volume of production . . .
undertaken in any year after the base period.” In terpreted according to the ordinary meaning of the
terms, in context, and in light of the object and purpose of the Agriculture Agreement, this provision
means that a decoupled income support measur e may not base or link payments to production
requirements, whether by type or volume.

26. Can the United States confirm Brazil's assert ions in paragraph 174 of its first written
submission that the implementing regulations for direct payments prohibit or limit payments if
base acreage is used for the production of certain crops? If so, can the United States clarify the
statement in paragraph 56 of its first written submission that direct payments are made
regardless of what is currently produced on th ose acres? Can the United States confirm the
same point in relation to production flexibility contracts? USA

56. The 2002 Act allows any commodity or crop to be planted on base acres on a farm for which
direct payments are made with limitations regarding certain commodities. Those commodities are
fruits, vegetables (other than len tils, mung beans, and dry peas), and wild rice. Planting of those
commodities on base acres is prohibited, except: (1) in a region with a history of double-cropping
those commodities with those crops the historical production of which makes acres eligible for direct
payments, double-cropping is permitted; (2) on a farm with a history of planting those commodities,
planting is permitted, and direct pa yments would be reduced for every acre so planted; and (3) for a
producer with a history of planting those commodities, planting is permitted, and direct payments
would be reduced for every acre so planted.
25

57. To be more precise, the third sentence of para graph 56 of the US first submission should have
used the phrase “whether upland cotton” in place of “what.” As the United States has previously
indicated,26 direct payments are not “related to, or based on, the type or volume” of current production

25Farm Security and Rural Investment Act of 2002, § 1106 (“2002 Act”) (Ex. US-1).
26US First Submission, para. 22 (“These [direct] paymen ts are made with respect to farm acreage that
was devoted to agricultural production in the past; the payments, however, are made regardless of whether
upland cotton is currently produced on those acres or whether anything is produced at all.”); id., para. 24 (“As
stated, no current production of upla nd cotton (or any other crop) is required to receive payment – or, put
another way, the payment is the same regardless of how much, or any, upland cotton is produced.”); id., para. 67
(“Not only is there no requirement that a direct payment recipient engage in any particular type or volume of

because there is no requirement that a recipient produce upland cotton or any other crop in order to
receive these payments. Direct payments are made with respect to farm acreage that was devoted to
agricultural production in the past. In its rebu ttal submission, the United States will describe
production flexibility contract payments, which woul d share these characteristics but not others with
direct payments, and explain why production flexibility contract payments are “green box” measures.

29. Please explain the meaning of the words "the fundamental requirement" as used in
paragraph 1 of Annex 2 of the Agreement on Agriculture. USA

58. “Fundamental” means “[s]erving as the base or foundation” and “primary, original; from
which others are derived.”
27 A “requirement” is “[s]omething called for or demanded.” 28 Thus, the
“fundamental requirement” that measures for wh ich exemption from reduction commitments under
Article 6 is claimed must have “no, or at most minimal, trade-distorting effects or effects on
production” is “something called for or demanded” “from which others are derived.”

59. The United States, perhaps in distinction fro m the European Communities, does not view this
“requirement” (“something called for or demanded” ) as merely setting out in hortatory terms the
objective of Annex 2. However, as suggested by the use of the word “fundamental” (“from which
others are derived”) and the structure of Anne x 2 (that is, beginning the second sentence with the
word “accordingly”), compliance with the fundament al requirement of the first sentence will be
demonstrated by conforming to the basic criteria of the second sentence plus the applicable policy-
specific criteria of paragraph 6 through 13. Relevant context supports this interpretation: Articles 6.1,
7.1, and 7.2 refer to measures which are not s ubject to reduction commitments because they qualify
under “the criteria set out in Annex 2.” Article 18.3 requir es a Member to notify “details of the new
or modified measure and its conformity with the agreed criteria as set out either in Article 6 or in
Annex 2.” Annex 2 itself, in describing the policy-specific criteria that must be met under paragraphs
2 and 5, emphasizes that measures must meet the “ basic criteria set out in paragraph 1” rather than
the “fundamental requirement” of that paragraph.

60. The text and context of paragraph 1 is al so confirmed by the object and purpose of the
Agriculture Agreement. Members need to be able to design green box measures with certainty that
these measures will be exempt from reduction commitm ents so that they can meet their binding
commitments on domestic support in furtherance of th e goal of “substantial progressive reductions in
agricultural support . . . sustained over an agreed period of time.”
29 Assessing the conformity of a
claimed green box measure against the “fundamental requirement” of the first sentence in isolation
would be a difficult, if not impossible task, for a Panel. Members foresaw the problem and therefore
provided guidance on how a measure would fulfill th at fundamental requirement – that is, if the
measures “conform to the . . . basic criteria” of the second sentence plus any applicable policy-
specific criteria, they shall be deemed to have met the fundamental requirement of the first sentence of
Annex 2.

30. Do the parties consider that direct p ayments and production flexibility contract
payments meet or met the basic criteria refe rred to in paragraph 1 of Annex 2 of the
Agreement on Agriculture? BRA, USA

61. The “basic criteria” referred to in paragraph 1 of Annex 2 are: (a) the support in question shall
be provided through a publicly-funded government programme (including government revenue

production, a recipient need not engage in any current agricultural pr oduction in order to receive the direct
payment.”); US Opening Statement at the First Panel Meeting, para. 18 (“The payments, however, are made
regardless of whether cotton is currently produced on those acres or whether anything is produced at all.”).
27The New Shorter Oxford English Dictionary, vol. 1, at 1042 (1993 ed.)
28The New Shorter Oxford English Dictionary, vol. 2, at 2557 (1993 ed.)
29Agriculture Agreement, preamble.

foregone) not involving transfers from consumers a nd (b) the support in question shall not have the
effect of providing price support to producers. Direct payments under the 2002 Act meet these basic
criteria, and the expired production flexibility contract payments under the 1996 Act met these criteria
as well.

62. As noted in the US first written submissi on, direct payments under the 2002 Act are support
provided through a publicly-funded government progra mme not involving transfers from consumers.
Under Section 1103 of the 2002 Act, the Secretary of Agriculture “shall make direct payments to
producers on farms [including landowners where no pr oduction occurs] for which payment yields and
base acres are established,” and, under Section 1601 of the Act, the Secretary “shall use the funds,
facilities, and authorities of the Commodity Credit Corporation to carry out this title.” Thus, no
transfers from consumers are involved.
30

63. Direct payments under the 2002 Act also do not have the effect of providing price support to
producers. Direct payments augment the income of persons on farms based on historic acres and
yields. They are not made to support any “applied administered price” for upland cotton (or that for
any other commodity), for example, by increasing upland cotton demand or reducing upland cotton
supply.
31 To-date, Brazil has not contested that US di rect payments satisfy both “basic criteria” under
paragraph 1.

64. As set out in the US answer to Question 15 from the Panel, the expired production flexibility
contract payments are not within the Panel’s terms of reference. Nonetheless, as we shall explain in
more detail in our rebuttal submission, these payments too satisfy the “basic criteria” referred to in
paragraph 1 of Annex 2. Production flexibility contract payments provide support through a publicly-
funded government programme not involving transfers from consumers.
32 In addition, production
flexibility contract payments did not have the effe ct of providing price support to producers; these
payments augmented the income of persons on farms based on historic acres and yields but were not
made to support any “applied administered price” for upland cotton (or that for any other commodity).
Again, Brazil has not contested that US production flexibility contract payments satisfy both “basic
criteria” under paragraph 1.

31. If the first sentence of paragraph 1 of Annex 2 is not a stand-alone obligation, then must
new, non- or minimally trade-distorting measures that do not conform to the criteria
listed in Annex 2 be classified as non-Green Box? BRA, USA

65. As set out in the US answer to Question 29 from the Panel, the United States views the first
sentence of paragraph 1 as an obligation in that it establishes a “fundamental requirement” for green
box measures under Annex 2. This obligation is met when measures conform to the basic criteria of
the second sentence plus the applicable policy-specifi c criteria of paragraphs 6 through 13. If a new
measure does not conform to the basic and applicable policy-specific criteria in Annex 2, it will not
have the benefit of the presumption that it meets the fundamental requirement of the first sentence.

32. If the first sentence of paragraph 1 of Annex 2 expresses a general principle which
informs the interpretation of the criteria in Annex 2, please explain how this affects the
assessment of the direct payments programme's compliance with paragraph 6 of
Annex 2. USA

32Federal Agricultural Improvement Act of 1996, Title I, § 161(a) (“Use of Commodity Credit
Corporation. — The Secretary shall carry out this title through the Commodity Credit Corporation.”); id., Title I,
§ 111 (providing for production flexibility contract payments).

66. As set out in the US answer to Question 29 from the Panel, the United States does not view
the first sentence of paragraph 1 as merely setting out a general principle; according to its term, it
establishes a “fundamental requirement” for green box measures under Annex 2. However, Annex 2
also indicates that measures that conform to th e basic criteria of the second sentence plus the
applicable policy-specific criteria of paragra phs 6 through 13 comply with that fundamental
requirement. Thus, the first sentence of paragraph 1 provides important context for the interpretation
of other provisions of Annex 2.

67. US direct payments satisfy the criteria set out in Annex 2 and therefore comply with the
fundamental requirement of the first sentence of pa ragraph 1. As explained in the US answer to
Question 30, US direct payments satisfy the two basic criteria under the second sentence of paragraph
1. In addition, as set out in the US first written submission,
33 direct payments satisfy the five policy-
specific criteria set out in paragraph 6 of Annex 2 for decoupled income support.

68. The context provided by the first sentence of paragraph 1 indicates that Brazil’s argument
that direct payments do not satisfy paragraph 6(b) because payments are eliminated or reduced if
payment recipients harvest certa in fruits or vegetables is wrong.
34 Brazil’s argument essentially is
that paragraph 6(b) precludes a Member from requiring a recipient not to produce certain crops, rather
than precluding a Member from requiring a recipient to produce certain crops. As indicated above,
however, Brazil’s interpretation leads to a conflic t between paragraph 6(b) and the fundamental
requirement of the first sentence. That is, a m easure that demonstrably meets that fundamental
requirement (there are no trade-distorting effect s or effects on production because production of no
crop is allowed) would be inconsistent with para graph 6(b) (the amount of payment would be based
on the type of production – production of no crops – in a year after the base period). In the context of
the first sentence of paragraph 1, then, paragra ph 6(b) should be read to prevent a Member from
requiring a recipient to produce certain crops. US direct paymen ts do not require a recipient to
produce upland cotton or any other crop in order to receive payment.

"do not grant support to a specific commodity"

33. According to the United States' interpretat ion of the word "grant", when can a Member
claim that a measure is not exempt from action under Article 13(b)? What if the measure is
enacted annually? Can the Member obtain a remedy in respect of that measure under the
DSU? USA

69. The United States has interpreted the word “g rant” according to its ordinary meaning: to
“bestow as a favour” or “give or confer (a possession, a right, etc.) formally.” 35 Because the phrase
“such measures do not grant support to a specific commodity” is expressed in the present tense, we
have explained that this criterion indicates that whether measures currently in effect are exempt from
actions depends upon the support they currently grant.
36 For example, whether payments under the
2002 Act can be challenged in the WTO at this tim e requires an examination of the product-specific
support such measures currently grant (understood to be as of the date of the panel request or panel
establishment), not the support measures granted 1, 2, or 3 years ago. A finding of a Peace Clause
breach by current measures would allow a Member to proceed with an action based on Peace Clause-
specified provisions and potentially obtain remedies with respect to those current subsidies.

70. A Member can make the claim that a measur e is not exempt from action under Article 13(b)
when the Member believes the measures at issue fa il to conform to the Peace Clause, including that
the Member believes the measure provides support in excess of that decided in 1992. It would not

33US First Written Submission, para. 67.
34See also US Answer to Question 25 from the Panel.
35The New Shorter Oxford English Dictionary, vol. 1, at 1131 (fourth & fifth definitions).
36US First Written Submission, paras. 79-81.

matter whether the measure were enacted annually. If there were a finding of a breach of the Peace
Clause, then the complaining party could obtain a remedy in the form of a recommendation to bring
the measure into conformity with the WTO agreements.

71. The issue of when a Member can claim that a measure is not exempt from action highlights
the difficulty in adopting Brazil’s interpretation that only budgetary outlays are relevant to the Peace
Clause comparison. In the case of US domestic support measures, budgetary outlays are not known
ahead of time. Accordingly, Brazil could only provide estimates of marketing year 2002 budgetary
outlays in its first submission, explaining that “the evidence to tabulate the support granted to upland
cotton during MY 2002 is not yet complete as the marketing year does not end until 31 July 2003.”
37
Brazil has not demonstrated that US product-sp ecific budgetary outlays for upland cotton exceeded
marketing year 1992 outlays as of the time of its pa nel request, as of the time of panel establishment,
nor, indeed, as of today.38

72. This problem is not presented when one looks at the support as decided by US domestic
support measures. Because those measures, both in 1992 and today, set a rate of support (72.9 cents
per pound during marketing year 1992; 52 cents per pound during marketing year 2002), the level of
support is known at the outset (or even in advance) of the relevant crop year in which payments are
made, permitting a rapid challenge and perhaps panel findings before a given crop year is over. Thus,
a Member would be able to claim that a current measure is not exempt from action under Article 13(b)
and would be able to obtain a remedy under the DSU.

35. Does a failure by a Member to comply in a given year with either the chapeau of
Article 13(b) or the proviso in subparagraph ( ii) of Article 13(b) impact its entitlement
to benefit in an earlier or a later year from the exemption from action provided by
Article 13(b)? BRA, USA

73. A failure by a Member to comply in a given y ear with either the chapeau of Article 13(b) or
the proviso in subparagraph (ii) of Article 13(b) would only lift the exemption from action for those
measures for the year of that breach. Measures (subs idies) in a later year would remain exempt from
action so long as those measures in the given year comply with the conditions in Article 13(b)(ii).

74. This conclusion flows from the text of the P eace Clause as well as the nature of the subsidies
challenged by Brazil. The universe of measures exempt from actions under Article 13(b)(ii) is
“domestic support measures that conform fully to the provisions of Article 6 of this Agreement
including direct payments that conform to the requ irements of paragraph 5 thereof, as reflected in
each Member's Schedule, as well as domestic support within de minimis levels and in conformity with
paragraph 2 of Article 6.” Because the fundament al commitment under Article 6 is to limit domestic
support as measured by the Current Total Aggregat e Measurement of Support to a Member’s final
bound commitment level, and that commitment is judged on a year-by-year basis
39, a Member may
breach its commitments under Article 6 in one year and come back into compliance in the following
year. Thus, conformity with this element of Article 13 must be judged on a year-by-year basis.

75. The proviso to Article 13 states that such measures shall be exempt from actions “provided
that such measures do not grant support to a specifi c commodity in excess of that decided during the
1992 marketing year.” Thus, with respect to past subsidies (and putting aside the issue of whether
there is a measure that can be challenged under th e DSU), the Peace Clause proviso would require an

38See US Answer to Question 67 from the Panel.
39Agriculture Agreement, Article 6.3 (“A Member sha ll be considered to be in compliance with its
domestic support reduction commitments in any year in which its domestic support in favour of agricultural
producers expressed in terms of Current Total AMS does not exceed the corresponding annual or final bound
commitment level specified in Part IV of the Member's Schedule.”) (emphasis added).

examination of the support those measures were granting as of the time such measures were in
existence. Were the Peace Clause breached in an y particular year, a Member could bring an action
against such measure (subsidy), but only for the y ear of the breach. For example, where subsidies
were provided on a yearly basis, a Member could breach the Peace Clause in one year in which the
support such measures grant is in excess of that d ecided during the 1992 marketing year but could be
in conformity in the following year if support were again within the 1992 marketing year level. Only
the subsidies for the year in which the Peace Clause were breached would not be exempt from actions.

76. Finally, we note that payments under the 2002 Act are recurring subsid ies, expensed in the
crop year to which they apply and superseded by new payments in the following crop year.
40 (So too
were past payments under the expired 1996 Act.) Thus, whether such measures conform fully to
Article 6 and do not grant support in excess of that decided during the 1992 marketing year – that is,
whether such measures are exempt from action unde r Article 13(b) – must be judged on a year-by-
year basis. A breach of the Peace Clause in any particular year would allow a Member to bring an
action against such measures, but only for the year of the breach.

36. Does a failure by a Member to comply wi th Article 13(b) in respect of a specific
commodity impact its entitlement to benefit in respect of other agricultural products
from the exemption from action provided by Article 13(b)? BRA, USA

77. No. For example, were the Panel to find a breach of the Peace Clause because the product-
specific support US measures grant for upland cotton is in excess of that decided during the 1992
marketing year, this would not remove Peace Clause protection for support for soybeans (or any other
commodity). In any subsequent action, a complaining Member would have to demonstrate that the
challenged measures breach the Peace Clause with respect to that commodity and support.

37. In the United States' view, why did the drafters not use the exact term
"product-specific" in Article 13(b)(ii)? USA

78. It is not possible to determine exactly why the drafters of Article 13(b)(ii) did not use the term
“product-specific support” in place of “support to a specific commodity.” Nonetheless, the phrase
“support to a specific commodity” must be interpreted according to its ordinary meaning, in context,
and in light of the object and purpose of the Agreem ent. As the United States has explained, this
phrase means “product-specific support.”
41 We note that while it is no doubt a good drafting rule to
use one and only one term for any given concept in an agreement, the drafters’ failure to follow that
rule does not alter a treaty interpreter’s obligation to interpret under the customary rules of public
international law the words that actually are in the treaty.

79. Further, it is not surprising that this exact phrase is not used in the Peace Clause. The phrase
“product-specific support” is not a defined term to be found in Agriculture Agreement Article 1. Not
surprisingly, then, in different provisions the Agri culture Agreement uses diffe rent words to describe
the concept of product-specific support. For exam ple, in Article 1(a), the basic definition of
product-specific support (although not identified as such) is given as "support . . . provided for an
agricultural product in favour of the producers of the basic agricultural product." In Article 1(h), the
Agreement again refers to product-specific support not by using that term but by using the words
"support for basic agricultural products." 42 None of these references to “product-specific support”
even uses the term “specific” whereas the phrase “support to a specific commodity” contains all three
elements of that phrase (that is, product, speci fic, and support), using “commodity” in place of

40See US Answer to Question 15 from the Panel.
41US First Written Submission, paras. 77-78.
42Similarly, in Annex 3, paragraph 6, the Agreement refers to a "product-specific" AMS not by using
those words but by using the phrase "for each basic agricultural product, a specific AMS shall be established."

“support.”43 The use of the phrase “support to a specific commodity” in the Peace Clause to refer to
“product-specific support” is not remarkable in light of these multiple examples of different words in
the Agreement that describe the same concept.44

38. Given the fact that subsidies available for more than one product could have various
effects on production, how does the United States demarcate between product-specific
support and non-product specific support ? USA

80. The phrase “support to a specific commodity” in the Peace Clause proviso, read according to
its ordinary meaning, in context, and in light of the object and purpose of the Agreement, means
“product-specific support.” The United States finds the demarcation between product-specific and
non-product-specific support in the Agriculture Agreem ent. Specifically, Article 1(a) defines the
universe of support making up the Aggregate Measurement of Support as follows:

“Aggregate Measurement of Support” and “AMS” mean the annual level of support,
expressed in monetary terms, provided for an agricultural product in favour of the
producers of the basic agricultural product or non-product-specific support provided
in favour of agricultural producers in general, other than support provided under
programmes that qualify as exempt from reduction under Annex 2 to this Agreement .
. . (italics added).
Article 1(h), which defines the “Total Aggregate Measurement of Support,”
45 and paragraph 1 of
Annex 3, explaining the calculation of the Aggregate Measurement of Support 46, also distinguish
between product-specific and non-product-specific s upport, without providing additional detail to that
found in Article 1(a).

81. Article 1(a), therefore, provides the b asic demarcation between product-specific and non-
product-specific support; as mentioned at the first pane l meeting, Brazil has not contested this point.
Product-specific support, then, is “support . . . provide d for an agricultural product in favour of the
producers of the basic agricultural product.” This definition contains two elements. First, the support
must be provided “ for an agricultural product ,” which suggests that the subsidy is given “in favour
of”
47 a product and not in respect of criteria not re lated to the product or in respect of multiple
products. Second, such support is “in favour of the producers of the basic agricultural product ,”

43Again, the use of the term “commodity” in place of “product” may result from the unique negotiating
history of the Peace Clause. While the term “product” is used exclusively elsewhere in the Ag reement, in the
course of the Uruguay Round agriculture negotiations, the term “commodity” had been commonly used. See,
e.g., Framework Agreement on Agriculture Reform Programme, Draft Text by the Chairman,
MTN.GNG/NG5/W/170, paras. 3, 5, 6, Annex I (11 July 1990). Despite th e fact that the Peace Clause uses
“commodity” in place of “product,” Br azil has not suggested that “commodity” should be interpreted as
anything other than agricultural "products" subject to the Agreement.
44The United States also notes that under paragraph 1 of Annex 3, non-product-specific support is to be
aggregated into one separate AMS, which supports the notion that non-product-specific support is not to be
allocated to specific products, contrary to what Brazil urges the Panel to do here.
45Agriculture Agreement, Article 1(h) (“‘Total Aggregate Measurement of Support’ and ‘Total AMS’
mean the sum of all domestic support provided in favour of agricultural producers, cal culated as the sum of all
aggregate measurements of support for basic agricultural products , all non-product-specific aggregate
measurements of support and all equivalent measurements of support for agricultural products . . . .”).
46Agriculture Agreement, Annex 3, paragraph 1 (“Subject to the provisions of Article 6, an Aggregate
Measurement of Support (A MS) shall be calculated on a product-specific basis for each basic agricultural
product receiving market price support, non- exempt direct payments, or any other subsidy not exempted from
the reduction commitment (‘other non-exempt policies’). Support which is non-product specific shall be
totalled into one non-product-specific AMS in total monetary terms.” (emphasis added)).
47The New Shorter Oxford English Dictionary , vol. 1, at 996 (1993 ed.) (definition of “for”: “in favour
of”; “[w]ith the purpose or result of benefitting”).

which suggests that subsidy benefits those who produce the product – that is, production is necessary
for the support to be received.

82. Article 1(a) explains non-product-speci fic support as “support provided in favour of
agricultural producers in general.” That is, non- product-specific support is not support provided “for
an agricultural product” and is not support in favour of “the producers of the basic agricultural
product” but rather is support in favour of agricultural producers “generally.”
48 Thus, read according
to its ordinary meaning and in the context of Article 1(a), non-product-specific support is a residual
category of support covering those measures that do not fall within the more detailed criteria set out in
the definition of product-specific support.

83. Finally, we note Brazil’s argument that “[t]he term ‘product-specific’ that the United States
seeks to read into Article 13(b)(ii) has a very tec hnical and particular meaning as set out in Article
6(4), and Annex 3 to the Agreement on Agriculture.” 49 As explained above, while both of these
provisions use the term “product-specific” as well as “non-product-specific,” the Panel will search
these provisions in vain for a “technical and particular meaning” of either of these terms. Brazil fails
to direct the Panel’s attention to the only explan ation of the meaning of those terms, Article 1(a),
perhaps because this explanation of the “technical and particular meaning” of product-specific support
suggests that several of the measures challenged by Brazil provide non-product-specific support and
are not part of the comparison under the Peace Clause proviso.

39. If "such measures" in Article 13(b)(ii) refers to all those in the chapeau of Article 13(b),
why are they not all included in the potential comparisons with 1992? In what
circumstances can measures which grant non- product specific support lose exemption
from action under Articles 5 and 6 of the SCM Agreement and Article XVI of GATT
1994? USA

84. The introductory phrase of Article 13(b) estab lishes the full universe of measures that are
potentially exempt from actions under this provi sion – that is, domestic support measures “that
conform fully to the provisions of Article 6.” Th e phrase “such measures” in Article 13(b)(ii) occurs
in the proviso, and the use of the word “such” re fers back to those measures identified in the
introductory phrase. However, the type of support th at must be compared pursuant to the proviso is
set out by the text of the proviso: the comparison is not between the total (product-specific and non-
product-specific) support provided by all measures that existed in 1992 versus those that exist
currently; rather, the proviso comparison is betw een the “support to a sp ecific commodity” that
challenged measures grant versus that decided during the 1992 marketing year.

85. With respect to Article 13(b), then, the Peac e Clause has two tiers of analysis and effect.
First, non-green box domestic support measures collectiv ely lose Peace Clause protection if they do
not conform fully to the provision of Article 6 – that is, if they exceed a Member’s domestic support
commitment level. Second, even if a Member’s Current Total Aggregate Measurement of Support is
within the reduction commitment, the support to a sp ecific commodity can still lose its Peace Clause
protection if it exceeds the level decided during ma rketing year 1992. This second tier was intended
to prevent a Member from increasing its non-green box support to a specific commodity while staying
within the domestic support commitment level. When a Member has disciplined its product-specific
support, however, by staying within the level decided during the 1992 marketing year (as the
United States has done), it is entitled to the benefit of observing that commitment.

86. Finally, we note that Brazil’s interpretation of the proviso calls for allocating support from all
non-green box measures to an agricultural produc t regardless of whether that support is product-

48 “In general” means “in general terms, generally” and “as a rule, usually.” The New Shorter Oxford
English Dictionary, vol. 1 , at 1073 (1993 ed.).
49Brazil’s Opening Oral Statement at the First Panel Meeting, para. 16.

specific or non-product-specific. This analysis h as no foundation in the Agriculture Agreement. In
fact, Brazil has not followed its own approach through to its logical conclusion: as alluded to by
Question 41 from the Panel, presu mably Brazil could have taken all non-product-specific support
provided by the United States and allocated some por tion of that support to upland cotton producers.
Brazil has not done so, but there is no basis in th e Agreement to distinguish the non-product-specific
support Brazil excluded from the non-product-specific support Brazil included for purposes of its
Peace Clause analysis (for example, counter-cyclical payments and crop insurance). The only basis to
distinguish whether a measure provides “support to a specific commodity” that is found in the
Agriculture Agreement is to rely on the distinc tion between product-specific and non-product-specific
support as explained in Article 1(a).

43. What are the precise differences between deficiency payments and counter-cyclical
payments that lead you to classify the fo rmer as product-specific and the latter as
non-product specific? How do you classify market loss assistance payments? USA

87. As indicated in the US answer to Question 38 from the Panel, Article 1(a) of the Agriculture
Agreement provides the demarcation between product-specific and non-product-specific support. The
definition of product-specific support contains two el ements. First, the support must be provided “ for
an agricultural product ,” which suggests that the subsidy is given in respect of a product and not in
respect of criteria not related to the product or in respect of multiple products. Second, such support
is “in favour of the producers of the basic agricultural product ,” which suggests that subsidy
recipients are those who produce the product – that is, production is necessary for the support to be
received. Non-product-specific support is a r esidual category of “support provided in favour of
agricultural producers in general” – that is, “generally.”

88. In light of these definitions, it follows that deficiency payments under the 1990 Act were
product-specific support whereas counter-cyclical paym ents are non-product-specific. The relevant
differences may be summarized as follows:

Deficiency Payments

Counter-Cyclical Payments

Farmer must plant upland cotton to receive payment

No requirement to plant upland cotton (or any crop)

Payment based on acres “planted for harvest” to
upland cotton in that crop year

Payment based on historical “base acres” irrespective
of acres currently planted to upland cotton

In short, deficiency payments required produc tion of upland cotton whereas counter-cyclical
payments do not. Thus, deficiency payments were support for upland cotton in favour of the
producers of upland cotton.

89. In order to receive a deficiency payment, a producer was required to plant upland cotton for
harvest. The “farm programme payment acreage” for an individual farm – that is, the acres on the
farm for which the producer would receive a deficien cy payment in a given crop year – was defined
as “the smaller of the maximum payment acreage or the acreage planted to the crop on the farm for
harvest within the permitted acreage of the crop of the farm.”
50 That is, a farmer would be paid on the
acres planted to upland cotton for harvest up to the maximum payment acreage. Under the
programme regulations, “crop acreage planted for harvest” was generally defined as “[t]he acreage

507 Code of Federal Regulations § 1413.108(d) (1 Jan. 1993) (emphasis added) (Exhibit US-3); 7 US
Code § 1444-2(c)(1)(B)(i) (1992 Supp.) (4 January 1993) (Exhibit US-5).

harvested.”
51 Thus, in a given crop year, production was required to receive a deficiency payment,
and the amount of the deficiency payment was based on the acreage on which upland cotton was
harvested. Thus, both elements of the definition of product-specific support in Article 1(a) are
satisfied. The deficiency payment was support for an agricultural product in favour of the producers
of the product because recipients had to have plan ted upland cotton for harvest to receive payment in
a given crop year.

90. On the other hand, counter-cyclical paymen ts are decoupled from production requirements.
Counter-cyclical payments are made to persons with farm acres that were devoted to production of
any of a number of crops, including upland cotton, du ring an historical base period. That base period
was defined in the 2002 Act and is fixed for the lif e of the legislation (that is, for marketing years
2002-2007).
52 However, a person with “upland cotto n base acres” need not produce upland cotton
(nor any other particular crop) to receive the count er-cyclical payment. A person with “upland cotton
base acres” also need not produce any crop at all. Thus, counter-cyclical payments do not satisfy the
definition of product-specific support: they are not payments for an agricultural product in favour of
the producers of the product since no production of any product, including upland cotton, need occur
for payment.

91. As indicated in our 1999 WTO domestic support notification (G/AG/N/USA/43), the
United States believes that market loss assi stance payments are non-product-specific amber box
support. As with production flexibility contract payments, market loss assistance payments were
made to persons with farm acres that previously had been devoted to production of certain crops,
including upland cotton, during an historical base period. No production of upland cotton or of any
other crop was required to receive payment, and no production was required at all. Thus, these
payments do not meet the definition of product-specific support in Annex 1(a).

92. However, the United States did notify these payments as amber box because they were made
in response to low prevailing commodity prices. As such, the United States does not consider that
they conform to the criterion in paragraph 6(c) of Annex 2 that the amount of decoupled income
support payments “in any given year shall not be related to, or based on, the prices, domestic or
international, applying to any production undertaken in any year after the base period”. We note that
while Brazil has included market loss assistance pa yments in its Peace Clause comparison, it has not
contested the US position (as evidenced by G/AG/N/USA/43) that these payments are non-product-
specific amber box support.
53

45. If the Panel considered that Step 2 paymen ts paid to exporters were an export subsidy,
would the United States count them as domestic support measures for the purposes of
Article 13(b)? Please verify Brazil's separate data for Step 2 export payments and
Step 2 domestic payments in Exhibit BRA-69 or provide separate data. BRA, USA

517 Code of Federal Regulations § 1413.4(b) (1 Jan. 1993) (Exhibit US-3). Under the 1990 Act, there
were so-called 50-92 provisions, under which a producer could devote part of the maximum payment acreage
(that is, 85 per cent of the established crop acrea ge base less any acreage under an acreage reduction
programme) to conserving uses and s till receive deficiency payments on the acreage. To take advantage of that
provision, the producer was still required to plant upland cotton for harvest on at least 50 per cent of the
maximum payment acreage. 7 US Code § 1444-2(c)(1)(D)(ii) (1992 Supp.) (4 Jan. 1993) (“To be eligible for
payments . . . the producers on a farm must actually plant upland cotton for harvest on at least 50 per cent of the
maximum payment acres for cotton for the farm.”) (Exhibit US-5).
52By way of contrast, under the de ficiency payment program, “base acres” were determined by a
farmer’s yearly upland cotton planting decisions. Base acres were defined as “the average of the acreages
planted and considered planted to such crop for harves t on the farm in each of the 3 crop years preceding such
crop year.” 7 Code of Federal Regulations § 1413.7(c) (1 Jan. 1993) (Exhibit US-3).
53See Brazil’s First Written Submission, paras. 60-62.

93. If the Panel were to conclude that the Step 2 programme and payments made thereunder could
be separated in to domestic and export components, and the export component were deemed to be an
export subsidy, logically, that component would no longer constitute domestic support. Therefore,
that measure would not form part of an analys is under Article 13(b), but rather would fall under
Article 13(c). For data relating to Step 2 payment by fiscal year and use, please see the US answer to
Question 104 from the Panel.

46. What is the relevance, if any, of the concept of "specificity" in Article 2 of the SCM
Agreement and references to "a product" or "subsidized product" in certain provisions
of the SCM Agreement to the meaning of "support to a specific commodity" in
Article 13(b)(ii) Agreement on Agriculture? BRA, USA

94. The concept of specificity in Article 2 of th e Subsidies Agreement is entirely unrelated to the
meaning of “support to a specific commodity” in Ar ticle 13(b)(ii) of the Agreement on Agriculture.
Generally, under Article 2 of the Subsidies Agreement, a subsidy is specific if it is limited, in law or
in fact, to “an enterprise or industry or group of en terprises or industries.” The relevant context for
“support to a specific commodity” is found in Articles 1(a), 1(h), 6.4, and Annex 3 of the Agriculture
Agreement.

"in excess of that decided during the 1992 marketing year"

47. Where does Article 13(b)(ii) require a year-on-year comparison? BRA, USA

95. Please see the US answer to Question 35 fro m the Panel for a reply to this question.

48. Does Article 13(b)(ii) require a comparison of support granted with support decided?
How could such a comparison be made? BRA, USA

96. The proviso to Article 13(b)(ii) requires a comparison of the product-specific support that
challenged measures grant (in this case, for upla nd cotton) to the product-specific support decided
during the 1992 marketing year. The United States agrees with Brazil that the Peace Clause proviso
requires an apples-to-apples comparison. However, while Brazil’s proposed comparison (the
budgetary outlays that may be allocated to a commodity, whether product-specific or non-product-
specific) has no grounding in the text or context of the Peace Clause, the United States believes the
basis for this comparison is established by the use of the word “decided.”

97. The term “decided” is not explicitly defined in the Agreement and is not used elsewhere in
the Agriculture Agreement nor in the Subsidies Agreement to refer to support or subsidies. Members’
unique choice of words must be given meaning. “Decide” means to “[d]etermine on as a settlement,
pronounce in judgement” and “[c]ome to a determination or resolution that, to do, whether .”
54 Thus,
the basis for the comparison under the Peace Clause proviso is the product-specific support that was
“determined” or “pronounced” during the 1992 ma rketing year. US measures “decided” product-
specific support for upland cotton in terms of a ra te of 72.9 cents per pound through the combination
of marketing loans and deficiency payments. Thus, to make an apples-to-apples comparison, this rate
of support must be compared to the rate of support that challenged measures “grant.”

98. Contrary to Brazil’s assertion, the use of the term “grant” does not compel an examination of
budgetary outlays. The ordinary meaning of “grant” is to “bestow as a favour” or “give or confer (a
possession, a right, etc.) formally”.
55 Thus, the use of the term “grant” would permit an evaluation of
the rate of support that challenged measures “give or confer . . . formally”. Brazil’s reference to

54The New Shorter Oxford English Dictionary , vol. 1, at 607 (first and third definitions) (italics in
original).
55The New Shorter Oxford English Dictionary, vol. 1, at 1131 (fourth & fifth definitions).

footnote 55 of the Subsidies Agreement
56 is not pertinent as this is one of several Subsidies
Agreement references to a Member granting a subsidy,57 which differs from the Peace Clause phrase,
“such measures do not grant support”. More importantly, Members did not choose to use the word
“granted” in place of “decided”, and a valid interpretation must make sense of that choice rather than
reading it out of the Agreement. In addition, had Members intended the Peace Clause comparison to
be made solely on the basis of budgetary outlays, they could have used that term. After all,
“budgetary outlays” is a defined term in Article 1(c) and repeatedly referred to in the Agreement.58

99. Thus, the comparison of the product-specific support “decided” during the 1992 marketing
year to the support challenged measures “grant” must be made on the terms established by US
measures themselves. The United States decided to ensure producer support at a rate of 72.9 cents per
pound of upland cotton during the 1992 marketing year. In this case, the comparison presents no
difficulty because the challenged measures also gran t a rate of support (52 cents per pound). Because
the latter is not in excess of the former, challenge d US domestic support measures are exempt from
actions pursuant to Article 13(b)(ii).

50. Please provide any written drafting history which could shed light on why the proviso
was added to what is now Article 13(b)(ii) and, in particular, why both words "grant"
and "decided" were used. USA

100. The United States is not aware of any written drafting history on this point.

51. Could the United States please comment on the interpretation advanced by the EC, in
paragraphs 16 and 18 of its oral statement, of the words "decided during the 1992
marketing year"? USA

101. The United States agrees with parts of the interpretation advanced by the EC. The
Communities too see the use of the term “decided” in the Peace Clause as notable and suggest that it
compels an examination of “an amount of support adopted by some form of decision”. The
Communities argues that a Member cannot be deemed to have “decided” all of the “applications for
support under a particular progra mme” (as is implied by an exam ination of budgetary outlays) and
that the term “decided” cannot “set up a comparis on between domestic support [actually] granted in
1992 and domestic support granted in a more recent period”. The United States agrees with these
statements.

102. The Communities also advance argumentation that may not flow from the ordinary meaning
of the term “decided.” For example, the Commu nities suggests that the term “implies a one-off
decision”, without further explanation. It would appear that the support “decided” during a marketing

56See Subsidies Agreement, fn. 55 ("For a developing country Member not granting export subsidies as
of the date of entry into force of the WTO Agreement, this paragraph shall apply on the basis of the level of
export subsidies granted in 1986.").
57See, e.g., Subsidies Agreement, Article 2.1(c) (“Such f actors are: . . . the manner in which discretion
has been exercised by the granting authority in the decision to grant a subsidy”); id., Article 3.2 (“A Member
shall neither grant nor maintain [prohibited] subsidies referred to in paragraph 1.”); id., Article 4.1 (“Whenever
a Member has reason to believe that a prohibited subsidy is being granted or maintained by another Member,
such Member may request consultations with such other Member.”); id., Article 7.1 (“Except as provided in
Article 13 of the Agreement on Agriculture, whenever a Member has reason to believe 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, such Member may request consultations with such other Member.”); id.,
Article 9.2 (“Upon request for consultations under paragraph 1, the Member granting or maintaining the subsidy
programme in question shall enter into such consultations as quickly as possible.”); id., Article 25.2 (“Members
shall notify any subsidy as defined in paragraph 1 of Article 1, which is specific within the meaning of Article 2,
granted or maintained within their territories.”).
58See Agriculture Agreement, Articles 3.3, 9.2; id., Annex 3, paras. 2, 10, 12, 13; id., Annex 4, para. 2.

year could be made through more than one decision, however. In addition, the Communities suggests
that this decision is one “in which support for a specific product is decided and allocated for future
years.” While it may be that a Member decided support for a future year during the 1992 marketing
year, forming the benchmark for the comparison und er the Peace Clause proviso, it would also appear
likely that a Member decided on a level of support for the marketing year during that marketing year.
Thus, the support decided during the 1992 marketi ng year would not appear to be necessarily limited
to support for future years.

52. Please comment on an interpretation of the words "decided during" in Article 13(b)(ii)
that would read them as synonymous with the words "authorized during". BRA, USA

103. The ordinary meaning of the words “decided during” would be “determined or pronounced
during” or “having come to a determination or resolution that or to do during.” The United States
understands that the term “decided during” was intended to capture not just a decision during 1992 for
1992, but also, as the EC indicates, a decision in 1992 of the support to be granted in a future year, in
particular the EC’s decision during 1992 for future years. The term “authorized during” would not
appear to capture all of these dimensions of the term “decided during”. In fact, a measure could be
“authorized” during 1992 based on a “decision” dur ing an earlier year so the two terms are not
synonymous.

54. Please identify all United States legal a nd regulatory and administrative instruments
decided during the marketing year 1992, with the respective dates of decision, that
decided support for upland cotton. BRA, USA

104. The level of support decided during marketing year 1992 was to ensure a rate of return to
producers of 72.9 cents per pound. Numerous lega l, regulatory, and administrative instruments
“determined” or “pronounced” this support. This level of support was first determined or pronounced
by the 1990 Act, which covered the 1991-1995 marketing years. This legislation stated that “[t]he
established price for upland cotton shall not be less than $0.729 per pound” for deficiency payments
59
and promised to make up the difference between that price and the higher of the (1) marketing loan
rate or (2) market price. The 1990 Act was enacted on 28 November 1990. We note that the
established price was set at “not less than” 72.9 cents per pound; that is, the Secretary of Agriculture
was given some discretion to set the effective pric e so long as this did not fall below 72.9 cents. The
Secretary, in fact, did not decide to alter this effective price prior to, during, or after the 1992
marketing year.

105. The Secretary decided on the marketing loan rate applicable for the 1992 crop via a series of
regulations. A proposed rule was published on 13 September 1991, at 56 Federal Register 46574.
The final decision on a loan rate of 52.35 cents per pound was announced on 31 October 1991,
published on 20 April 1992, at 57 Federal Register 14326.
60 Those determinations applied to all
marketings during marketing year 1992.

106. The United States decided to maintain the eff ective price for deficiency payments and loan
rate for marketing loans at those levels during the 1992 marketing year as reflected in several
published documents. The 1 January 1993, Code of Federal Regulations (Exhibit US-3) codified
these levels of support.
61 The 1992 Supplement to the US Code also codified the legislated effective
price of “not less than” 72.9 cents per pound. In addition, the Department of Agriculture published an
upland cotton fact sheet in September 1992 announcing that “[t]he 1992 target price [for deficiency
payments] is 72.9 cents per pound” and the “1992 loan rate . . . is 52.35 cents per pound”.62

597 US Code § 1444-2(c)(1)(B)(ii) (1992 Supp.) (4 Jan. 1993) (Exhibit US-5).
60Exhibit US-2.
617 Code of Federal Regulations § 1413.104(a) (1 Jan. 1993) (Exhibit US-3).
62US Department of Agriculture, Upland Cotton Fact Sheet, at 2 (September 1992) (Exhibit US-17).

107. Finally, we note that in anticipation of the 1993 crop year the Department of Agriculture also
initially pronounced the level of support for the 1993 crop year during the 1992 marketing year. On
24 March 1993, regulations were published at 58 Federal Regi ster 15755 setting the marketing loan
rate at 52.35 cents per pound and leaving undisturbed th e effective price for deficiency payments at
72.9 cents per pound.
63 Thus, the support decided for the 1993 crop was the same as that decided for
the 1992 crop: to ensure producer support of 72.9 cents per pound of upland cotton.64

55. Please provide a copy of the instrument in which the rate of support for upland cotton
during the marketing year 1992 was decided, indicating the date of the decision. USA

108. As indicated in the US answer to Question 54 from the Panel, the United States has provided
copies of multiple legal, regulatory, and administrative instruments and publications reflecting the rate
of support decided during marketing year 1992. These multiple decisions stem from the fact that an
effective price and marketing loan rate were firs t published in advance of the 1992 marketing year in
order to allow producers to become familiar with the programmes; subsequently, the Secretary of
Agriculture decided not to change either the eff ective price (72.9 cents per pound) or the marketing
loan rate (52.35 cents per pound), despite having the authority to do so.

56. Could the United States please explain how support granted under legislation that dates
back to 1990 can have been support "decided during the marketing year 1992"? USA

109. Payments during the 1992 marketing year we re made pursuant to the 1990 Act, which
directed the Secretary of Agriculture to make mark eting loan payments and deficiency payments (as
well as Step 2 payments). The 1990 Act, however, was only the first decision on the level of support.
The Act provided that the marketing loan rate could “not be reduced below 50 cents per pound”.
65
The 1990 Act also stated that the “established price for upland cotton shall not be less than $0.729 per
pound”.66 Thus, the Secretary had discretion to alter those rates of support.

110. The Secretary decided to set the marketing loan rate at 52.35 cents per pound in April 1992
but also decided not to change the implementin g regulations establishing the effective price for
deficiency payments. Similarly, during the 1992 marketing year, the Secretary had the discretion to
raise the deficiency payment target price above 72.9 cents per pound and to raise the marketing loan
rate above 52.35 cents per pound but decided not to . Documents published during 1992 evidence this
decision: the 1992 supplement to the United States Code published in January 1993 reflects the
decision not to alter the statutory provisions relating to upland cotton rates. The 1993 Code of Federal
Regulations was published in January 1993 and also reflects the decision not to alter the regulatory
rate provisions. Finally, when the upland cotton fact sheet was published in September 1992, the
effective price and marketing loan rate were left unchanged, reflecting the Secretary’s decision not to
change the level of support.

111. In this case, the support determined or pronounced by US measures during the 1992
marketing year was also the support determined or pronounced for the 1992 marketing year. This
result is entirely consistent with the Peace Clause text; in fact, it provides certainty to both Members
seeking to provide support within Peace Clause limi ts and Members seeking to understand whether
the Peace Clause has been breached.

63A proposed rule for the 1993 crop was published on 29 September 1992. The 1993 rates were
announced on 2 November 1992, and published in the 24 March Notice.
64We note that one distinction made by the 24 March 2003 regulations between the 1993 crop and the
1992 crop was that the acreage reduction program percentage was lowered from 10 per cent in 1992 to 7.5 per
cent in 1993.
657 U.S.C. 1444-2(a)(1), (2)(A) (1992 Supp.) (Jan. 4, 1993) (Exhibit US-5).
667 U.S.C. 1444-2(c)(1)(B)(ii) (1992 Supp.) (Jan. 4, 1993) (Exhibit US-5).

112. Thus, the 1990 Act initially established a leve l of support applicable to the 1991-95 crops.
The US Congress could have changed the 72.9 cents per pound level at any time during MY 1992, but
it decided not to. The Secretary of Agriculture also had discretion to alter the level of support (that is,
to raise it) but also decided not to. Thus, 72.9 cents per pound was decided and remained decided as
the level of support for each day of the 1992 marketing year.

57. If the United States decided on a rate of support for MY1992, does that not mean that it
decided on whatever budgetary outlay was required to meet that rate of support, even if
the exact amount was not known at that time? USA

113. The Peace Clause proviso establishes the benc hmark for comparison: the support “decided”
during the 1992 marketing year. To say that the United States “determined” or “pronounced” an
indefinite amount of budgetary outlays would not fi t those meanings of the term. The United States
could also not have come to a “determination or r esolution” to make any budgetary outlay since that
outlay would be determined by market prices during the year, not by the US Government. To read
support “decided” as encompassing not only the explic it rate of support set out in US measures but
also “whatever budgetary outlay was required to meet that rate of support, even if the exact amount
was not known at the time,” would also appear to make the Peace Clause comparison impossible.
That is, because both during the 1992 marketing year and under the 2002 Act the support decided
would be “whatever budgetary outla y was required to meet that ra te of support,” both budgetary
outlay “decisions” by the United States would appear to be unlimited, and one could not be in excess
of the other. Alternatively, one could reason th at a decision to provide whatever budgetary outlays
would be necessary implies that the 1992 decided level would be higher because, even if prices fell to
zero, the higher nominal level in 1992 would mean higher budgetary outlays.

114. The only support “decided” by the United States was the 72.9 cents per pound level of
support. In effect, the United States provided a re venue floor for producers by guaranteeing a rate of
income for plantings. The United States has neve r exceeded that level of incentive “for the
commodity.” Brazil’s approach, which would ascr ibe to the United States a decision to make
budgetary outlays resulting from differences between ma rket prices and the level of support, is an
effort to impose something akin to an AMS lim it on US support for upland cotton. (We note,
however, that Brazil cannot simply argue for cal culating an AMS for upland cotton because that
would exclude non-product-specific support, which Brazil wishes to include in the Peace Clause
comparison, and would not require that support be measured through budgetary outlays.) Members
considered and rejected any product-specific AMS limits in the Uruguay Round, however, and such a
concept may not be overlaid onto the Article 13 language. The United States has introduced
payments decoupled from production precisely to lo wer the incentive to produce the marginal pound
of cotton and avoid exceeding the product-specific level of support of 72.9 cents per pound.

59. Should the rate of support as indicated in Ar ticle 13(b)(ii) include the market price? If
so, why is it appropriate to include it in the comparison under Article 13(b)(ii)? BRA,
USA

115. No, the market price is not relevant fo r purposes of the Peace Clause comparison. As
indicated in the US answers to Questions 48 and 57 from the Panel, the benchmark for that
comparison is the support “decided” during the 1992 marketing year. That support was decided by
the United States as a rate of support: 72.9 cents per pound. The actual amount of expenditures
necessary to provide that support depended on the market prices during the marketing year. However,
these prices were not “determined” or “pronounced ” by the United States and therefore cannot have
been (or be) part of any US decision.

60. Can you provide information on support decided in 1992 and the years with which you
believe it should be compared, on a per s upport programme / per unit of production/per

annum basis? If possible, please specify how, if at all, budget outlays may be transposed
into units of production, and which units of production are best to use. BRA, USA

116. The United States has explained that the product-specific support decided during the 1992
marketing year for upland cotton was 72.9 cents per pound through the combined effect of the target
price for deficiency payments and the loan rate fo r marketing loans. This rate was the only support
“decided” by the United States as evid enced by the relevant legisla tion, regulations, and programme
announcements. By comparison, the product-specifi c support that upland cotton support measures
currently grant is only 52 cents per pound through the loan rate for the marketing loan programme.

117. The United States believes that any analys is that takes budgetary outlays into account
necessarily will not reflect the support “decided” by the United States. Because US domestic support
measures are largely dependent on a price-gap, budge tary outlays will reflect prevailing market prices
during the applicable marketing year, prices the Unite d States cannot decide. Budgetary outlays will
also reflect, for the product-specific support that marketing loans grant, various producer decisions on
programme participation, timing of receipt of paym ents, and production levels. Again, these factors
cannot be decided by the United States. Thus, gi ven the way in which the challenged US measures
decide the level of support, the Peace Clause comparison may only be made on the basis of rates of
support, not budgetary outlays.

61. Does the United States consider that Article 13(b)(ii) permits a comparison on any basis
other than a per pound basis? USA

118. Article 13(b)(ii) requires that the benchmar k for comparison be the support “decided” during
the 1992 marketing year. The United States decided on an a rate of support of 72.9 cents per pound
during the 1992 marketing year. Therefore, the evaluation must be whether challenged measures
grant product-specific support in excess of that decided during the 1992 marketing year – that is, in
excess of the 1992 rate of support. Were the re levant US domestic support measures structured
differently, the term “decided” might imply a different comparison.

66. Could you please comment on the relative m erits of each of the following calculation
methods for the purposes of the comparison of support to upland cotton with 1992,
irrespective of whether a particular measure should be included or excluded:

 (a) Total budgetary outlays (Brazil's approach). USA

119. As stated in the US answer to Question 60 from the Panel, the United States believes that any
analysis that takes budgetary outlays into account necessarily will not reflect the support “decided” by
the United States. Because some US domestic support measures ar e dependent on a price-gap (for
example, marketing loans), budgetary outlays will reflect prevailing market prices during the
applicable marketing year, prices the United States cannot decide. Budgetary outlays will also reflect,
for the product-specific support that marketing loans grant, various producer decisions on programme
participation, timing of receipt of payments, a nd production levels. Again, these factors cannot be
decided by the United States. Thus, given the wa y in which the challenged US measures decide the
level of support, the Peace Clause comparison may only be made with respect to these measures on
the basis of rates of support, not budgetary outlays.

 (b) Budgetary outlays per unit of upland cotton: Could you please calculate and
provide an estimate for the marketing years 1992 and 1999-2002, respectively,
and draw attention to any factors/qualificat ions that the Panel would need to be
aware of. BRA, USA

120. For the reasons stated in response to Questi on 66(a), any analysis involving budgetary outlays
necessarily will not reflect the support “decided” by the United States. A budgetary outlays per unit

of upland cotton approach thus would not only be ba sed on a faulty premise, but to calculate outlays
per unit might also necessitate an ex post or retrospective analysis. Again, this cannot reflect the
support “decided” by the United States.

 (d) Per unit rate of support for upland co tton (Prof. Sumner's approach at the first
session of the first substantive meeting ). USA

121. The United States continues to examine Mr. Sumner’s approach to calculating a per-unit
subsidy rate. We will present a de tailed critique of Mr. Sumner’s analysis in our rebuttal submission.
Here, we limit our comments to two points.

122. First, as with the budgetary outlays approach favoured by Brazil, this per unit rate of support
analysis ascribes to the United States choices made by producers themselves. For example, the first
line of Sumner’s analysis of the deficiency payment programme stated: “The following qualifications
and adjustments must [] be made to the level of support provided by the deficiency payment
programme: (1) payments were made only if a farm chose to participate in the deficiency payment
programme; in 1992, farms representing 11 per cent (1.64 million acres) of the total ‘effective’ upland
cotton acreage base (14.9 million acres) did not agree to participate in the programme and hence
cotton production on this la nd could not receive support.”
67 Sumner makes a similar argument and
adjustment for the 1992 loan rate.68

123. Attempting to adjust the per unit rate of suppor t to take account of producers that chose not to
participate in the programme is a serious conceptu al error. In economic terms, a farmer that
participated in the upland cotton programme receiv ed full programme benefits; a farmer who chose
not to participate did not. Averaging these numbers produces a “per unit rate of support” that no
cotton farmer ever could have expected to receive.

124. Nor could a Member have “decided” such a le vel of support. In lega l terms, an individual
producer’s choices on programme participation do not reflect any decision by the US Government.
Thus, estimated rates of support that reflect these producer decisions are not relevant to the Peace
Clause analysis under Article 13(b)(ii). We will discuss other conceptual errors in Sumner’s approach
in our rebuttal submission.

125. In reviewing Sumner’s analysis, the United St ates was particularly struck by another point.
The Panel may recall Brazil commenting at the first panel meeting that Sumner’s calculations were
not entirely unfavourable to the US position. A look at Appendix Table 1 to Sumner’s statement
(Exhibit BRA-105) reveals why.

126. Even using Sumner’s flawed calculations, if one excludes the non-product-specific support
that Brazil is attempting to “allocate” to upland co tton from the table, Sumner’s analysis supports the
United States, not Brazil. That is, Sumner’s estimated per unit rate of support was lower in every year
from marketing year 1999 through marketing year 2002 than the level of support during marketing
year 1992:

67Exhibit BRA-105 (Statement of Mr. Daniel Sumner, para. 10) (emphasis added).
68Exhibit BRA-105 (Statement of Mr. Daniel Sumner, para. 12).

Product-Specific Support in Sumner’s per Unit Subsidy Rates (Cents per Pound) by Programme and Year

MY1992

MY1999

MY2000

MY2001

MY2001

Marketing Loan

44.34

50.36

50.36

50.36

52.00

Deficiency

13.25

na

na

na

na

Step 2

2.46

2.46

2.46

2.46

3.71

Cottonseed

na

0.97

2.27

na

0.6169

Total

60.05

53.79

55.09

52.82

56.32

127. Thus, even were one to accept for purposes of argument Sumner’s approach, comparing the
product-specific support the challenged measures gran t to the product-specific support decided during
marketing year 1992 reveals that in no marketing year from 1999 through 2002 did the level of
support exceed the marketing year 1992 level . Under Article 13(b)(ii), then, Sumner’s own analysis
reveals that US domestic support measures that c onform fully to the provisions of Article 6 are
exempt from actions based on Peace Clause-specified WTO subsidies provisions.

67. The Panel requests the parties to calculate and submit estimates of the AMS for upland
cotton for marketing years 1992, 1999, 2000, 2001 and 2002. For this purpose the
parties are each requested to submit AMS calculations for upland cotton (using the
budgetary-outlay/non-price gap methodology employed by the United States in respect
of cotton in its DS Notifications (e.g., G/AG/N/USA/43) and using the formats and
supporting tables in document G/AG/2) on the same basis as would be the case in
calculating a product specific AMS for the purposes of the calculation of the "Total
Current AMS" in any year in accordance with the relevant provisions, including as
appropriate Article 1(a), (b) and (h), Article 6 and Annex 3 to the Agreement. BRA,
USA

128. The United States has calculated a product-sp ecific Aggregate Measurement of Support for
upland cotton for marketing years 1992, 1999, 2000, 2001 , and 2002, as explained below. This table
summarizes the results of those calculations, and the following paragraphs provide additional detail:

US Upland Cotton Aggregate Measurement of Support

Marketing Year

AMS (US $, millions)

1992

2,085

1999

2,262

2000

1,057

2001

2,804

69The United States includes the cottonseed amount from the table without prejudice to our preliminary
ruling request that the Panel find the 2003 cottonseed payment not to be within the scope of this dispute.

US Upland Cotton Aggregate Measurement of Support
200270 970

129. For marketing year 1992, the United States has used official data on budgetary outlays 71 to
calculate the upland cotton Aggregate Measurement of Support, except for other product-specific
support in the form of storage payments and inter est subsidies. The latter payment amounts are based
on estimates by the US Department of Agriculture. The calculations, in millions of US dollars, are as
follows:

Crop year 1992 (estimate)

Payments

Source

 Deficiency payments

1,017

US Department of Agriculture (USDA), Upland Cotton
Fact Sheet (Ex. Bra-4)

 Marketing loan gains /
 Certificate exchange gains

476

USDA budget data (Ex. Bra-6)

 Loan deficiency payments

268

USDA budget data (Ex. Bra-76)

 User marketing certificates

207

USDA, Upland Cotton Fact Sheet (Ex. Bra-4)

 Commodity loan forfeit

(5)

USDA estimate

 Other payments

122

USDA estimate of storage payments & interest subsidy

Product-Specific AMS

2,085

130. To calculate the upland cotton Aggregate Measu rement of Support for marketing year 1999,
the United States has used official budgetary outlays data for loan deficiency payments, marketing
loan gains, certificate exchange gains, user ma rketing certificates, and the 1999 crop year cottonseed
payment. For storage payments and interest subsid ies, we have used estimates by the US Department
of Agriculture as notified to the WTO. The calculations, in millions of US dollars, are as follows:

70As explained further below, the United States ha s calculated the 2002 Ag gregate Measurement of
Support for upland cotton as of the date of panel establishment, 18 March 2003.
71In light of the question from the Panel, we have used budgetary outlays to estimate payments.

Crop year 1999

Payments

Source

 Marketing loan gains/
 Certificate exchange gains

860

USDA budget data (Ex. Bra-55)

 Loan deficiency payments

685

USDA, Upland Cotton Fact Sheet (Ex. Bra-4)

 User marketing certificates

422

USDA, Upland Cotton Fact Sheet (Ex. Bra-4)

 Cottonseed payments

79

 Other payments

216

USDA estimate of storage payments & interest subsidy
(G/AG/N/USA/43)

Product-Specific AMS

2,262

131. To calculate the upland cotton Aggregate Measu rement of Support for marketing year 2000,
the United States has again used official budgetary outlays data for loan deficiency payments,
marketing loan gains, certificate exchange gains, and user marketing certificates; the amounts set by
legislation for the 2000 crop year cottonseed paymen ts; and estimates by the US Department of
Agriculture for storage payments and interest subsidies. The calculations are as follows:

Crop year 2000 (estimate)

Payments

Source

 Marketing loan gains

61

USDA budget data (www.fsa.usda.gov/dam/
BUD/estimatesbook.htm)72

 Loan deficiency payments

152

USDA, Upland Cotton Fact Sheet (Ex. Bra-4)

 User marketing certificates

236

USDA, Upland Cotton Fact Sheet (Ex. Bra-4)

 Cottonseed payments

185

Public Law 106-224, § 204(e) (20 June 2000); Public Law
107-25, § 6 (13 Aug. 2001)

 Certificate exchange gains

360

USDA budget data (www.fsa.usda.gov/dam/
BUD/estimatesbook.htm)

 Other payments

63

USDA estimate of storage payments & interest subsidy

Product-Specific AMS

1,057

132. For marketing year 2001, the United States ha s used estimates by the US Department of
Agriculture for storage payments and interest subsid ies and official data on budgetary outlays for all
other payments to calculate the upland cotton Aggr egate Measurement of Support. The calculations,
in millions of US dollars, are as follows:

72Exhibit US-18.

Crop year 2001 (estimate)

Payments

Source

 Marketing loan gains

47

USDA budget data (www.fsa.usda.gov/dam/
BUD/estimatesbook.htm)

 Loan deficiency payments

744

USDA budget data (Ex. Bra-76)

 User marketing certificates

196

USDA, Upland Cotton Fact Sheet (Ex. Bra-4)

 Certificate exchange gains

1,750

USDA budget data (www.fsa.usda.gov/dam/
BUD/estimatesbook.htm)

 Other payments

68

USDA estimate of storage payments & interest subsidy

Product-Specific AMS

2,805

133. For crop year 2002, the United States has provi ded unofficial data on budgetary outlays as of
18 March 2003, the date of establishment of the Pane l, for marketing loan gains, certificate exchange
gains, loan deficiency payments, and user marke ting certificates. Because the crop year has just
ended (as of 31 July 2003), official budgetary outlay data is not yet available. For the 2002 crop year
cottonseed payment, the United States has used the amount set by legislation ($50 million). We use a
crop-year’s-end estimate by the US Department of Agriculture for storage payments and interest
subsidies. The calculation, in millions of US dollars, is as follows:

Crop year 2002 (estimate as
of panel establishment)

Payments

Source

 Marketing loan gains/
 Certificate exchange gains

563

USDA unofficial data (www.fsa.usda.gov/
pscad/answer82rnat.asp (18 March 2003))73

 Loan deficiency payments

202

USDA unofficial data (www.fsa.usda.gov/
pscad/answer82rnat.asp (18 March 2003))

 User marketing certificates

137

USDA unofficial data

 Other payments

68

USDA estimate of storage payments & interest subsidy

Product-Specific AMS

970

134. We note that it would not be appropriate for the Panel to examine payments made after the
date of panel establishment, on which the Panel’s terms of reference were set. Measures taken after
the Panel was established cannot be within the Panel’ s terms of reference. However, for the Panel’s
convenience, we have also estimated an Aggregat e Measurement of Support for the entire crop year
2002, using US Department of Agriculture projections of all payments with respect to the 2002 crop

73See Exhibit US-19 (Marketing Year 2002 Loan De ficiency Payment and Pr ice Support Cumulative
Activity As of 3/12/2003). Upland cotton data is shown in the row marked “UP.” The loan deficiency payment
amount is shown in the third column, and the marketing loan gain and certificate exchange gain amounts are
shown in the eighth column (second from left). This Report, the PSL-82R, provides weekly, unofficial data.
Brazil provided the same report as Bra-55 but chose to present the report with data as of 13 June 2003.

year. These projections show no dramatic change from the unofficial budgetary outlays as of
18 March. The full-year 2002 crop year estimate, in millions of US dollars, is as follows:

Crop year 2002 (full-year
estimate)

Payments

Source

 Marketing loan gains

11

USDA estimate (www.fsa.usda.gov/dam/BUD/estimatesbook.htm)74

 Loan deficiency payments

206

USDA estimate (www.fsa.usda.gov/dam/BUD/estimatesbook.htm)

 User marketing certificates

217

USDA estimate (www.fsa.usda.gov/dam/ BUD/estimatesbook.htm)

 Cottonseed payments

50

Public Law 108-7, § 206 (24 Feb. 2003)

 Certificate exchange gains

701

USDA estimate (www.fsa.usda.gov/dam/BUD/estimatesbook.htm)

 Other payments

65
USDA estimate of storage payments & interest subsidy

Product-Specific AMS

1,250

68. Could you please clarify the result of the calc ulations of, and the meaning of the title, in
Appendix Table 1 "Estimated per unit Subs idy Rates by Programme and Year" in
Annex 2 to Exhibit BRA-105, page 12. Why are the numbers calculated for marketing
loans considered to be subsidies? Could the Panel, for example, read the "total level of
support" (bottom line of the table) as the effective support price for upland cotton or the
maximum rate of support for upland cotton? BRA, USA

135. The United States looks forward to reviewing Br azil’s explanation of its Appendix Table 1 to
Annex 2 to Exhibit BRA-105.

69. Can the United States confirm that the "mar keting year" for upland cotton is 1 August
to 31 July ? Can the United States confirm the Panel's understanding that USDA data
for the "crop year" corresponds to the "marketing year"? USA

136. The United States confirms that the "marke ting year" for upland cotton is 1 August to
31 July.
75 In response to a question from the Panel at the first meeting, we also communicate that
payments listed in the Upland Cotton Fact Sheet (Ex. Bra-4) are for monies spent with respect to
cotton harvested in a particular crop year, not n ecessarily for payments made during the marketing
year.

EXPORT CREDIT GUARANTEE PROGRAMMES

71. (a) Is an export credit guarantee a financia l contribution in the form of a "potential
direct transfer of funds or liabilities (e.g. loan guarantee)" within the meaning of
Article 1.1(a)(1)(i) of the SCM Agreement? Why or why not? Does it confer a
benefit within the meaning of Article 1.1(b)? Why or why not? If so, to whom?
USA

74Exhibit US-19.
757 Code of Federal Regulations 1412.103.

 (b) How, if at all, would these elements be relevant to the claims of Brazil, and the
United States response thereto? BRA, USA

137. (a) For the reasons stated in its first written submission 76 and in response to Question 71(b),
the United States does not believe that the appropria te analysis of the US export credit guarantee
programme should begin with the Subsidies Agreement, much less Article 1of that Agreement. The
text of Article 10.2 defers WTO obligations for export credit guarantees until disciplines are
internationally agreed, such as within the OECD or WTO. Under the Agriculture Agreement, the
provisions of the Subsidies Agreement “apply s ubject to the provisions of this Agreement,” 77 and the
export subsidy disciplines of Article 3.1(a) of the Subsidies Agreement expressly apply “[e]xcept as
provided in the Agreement on Agriculture.” 78 Thus, the appropriate analysis would begin and end
with Agriculture Agreement Article 10.2.

138. Even were the Subsidies Agreement relevant to US export credit guarantees, given that export
credit guarantees are covered by item (j) of the Illust rative List of Export Subsidies, the appropriate
mode of analysis under the Subsidies Agreement is to examine whether the programme is covering its
long-term operating costs and losses.

139. (b) Article 3 of the SCM Agreement specifica lly states that Article 3.1(a), prohibiting export
subsidies, applies “[e]xcept as provided in the Ag reement on Agriculture”. Article 21.1 of the
Agriculture Agreement states that “[t]he provisi ons of GATT 1994 and of other Multilateral Trade
Agreements in Annex 1A to the WTO Agreement sh all apply subject to the provisions of this
Agreement”. Under Article 10.2 of the Agreem ent on Agriculture, the negotiators specifically
deferred the application of e xport subsidy disciplines on agricultural export credit guarantee
programmes like those of the United States. Any incidental “benefit” of any such measures is
therefore irrelevant. Similarly, even if a pa rticular (non-export credit) measure comprised a
contribution and conferred a bene fit for purposes of the Subsidies Agreement, to the extent the
resulting subsidy was contingent on export perform ance, such export subsidy might nevertheless be
permitted under the Agreement on Agriculture if within a Member’s applicable reduction
commitment.

73. The Panel could arguably take the view that Articles 1 and 3 of the SCM Agreement
were relevant in assessing the WTO-consistency of United States export credit
guarantees. The United States has yet to submit any evidence or argumentation on this
point, either as potential co ntext for interpretation of the terms in Article 10 of the
Agreement on Agriculture or in relation to Brazil's claims under the SCM Agreement.
The Panel would therefore appreciate United St ates views in respect of this situation,
and invites the United States to submit relevant argumentation and evidence. USA

140. The United States does not believe that Braz il has submitted evidence and argumentation that
would establish a prima facie case in favour of Brazil’s claims, in particular in light of Article 10.2 of
the Agriculture Agreement. However, the Unite d States will review Brazil’s submissions, including
its responses to these questions, and provide any further response in the US submission.

74. If the Panel decides to refer to provisi ons of the SCM Agreement for contextual
guidance in the interpretation of the terms in Article 10 of the Agreement on
Agriculture, should the Panel refer to item (j) or Articles 1 and 3 of the SCM Agreement
or both? BRA, USA

76US First Written Submission, paras. 167-170.
77Agriculture Agreement, Article 21.1.
78Subsidies Agreement, Article 3.1.

141. As the United States has argued, the first point of analysis is Article 10.2 of the Agreement on
Agriculture, in which Members agreed that they would only provide expo rt credit guarantees in
conformity with internationally agreed disciplin es, which they undertook to develop. That is,
Article 10.2 indicates that no “internationally agreed disciplines” currently exist. The obligation with
respect to export credit guarantees is, in effect, a work programme to establish a future discipline.
Brazil has not contested that challenged US expor t credit guarantee programmes are within the scope
of Article 10.2. Therefore, neither item (j) nor Articles 1 and 3 of the Subsidies Agreement are
relevant to the Panel’s analysis of Article 10.2. We do note, however, that item (j) of the Illustrative
List of Export Subsidies was agreed in the Uruguay Round, and, in fact, had previously formed part of
the Illustrative List under the Tokyo Round Subsidies Code. Thus, the fact that Members had agreed
on item (j) and yet, in Article 10.2, agreed to “undertake to work toward the development of
internationally agreed disciplines to govern the pr ovision of export credits, export credit guarantees”
and, once agreed, only to provide export credit guarantee programmes “in conformity with” such
developed and agreed disciplines, suggests that item (j) does not impose disciplines on export credit
guarantees for agricultural goods.

142. Context for Article 10 is found in Article 9.1 of the Agreement on Agriculture, which
describes specific practices that constitute e xport subsidies for purposes of the Agreement on
Agriculture. Export credit guarantees were not lis ted among such practices. As to the practices
described in Article 9.1, no recourse is necessary to Articles 1 and 3 of the SCM Agreement to
determine whether a particular practice is an expo rt subsidy. Article 1(e) of the Agreement on
Agriculture defines an export subsidy only as a subsidy contingent on export performance. To
determine the applicability of Article 10.1 to a par ticular measure not described in Article 9.1 first
requires a determination whether a subsidy exists. In this regard, Article 1of the SCM Agreement
would provide relevant context.

75. The Panel's attention has been drawn to Ar ticle 14(c) of the SCM Agreement (see e.g.
written third party submission of Canada) and to the panel report in DS 222 Canada-
Export Credits and Loan Guarantees. How an d to what extent are Article 14(c) of the
SCM Agreement, and the cited panel report, relevant to the issue of whether or not the
United States export credit guarantee programmes confer a "benefit"? What would be
the appropriate market benchmark to use for any comparison? Please cite any other
relevant material. BRA, USA

143. For reasons set out in more detail in the US answer to Question 71(b) and Question 71(c)
from the Panel, the United States does not believe that Article 14(c) is relevant to the Panel’s analysis.
An appropriate analysis of the US export cr edit guarantee programme begins and ends with
Article 10.2 of the Agreement on Agriculture. Even were the Subsidies Agreement relevant to US
export credit guarantees, the only appropriate mode of analysis under the Subsidies Agreement is to
examine whether US export credit guarantee programmes are covering their long-term operating costs
and losses under item (j) of the Illustrative List of Export Subsidies.

76. How does the United States respond to Braz il's statement that : "...export credit
guarantees for exports of agricultural export s [sic] are not available on the marketplace
by commercial lenders."? USA

144. Brazil is incorrect. Commercial insurers do offer export credit insurance covering agricultural
commodities. According to a background paper on export credits prepared by the WTO Secretariat,
“While guarantees could be unconditional, they usually have conditions attached to them, so that in
practice there is little distinction between credits which are guaranteed and credits which are subject
to insurance.”
79 However, for the sake of completeness we wi sh to note that such private insurance is
structured differently than CCC credit guarantees. Most commonly, private insurers offer portfolio

79See Export Credits and Related Facilities, G/AG/NG/S/13 (26 June 2000).

coverage, covering multiple customers and transac tions for a particular exporter. Because the
coverage is not based on individual transactions (like CCC’s coverage), it may be difficult or
impossible to discern which particular transactions involve agricultural commodities.

77. How does the United States interpretation of "long term operating costs and losses" in
item (j) as claims paid give meaning to bo th "costs" and "losses"? Do claims paid
represent "losses" or "costs" or both? If cl aims paid is represented by "losses", what
would go into the "cost" element of item (j)? Could the United States expand on why it
disagrees with the items which Brazil identifi es for inclusion in the examination to be
conducted under item (j)? USA

145. Item (j) applies to three different typ es of programmes: export credits, export credit
guarantees, and insurance. In the case of the la tter two types of programmes, the provider will
necessarily incur claims from time to time. In th e case of direct export credits (the first type of
programme), the provider will experience defaults on o ccasion. To the extent such claims or defaults
exceed revenue from whatever source it may be deri ved, the net result would be a loss arising from
operations. In an accounting sense such result would constitute an "operating loss."

146. In addition, it is appropriate to identif y and allocate costs necessary to operate such
programmes. For example, the Unite d States agrees that certain administrative expenses should be
allocated to the operation of the export credit guarantee programmes, a nd an annual figure is
attributed as administrative expense in the budget of the United States. Other costs necessary for the
operation of a programme would constitute "operating costs" of such programme.

147. Were item (j) to be relevant in this dispute, therefore, that item compels an examination of
losses derived from the operation of the programme plus the costs necessarily allocable to the
programme for its operation. In the case of US export credit guarantee programmes, as reflected in
paragraph 173 and accompanying tables of the US first written submission, the Commodity Credit
Corporation (CCC) charges and receives premiums from applicants. In addition, CCC receives
post-claim revenue through late payments and rescheduling. As reflected in the tables, with respect to
cotton, such revenue exceeds the relevant claims experience. The United States has, therefore, not
incurred an operating loss.

148. It is appropriate to allocate operating costs of the programme in the final analysis within the
meaning of item (j). The United States disagrees, however, with the allega tion of Brazil concerning
interest allocation and the manner in which it attempts to ascribe figures from the US budget to
operating costs for purposes of item (j). These items are addressed specifically in the US response to
Question 81 from the Panel.

78. Can the United States provide supporting documentation for data used relating to
"costs and losses" in paragraph 173? Could the United States confirm that the figures
cited in paragraph 173 of its first written submission relate to the SCGP? Why did the
United States cite these figures after stating that it is not possible to make any
assessment of the long-term operating costs and losses of this programme? USA

149. The United States maintains a comprehensive electronic data base of export credit guarantee
programme activity. The data base is updated on a regular basis and is the source of the data shown in
paragraph 173 and accompanying table. Data is r ecorded in the system at the time of each
transaction. These include such items as claim pa yments, recoveries, rescheduling agreements, and
fees received.

150. As indicated in the tables accompanying pa ragraph 173, the figures s hown in paragraph 173
relate to GSM-102 in the first table and SCGP in the second table. During the ten fiscal years
reflected in the tables, no GSM-103 export credit guarantees were issued with respect to cotton.

79. In respect of what time periods does Arti cle 13(c) require an assessment of conformity
with Part V of the Agreement on Agriculture? How does this affect, if at all, your
interpretation of Article 13(b)? BRA, USA

151. Article 13(c) applies to “export subsidies that c onform fully to the provisions of Part V of th[e
Agriculture] Agreement, as reflected in each Member 's Schedule.” Part V of the Agreement, and in
particular Article 8, establishes that “Each Me mber undertakes not to provide export subsidies
otherwise than in conformity with this Agreemen t and with the commitments as specified in that
Member's Schedule.” Those export subsidy redu ction commitments, which are expressed in both
export quantity and budgetary outlay terms, apply on a yearly basis.
80 Accordingly, a Member may
be in conformity one year and not in conformity in another with regard to any particular commodity
subject to reduction commitments.

152. If a Member has provided export subsidies to a particular commodity in any one year in
excess of the applicable reduction commitments, th en export subsidies for that commodity during
such year would not “conform fully to the provisions of Part V”, and those subsidies would not have
Peace Clause protection. In a subsequent year, a Member may again comply with its export subsidy
commitments. Its export subsidies would then conf orm fully to Part V of the Agreement and would
again receive Peace Clause protection.

153. Similarly, a failure by a Member to comply in a given year with the criteria in Article 13(b)
would lift the exemption from action for those dom estic support measures only for the year of the
breach. Measures (subsidies) in a later year would remain exempt from action so long as those
measures in the given year comply with the conditi ons in Article 13(b)(ii). This conclusion flows
from the text of the Peace Clau se (measures must conform to Article 6, and Members’ final bound
commitment levels are expressed in yearly terms) as well as the nature of the subsidies challenged by
Brazil (recurring subsidies that are provided yearly and expensed in the year given). For further
explanation of the US interpretation of Article 13(b), please see the US answers to Questions 33 and
35 from the Panel.

81. How does the United States respond to th e following in Brazil's oral statement: USA

 (a) paragraph 122 (rescheduled guarantees)

154. Brazil is correct to assert "debt rescheduli ng does not involve any reduction in the value of
outstanding debt". A rescheduling does not involve de bt forgiveness. As reflected in the terms of the
various rescheduling agreements, outstanding inter est is capitalized, and interest accrues on such
capitalized interest as well as on outstanding principal. Further, the United States expects to recover
in full pursuant to such rescheduling.

155. Therefore, from an accounting perspective, rescheduled amounts are counted as receivables,
not losses, and are reflected as such in paragraph 173 of the US First Written Submission. Contrary to
the assertion of Brazil, the United States does in fa ct collect on the rescheduling. The history of
rescheduled Commodity Credit Corporation (CCC) export credit guarantee claims over the long-term
(the 10-year period 1993-2002) c onfirms this position. All rescheduled claims are currently
performing. In other words, all payments due up to this point under these agreements have been
received.

80With the exception of Agriculture Agreement Article 9.2(b), which is no longer applicable.

 (c) paragraphs 125 ff. (guaranteed loan subsidy) 81

156. The Credit Reform Act of 1990 establishes the procedures and parameters for US credit and
credit guarantee programmes. In accordance with the provisions of that Act, the budgeting and
accounting for US credit programmes, including the CCC export credit guarantee programmes, are
based on the estimated lifetime costs to the Federal Government of making the credit available. In the
case of credit guarantees, those costs are based on estimated payments by the Government to cover
defaults and delinquencies, interest subsidies, and other requirements, and payments to the
Government, including origination and other fees, penalties, and recoveries.

157. In presenting the annual budget, the subs idy costs of the programme reflect an estimate of the
long-term costs to the Government. This estimate reflects various assumptions regarding credit risk,
interest costs, and other factors that will apply over the lifetime period of the credit. At the time the
budget is prepared, these costs are presented as estimates as of the date the budget is prepared – that
is, they are a snapshot of the estimated costs. In fact, Brazil acknowledges in paragraph 125 of its oral
statement that the "guaranteed loan subsidy" entry in the annual US budget is an estimate of the cost
of the guarantees projected to be issued.

158. A fundamental tenet of credit reform accounti ng is the requirement that the performance of
the credit be tracked over its lifetime. This is accomplished by tracking each cohort of credit until the
credit period has expired or lapsed. A cohort consists of all transactions associated with each type of
guarantee issued during a particular year – for example, all guarantees issued during fiscal year 2002
comprise a distinct cohort.

159. Activity (disbursement, repayment, claims, et c.) occurs within a given cohort over the life of
all guarantees that were disbursed against that cohor t. To view the data and activity strictly on an
annual basis and not by cohort limits the utility of th e data and distorts the costs of the programme.
Not until the cohort is closed can one make an assess ment as to whether or not that particular cohort
represents a cost to the Federal Government.

160. All cohorts for the CCC export credit gua rantee programmes under cr edit reform are still
open although cohorts for 1994 and 1995 should close this year. At present, the 1994 cohort has a
total net downward subsidy re-estim ate of $116 million. The original subsidy cost estimate for the
1994 programme was $123 million; thus, applying the downward re-estimate, the net cost of the
programme to the US Government is currently pr ojected at $7 million. The 1995 cohort has a total
net downward subsidy re-estimate of $149 million, versus an orig inal subsidy estimate of $113
million. Thus, the net cost of the 1995 programme is a receipt of $36 million to the US Government.
For 1994 and 1995 together, the total net receipt to the US Government is $29 million.

161. The experience of 1994 and 1995 is viewed as representative of the costs of the CCC export
credit programmes generally, and it is expected that, once the cohorts for other years of credit activity
are closed, they will follow closely the experience of the 1994 and 1995 programmes.

 (d) paragraphs 127-129 (re-estimates, etc.)

162. As discussed in response to Question 81( c), it is necessary to understand the difference
between activity that occurs on a fiscal year basi s as opposed to the estimates and re-estimates of
subsidy that calculate net present value over th e life of the programme. Although estimates and
re-estimates are made annually for each cohort, these include both actual data to date and estimates of
future activity for the remainder of the life of the cohort.

81The US answer to Question 81(b) follows the answer 81(d), which discusses budget re-estimates.

163. With the exception of 2002, all cohorts for annual export credit programming since the
inception of credit reform accounting in 1992, have a cumulative downward re-estimate. The net total
for all cohorts for guarantees issued since 1992 cu rrently stands at a downward re-estimate of
$1.9 billion. This experience with re-estimates indicates that performance under the programme has
been better than originally project ed and that the original cost es timates for those programming years
as presented in the annual US budget were too high. This experience also demonstrates that the
assertion by Brazil at paragraph 129 of its oral statement that the original estimate of "guaranteed loan
subsidy" line in the budget is an "ideal basis" for determining the costs of the programme is in error.
Those estimates will be re-estimated on an annu al basis until each cohort is closed and, as
demonstrated above, to date the re-estimates for each cohort on a net b asis have been almost
exclusively downward.

 (b) paragraph 123 (interest on debt to Treasury)

164. Under the guidelines for credit reform budgetin g as established in the Credit Reform Act of
1990, there are two kinds of interest calculations that affect the CCC export guarantee programmes.
These calculations are "snapshots" in time and w ill change annually for a cohort until the cohort has
closed. Therefore, any one number shown in the bu dget for a given year is an estimate. The actual
cost of the programme can be determined only when all financial activity for the cohort is completed.

165. An interest rate re-estimate is a component of the annual re-estimates of a cohort, which are
made for as long as the guarantees are outstanding. The interest rate re-estimate calculates the
difference between the estimated interest at th e time the guarantee programme was budgeted and the
actual interest at the time the guarantee is disbursed. If the actual interest is higher, the additional cost
is shown in the programme account as a re-estimate. It should be noted that this cost would change
with subsequent re-estimates in future years depending on the timing of the guarantee disbursement.

166. Interest on borrowings occurs in the financ ing account only if additional funds beyond those
budgeted for a cohort is needed to pay claims. Agai n, these costs will vary from year to year as
borrowings with a particular cohort change and the interest rate varies.

167. It is important to understand that should any in terest on borrowings occur, they would be fully
reflected in the costs attributed to the individual cohort. Thus, as the costs of the cohort are adjusted
during the period it is active, any costs associated with the interest on borrowings are fully reflected in
the programme costs. It is, therefore, incorrect to state as Brazil asserts in paragraph 123 that those
payments are not fully reflected in the ope rating costs of the CCC export credit guarantee
programmes.

 (e) Exhibits BRA-125-127

168. Exhibits BRA-125-127 are pages from th e Budget Estimates for the United States
Government for fiscal years 1994, 1995, and 2004. These particular pages show one aspect of the
budgeting for the CCC export credit guarantee progra mmes, the Export Loans Programme Account.
In and of themselves, they do not reflect all aspects of the budgeting and financing transactions for the
programmes. For example, Exhibit 127 for the fi scal year 2004 budget estimates excludes the Export
Guarantee Financing Account, which appears on th e following page. The data presented in the
financing account is important because it presen ts information on both downward and upward
re-estimates for the programme.

 (f) the chart on page 53 of Brazil's oral statement at the first session of the first
Panel meeting relating to "Guaranteed Loan Subsidy and Administrative
Expenses of US Export Credit Guar antee Programmes GSM-102 GSM 103 and
SCGP"?

169. The table on page 53 of Brazil's oral statemen t at the first panel meeting presents information
on budget estimates for the CCC export credit progr ammes for fiscal years 1992 through 2004. The
data presented in the table are correct. However, as discussed previously in the answers to questions
81(c) and 81(d) above, the "guaranteed loan subsidy" is a snapshot estimate of the lifetime costs of the
guarantees issued during the course of a given fiscal year. As the cohorts for those guarantees are
reviewed annually over their lifetime, those estimates will change and, until the cohorts are closed
out, the estimated costs of the programmes are simply that, estimates. Accordingly, Brazil is incorrect
in asserting in paragraph 132 of its oral statement that, because the guaranteed loan subsidy line of the
annual budget has always reflected a positive net present value, that fact indicates the programmes are
"extending a subsidy to borrowers". That statemen t misinterprets and misrepresents the information
presented in the budget.

170. In addition, Brazil makes a statement in para graph 131 of its oral presentation with regard to
the table on page 53 that likewise is incorrect. Brazil asserts that the column heading in the budget for
the last completed fiscal year represents "actual" co sts for the programme for that particular year. In
fact, the numbers appearing in that colu mn simply represent the latest, revised estimate of the costs of
the programme for the fiscal year just completed. The estimate of those costs will change over the
lifetime of the credit as the cohort for that year is tr acked. The term "actual" is used in the column
because the revised estimate is based on an actual level of guarantees issued by CCC during the year
just completed.

171. Frequently, the level of guarantees issued by CCC in any given year is less than the level
projected in the original budget for that year. In the case of the 2002 budget that was released in
February 2001, it projected that $3.9 billion of guarantees would be issued by CCC during that year.
However, only $3.4 billion of guarantees were actually issued. Thus, the estimate of programme costs
in 2002 column of the 2004 budget has been revised to reflect that actual level of activity.
Nevertheless, the cost presented in the column rema ins an estimate, and the estimate will continue to
be revised as long as the cohort for 2002 remains active.

172. With respect to the "administrative expenses" that are displayed in the table on page 53 of
Brazil's oral statement, the United States has noted elsewhere that those are imputed costs ascribed to
the operation of the CCC export credit programmes as a whole.

 (g) In respect of (a)-(f) above, how and to what extent do the information and data
presented for the export guarantee programmes concerning "programme" and
"financing", "summary of loan levels", "subsidy budget authority", "outlay
levels", etc., in particular in Exhibi ts BRA-125-127, reflect "actual costs and
losses" of the GSM-102, GSM-102 and SCGP export credit guarantee
programmes (see e.g. Brazil's closing oral statement at the first session of the
first substantive meeting, paragraph 24)? USA

173. The closing oral statement of Brazil at the fi rst session of the first substantive meeting of the
Panel, and paragraph 24 in particular, display a fundamental misunderstanding of the budget and
accounting for the CCC export credit programmes. Contrary to what is asserted in that paragraph, the
information presented in the annual budget of the Un ited States does in fact represent estimates of the
lifetime costs of the programmes. Those estimates are being revi sed annually to reflect actual
performance and, until the cohorts for the annual pr ogrammes have been clos ed out, the actual costs
cannot be determined definitively. However, as demonstrated in response to Question 81(d), the

re-estimates thus far have resulted in a net reduc tion in the estimated costs of these programmes of
over $1.9 billion since the inception of credit reform budgeting in fiscal year 1992.

174. Further, as discussed in response to Question 81(c), the combined net costs of the cohorts
associated with the 1994 and 1995 guarantee programmes, which are expected to close this year, are a
receipt of $29 million to the Federal Government. Based on those results, the Brazilian claim in
paragraph 24 that "operating costs and losses for GSM 102, GSM 103, and SCGP have outpaced
premiums collected in every single year since the United States started applying the formula in 1992"
is not supportable.

82. Please explain each of the following statemen ts and any possible significance it may have
in respect of Brazil's claims about GS M-102 and GSM-103 (7 CFR 1493.10(a)(2),
Exhibit BRA-38): BRA, USA

 (a) "The programmes operate in cases where credit is necessary to increase or
maintain US exports to a foreign mark et and where US financial institutions
would be unwilling to provide financing without CCC's guarantee. (7 CFR
1493.10(a)(2), Exhibit BRA-38)

175. The export credit guarantee programmes are ge nerally made available in connection with
middle-tier economies in which liquidity is constricted. In such cases, cash sales for all suppliers are
not occurring readily. US financial institutions may face requirements regarding loan-loss reserves
that impede their ability to lend.

 (b) "The programmes are operated in a manner intended not to interfere with
markets for cash sales. The programm es are targeted towa rd those countries
where the guarantee is necessary to secu re financing of the exports but which
have sufficient financial strength so that foreign exchange will be available for
scheduled payments." (7 CFR 1493.10(a)(2) Exhibit BRA-38)

176. The export credit guarantee programmes are inte nded to operate and indeed are applied in a
manner not to displace cash sales. As liquidity improves in certain countries, the use of the
programme recedes. This explains, in part, the dramatic reduction in US export credit guarantees
since the years immediately preceding the inception of the WTO Agreement.

177. The following table shows the dollar value of guarantees provided by the United States in US
fiscal years 1992-1994, along with the average value of guarantees for fiscal years 1995 - 2002:

Fiscal Year(s)

Guarantee Value (Millions of USD)

1992

$5,671.8

1993

$3,853.7

1994

$3,177.4

1995 - 2002

$3,061.9

 (c) "In providing this credit guarant ee facility, CCC seeks to expand market
opportunities for US agricultural expo rters and assist long-term market

development for US agricultural commodities." (7 CFR 1493.10(a)(2) Exhibit
BRA-38)

178. Although the goal of the export credit guarantee programmes is to expand market
opportunities, such goal alone has no bearing on th e proper characterization of the programmes, the
measures in dispute, or the conformity of the application of such programmes with the WTO
obligations of the United States. Moreover, the Unit ed States is statutorily compelled to be mindful
not to provide any such guarantees in connection w ith any country that the Secretary of Agriculture
determines cannot adequately service the debt associat ed with such sales, nor does the United States
provide guarantees in connection with any foreign ba nk that it has not approved and with respect to
which it has not established an exposure limit.

84. Is the Panel correct in understanding that, under the GSM-102 and GSM-103
programmes, the exporter pays a fee calculat ed on the dollar amount guaranteed, based
on a schedule of rates applicable to different credit periods? How and on what basis are
the fee rates fixed? Do the fee rates ever change? If so, how and for what reason?
Would it be necessary to amend the legislatio n and/or regulations in order to adjust the
fee rates? USA

179. Fees paid by an exporter participating in either the GSM-102 or GSM-103 programme vary
by the guaranteed dollar value of the transaction, the repayment period, and the principal repayment
interval (annual or semi-annual). A schedule of current fees is attached as Exhibit US-20. Section
211(b)(2) of the Agricultural Trade Act of 1978, 7 U.S.C. 5641(b)(2), limits the origination fee in
connection with transactions under the GSM-102 progr amme, except for those transactions under the
CCC Facility Guarantee Programme, to no more than 1 per cent of the amount of credit to be
guaranteed. There is no other legislation or regulation addressing the specific fee rates.

180. Other than the legislative restriction noted above, the CCC sets and changes the fee rates as it
deems appropriate. Fee rates are changed via a press announcement to the public. The most recent
change in guarantee fee rates occurred on 1 Oc tober 2002, at which time the fee schedule was
modified to include rates for transactions with 30- and 60-day repayment periods. Previously, the fee
schedule had been adjusted to accommodate variab le interest rates as opposed to fixed rates.
Legislative amendment is not required to change the fee rates unless the rates for the GSM-102
programme are to exceed 1 per cent of the guaranteed dollar value of a transaction. Neither is it
necessary to amend the programme regulations in order to change the fee rates.

85. Is the Panel correct in understanding that , under the SCGP, the exporter pays a fee for
the guarantee calculated on the guaranteed portion of the value of the export sales? How
and on what basis are the fee rates fixed? Do the fee rates ever change? If so, how and
for what reason? Would it be necessary to amend the legislation and/or regulations in
order to adjust the fee rates? Please explain any "risk" assessment involved in the
programme. USA

181. Under the SCGP, the exporter pays a fee to CCC based on the guaranteed dollar value of the
export transaction and the repayment period. Th e current guarantee fee rates are $0.45 per $100 of
coverage for credit terms up to 90 days, and $0. 90 per $100 of coverage for credit terms up to 180
days. Section 211(b)(2) of the Agricultural Trade Act of 1978, 7 U.S.C. 5641(b)(2), limits the
origination fee in connection with transactions unde r the SCGP to no more than 1 per cent of the
amount of credit to be guaranteed. There is no other legislation or regulation addressing the specific
fee rates.

182. Other than the legislative restriction noted above, the CCC sets and changes the fee rates as it
deems appropriate. For example, fee rates for the SCGP were changed in US fiscal year 2000
(beginning 1 October 1999) and set at their current level. Prior to that time, the fee rate was $0.95 per

$100 of coverage regardless of the repayment period . The fee rates were changed to give exporters
and importers an incentive to negotiate repayment terms of less than 180 days. Legislative
amendment is not required to change the fee rate s unless the rates for the SCGP are to exceed 1 per
cent of the guaranteed dollar value of a transaction. It is not necessary to amend the programme
regulations in order to change the fee rates.

183. CCC carries out a country risk assessment for each country prior to announcing its eligibility
for SCGP participation. Country risk assessment entails a review of the economic and political
situation in each country to ensure there is a reas onable expectation that the country's importers will
be able to repay debts incurred under the program me. CCC does not determine the creditworthiness
of importers participating in the SCGP. CCC pr ovides a guarantee covering 65 per cent of the export
transactions under the programme; the exporter or his assignee (US bank) must accept the remaining
35 per cent of the transaction's risk. This "ris k sharing" between CCC and the exporter/assignee is
intended to ensure that due diligence is performed in assessing an importer's creditworthiness before
undertaking a transaction with that importer.

86. Is there a risk categorization in relatio n to three export credit guarantee programmes
(GSM-102, GSM-103 and SCGP)? Does this have any impact on premiums payable and
the ability of the CCC to on-sell the guarantees ? USA

184. All countries eligible for any of the CCC e xport credit guarantee programmes are categorized
according to risk. CCC categorization of countries is based on a US government internal risk
classification system. This system is administratively controlled and may not be released outside of
the US Government. A country's risk classification has no impact on the premiums payable under the
US export credit guarantee programmes. There is no secondary market for CCC guarantees;
therefore, CCC does not "on-sell" the guarantees.

87. What proportion of CCC (export-related and total) long term operating costs and losses
are represented by GSM-102, GSM-103 and SCGP programmes? USA

185. With the advent of the Credit Reform Act, the export guarantee programmes are not financed
out of the Commodity Credit Corporation. While the programmes continue to be run through the
authorities and facilities of the CCC, all budget auth ority (funding) for the guarantee programmes is
provided directly to accounts for those programmes from the US Treasury.

88. (a) Is the Panel correct in understanding that the United States' argument is that, at
present, by virtue of Article 10.2 of the Agreement on Agriculture, there are no
disciplines on agricultural export cred it guarantees under the Agreement on
Agriculture (or the SCM Agreement)? USA

186. Article 10.2 provides: “Members undert ake to work toward the development of
internationally agreed disciplines to govern the provision of export credits, export credit guarantees or
insurance programmes and, after agreement on such disciplines to provide export credits, export credit
guarantees or insurance programmes only in conf ormity therewith.” Article 10.2 imposes an
obligation on Members to work toward “interna tionally agreed disciplines” and, upon agreement on
such disciplines, to provide export credit guarantees onl y in conformity with such disciplines. This
was the purpose of the negotiations in the OECD that followed the Uruguay Round, and which now
are occurring under the aegis of the WTO. If and when such disciplines ar e agreed upon, they are
WTO obligations under the Agreement on Agriculture.
82

82This is similar to other work programs that continued beyond the close of the Uruguay Round. See
US First Written Submission, paras. 154-66.

187. Brazil's argument is that such "internationall y agreed disciplines" already apply. If export
credit guarantee programmes were already subject to export subsidy disciplines, then Article 10.2
would be unnecessary. That is, Members would already have “to provide . . . export credit guarantees
. . . only in conformity” with the internationally agreed disciplines of the WTO. In Brazil’s oral
statement, Brazil attempts to avoid this implicati on of its reading by repeatedly attempting to insert
the word "specific" into the text of Article 10.2 – that is, “undertake to work toward the development
of specific internationally agreed disciplines .”83 That word is not there, however. The United States'
interpretation of Article 10.2 gives meaning to th e text of Article 10.2 as drafted and agreed by
Members whereas Brazil's reading would effectively read it out of the Agreement on Agriculture.

 (b) Does the United States agree with the following proposition: a WTO Member
may therefore extend agricultural export credit guarantees without charging a
premium, and for an indefinite period, in addition to any other terms and
conditions it may wish? How would this reconcile with the title of Article 10 of
the Agreement on Agriculture ("Preven tion of Circumvention on Export
Subsidy Commitments"), and with other commitments contained in the
Agreement on Agriculture? Please cite any relevant material, including any past
WTO dispute settlement cases. How would this reconcile with the United States'
own statement, at paragraph 21 of its closing oral statement that "of course, the
United States may not provide subsidies without any limit". USA

188. Article 10.2 applies only to export cred it guarantees (and export credits and insurance
programmes) properly characterized as such. In the case of the United States, export credit guarantees
are offered pursuant to programmes which charge premiums; impose limits on tenor; impose limits on
exposure to individual bank obligations; impose limi ts on exposure to risk of default from different
countries; define shipping periods; and issue allo cations (value limitations) of potential guarantee
availability for specific commodities to be exported to specific destinations. The United States also
guarantees only a relatively small portion of interest. Consequently, participants remain exposed to a
significant component of the over-all risk of default.

189. The United States submits that the deferral of disciplines under Article 10.2 properly applies
to export credit guarantees offered pursuant to a pr ogramme with such characteristics; indeed, Brazil
has not contested that US export credit guarantee programmes are encompassed by the terms of
Article 10.2. Illegitimate attempts to char acterize export subsidy programmes as export credit
guarantee programmes would be subject to the anti- circumvention provisions of Article 10.1 and the
other commitments of the Agreement on Agriculture.
84

190. The US interpretation of Article 10.2 presents no conflict with the title of Article 10, which
provides relevant context in interpreting the pr ovisions of Article 10. Article 10 is entitled
“Prevention of Circumvention on Export Subsid y Commitments.” Article 10.2 contributes to the
prevention of circumvention of export subsid y commitments by imposing two obligations on
Members: first, they must undertake to work toward the development of internally agreed disciplines

83See, e.g. , Brazil’s Oral Statement, para. 100 (“Article 10.2 instead announces Members’ intent to
work toward negotiations on specific disciplines for export credits.”) (italics in original); id. (“In the meantime,
while those specific disciplines are being discussed . . .”) (emphasis added); id., para. 102 (“Under the first part
of Article 10.2, therefore, WTO Members have pledged to work toward the development of specific disciplines
. . . .”) (emphasis added); id., para. 103 (“If Members do conclude an agreement on these specific disciplines
. . . .”) (emphasis added); id. (Brazil and the United States agree that there has been no agreement on any such
specific disciplines . . . .”) (emphasis added).
84For example, the United States could not simply change the name of the FSC Repeal and
Extraterritorial Income Exclusion Act to the "FSC Repeal and Extr aterritorial Income Exclusion Export Credit
Guarantee Program" and successfully assert that the deferral of disciplines contemplated by Article 10.2 applies
to such re-named program.

on export credit guarantees; second, “after agreement on such disciplines,” they must provide export
credit guarantees “only in conformity therewith”. Thus, Members agreed that those internationally
agreed disciplines would constrain the provision of export credit guarantees, which in turn would
contribute to the goal of Article 10, to prevent the circumvention of export subsidy commitments.

191. Although the language quoted fro m paragraph 21 of the United States' closing oral statement
was intended to address concerns involving domestic support for upland cotton,
85 it also applies in the
case of export subsidies. The United States also can not provide export subsidies without limit. It has
a schedule of export subsidy reduction commitments for 12 commodities. For these commodities,
export subsidies can only be provided in accordan ce with such schedule. For the remainder of
agricultural commodities, the United States cannot provide export subsidies at all.

192. Although internationally agreed disciplines on export credit guarantee programmes have yet
to be agreed, the characteristics of such programme s and the discipline inherent in the risk-sharing
aspects of such programmes impose an internal constr aint on their use. Indeed, the use of US export
credit guarantee programmes has declined since the period before the inception of Uruguay Round
commitments. As shown in the US answer to Qu estion 82(b), the dollar value of guarantees provided
by the United States in US fiscal year 1992 was $5,671.8 million, in fiscal year 1993 was
$3,853.7 million, and in fiscal year 1994 was $3,177.4 million. In contrast, the average value of
guarantees for fiscal years 1995 - 2002 was only $3,061. 9 million. Any concerns about unchecked
use of export credit guarantee programmes, then, are not supported by the post-Uruguay Round
experience.

 (c) If, as the United States argues, there are no disciplines on export credit
guarantees in the Agreement on Agriculture, how could export credit guarantees
"conform fully to the provisions of Part V" of the Agreement on Agriculture
within the meaning of Article 13 (how can you assess "conformity" or
non-conformity when there are allegedl y no disciplines against which such an
assessment could occur)? USA

193. US export credit guarantee programmes pr ovide “export credit guarantees” within the
meaning of Article 10.2 and therefore will be subject to disciplines only as contemplated by that
Article. Because no such disciplines currently ex ist, these programmes cannot be out of compliance
with Part V of the Agriculture Agreement. Moreover, export credit guarantees are not export
subsidies within the meaning of either Article 9.1 or 10.1, and since they are not export subsidies,
Article 13(c) does not apply to them.

 (d) Is the United States advocating the view that its own export credit guarantee
programmes, which pre-dated the Uruguay Round, are effectively
"grandfathered" so as to benefit from some sort of exemption from the export
subsidy disciplines of the Agreement on Agriculture? How, if at all, is it relevant
that the SCGP did not, according to the United States, become relevant for
upland cotton until the late 1990's (i.e. after the entry into force of the WTO
Agreement)? USA

194. It is not entirely clear what is meant by the term “grandfathering” in this connection.
Agriculture Agreement Article 10.2 defers the imposition of disciplines on export credits, export

85The statement itself was intended to note that the United States is subject to the limit set forth in its
domestic support reduction commitments for the Current Total Aggregate Measurement of Support. This
amount, across all US commodities, is $19.1 billion. In a ddition, a very specific lim it applies with respect to
domestic support for upland cotton under the Peace Clause. It may not exceed the rate of 72.9 cents per pound,
as decided in 1992, without removi ng the Peace Clause protection of Article 13 of the Agreement of
Agriculture.

credit guarantees, and insurance programmes until inte rnationally agreed disciplines are reached, and
in that sense the export subsidy disciplines of th e Agreement do not apply to the export credit
guarantee programmes at issue in this dispute.

195. The SCGP began in 1996, and no transactions occurred under this programme in connection
with cotton until fiscal year 1998, which began in September 1997. Although the negotiators
obviously could not have considered the applicati on of this specific programme, it is substantially
similar in its operation to other US export cred it guarantee programmes. Again, Brazil has not
contested that SCGP provides export credit guarantees within the meaning of Article 10.2. Thus, the
deferral of disciplines under Article 10.2 similarly applies.

STEP 2 PAYMENTS

89. Does the United States confirm Brazil's statement in paragraph 331 of its first
submission that "The conditions and requirements for Step 2 domestic payments remain
unchanged with the passage of the 2002 FSRI Act"? What is the relevance of this, if
any, to this dispute? USA

196. While the Step 2 programme under the 2002 Act is largely consistent with the programme
under the 1996 Act, there have been some modi fications since the inception of the programme,
relating to the precise nature of the price differe ntial formula and the price ceiling for the Step 2
payments. The 2002 programme was unchanged fro m the 1996 Act programme, as amended, except
for suspending the 1.25 cent differential. In the end, this is inconsequential because it does not
materially affect the levels of support decided in marketing year 1992 (72.9 cents per pound) or that
measures currently grant (52 cents per pound).

90. Does the United States confirm Brazil's statement in paragraph 235 of its first
submission that the changes concerning Step 2 export payments from the 1996 FAIR
Act to the 2002 FSRI Act are: increase in the amount of the subsidy by 1.25 cents per
pound and the removal of any budgetary limits that applied under the 1996 FAIR Act?
What is the relevance of this, if any, to this dispute? USA

197. As noted in the US answer to Question 89, the 2002 Act suspended the 1.25 cents differential,
but the United States disagrees with the assertion of increased budgetary exposure for the programme.
First, we note that Step 2 for the 1992 crop and marketing years was covered by the provisions of the
1990 Act, which had no limit on the amount of expense th at could be undertaken in Step 2. For the
1996 Act, which covered the 1996-2002 crops until s upplanted by the 2002 Act, there was a limit of
$701 million for the six-year duration of the Act, and in fact that money did run out in
December 1998. However, the Congress rem oved the budgetary limit of the 1996 Act as of
October 1999 (Public Law No. 106-78, 22 Oct. 1999). Therefore, neither the 2002 Act, nor the 1996
Act (as of October 1999), nor the 1990 Act had budgetary limits on Step 2 expenditures.

198. While the potential step 2 payment (when price conditions in the statute are met) is higher in
the 2002 Act than under the 1996 Act by as much as (but not more than) 1.25 cents per pound, step 2
merely changes the vehicle of support.

91. What is the significance of the elimin ation of the 1.25 cent threshold payment in the
2002 FSRI Act pertaining to Step 2 payments? USA

199. Please see the US answers to Question 89, 90, and 117.

92. Does the United States confirm that Exhi bit BRA-65 represents a sample contract for
exporters of eligible upland cotton to conc lude with the CCC under the FSRI 2002, and
that an application form (Exhibit BRA-66) needs to be filled out with data on weekly

exports and submitted to the USDA FAS. Is Exhibit BRA-66 - Form CCC 1045-2 - also a
valid example? If not, please identify any differences or distinctions. USA

200. The Brazilian exhibits appear to be accurate versions of old Step 2 programme documents.
Some of the documents in the exhibit are for domestic handlers and involved programme payment
assignments. We also note that, in making an expor t claim, other documentation like bills of lading
may be needed.

201. The official documents for the upland cott on step 2 programme can be found at the Farm
Services Agency website (www.fsa.usda.gov/daco, c lick on "cotton" and on "upland cotton user
marketing certificate programme".) There is a common contract that exists for both domestic users
and exports under the Step 2 programme, CCC Fo rm CCC-1045UP. Because of the different nature
of uses and therefore applications, there are se parate reporting forms: CCC-1045UP-1 for domestic
users and CCC-1045UP-2 for Exporter Users. Recen tly updated documents used for this programme
are attached as Exhibit US-21.

93. Please elaborate why the United States deems that Step 2 payments upon submission of
proof of export are not subsidies contingent upo n export. Is it the US contention that, in
order to be contingent on export, exportatio n must be the exclusive condition for receipt
of the payment? USA

202. As the United States has indicated, all upla nd cotton produced in the United States is eligible
for the benefit of the Step 2 cotton subsidy. If the statutory price condition applies, all US upland
cotton used during the applicable period of time will received the subsidy. “Use” in domestic
manufacture or export constitutes the universe of potential use of US upland cotton. The United
States submits that when the entirety of production of a good in a country is eligible to receive a
subsidy, no contingency on export exists. The Step 2 subsidy is entirely distinct in this regard from a
hypothetical situation in which a subsidy is theoreti cally available for domestic use, but in reality is
exclusively or nearly exclusively available in connection with exports.

95. Do the criteria in 7 CFR 1427.103(c)(2) (Exhibit BRA-37) that Step 2 "eligible upland
cotton" must be "not imported cotton" appl y to both domestic and export payments?
USA

203. Only domestic cotton is eligible for Step 2 payment, which is made if the statutory price
conditions are met and requisite proof of use is submitted.

96. Is a domestic sale a "use" for the purposes of Step 2 payments? Is a sale for export, or
export, considered a "use"? USA

204. A sale is not a use for purposes of the Step 2 subsidy. For domestic manufacture, opening the
cotton bale constitutes use. For exports, similarly, the sale alone does not itself constitute use; the
exporter must demonstrate actual exportation.
86

97. How does the United States respond to Braz il's assertion, at paragraph 70 of Brazil's
oral statement at the first session of the first substantive meeting, that "It is obvious that
a single bale of cotton cannot be both expo rted and used domestically." Is this a
relevant consideration? USA

205. It is unclear what Brazil’s assertion is intende d to demonstrate. The Step 2 programme makes
payments to documented users of US upland cotton. If a bale cannot be both opened domestically and
exported (although it is not clear why that would be so), that amounts to arguing that a single bale

867 Code of Federal Regulations 1427.103(a).

cannot be “used” twice. The fact remains that either opening the bale domestically or exporting it –
that is, the universe of activities resulting in u se of US upland cotton – is entitled (given certain
market conditions) to a Step 2 payment.

206. The United States notes, moreover, that it ma y actually be possible (economic realities aside)
that the same bale could be exported and then br ought back into the country and opened for domestic
use. (Please see the US answer to Question 98 for mo re detail.) The US Department of Agriculture’s
position would be that the payment should be made on the bale once only. The purpose of the
programme is to provide support to upland cotton fa rmers. Once the bale has been purchased by an
upland cotton user, there would be no additi onal support for upland cotton farmers from providing
Step 2 payments on additional “uses” of the same bale.

98. How many Step 2 payments are received if a bale of upland cotton is exported, and then
opened by a domestic user in the United States, or vice versa? USA

207. If a bale were exported and then imported and opened up (or vice versa) it would be the US
position that only one payment would be made. It does not appear that this situation has ever arisen in
fact, but we note that the Step 2 regulations specifical ly provide that “imported” cotton is not eligible
for payment. Such cotton may include any cotton that was imported, even if it had been produced in
the United States.

99. How does the United States respond to Brazil's arguments in paragraphs 71-75 of
Brazil's oral statement at the first session of the first Panel meeting concerning the
relevance of the Appellate Body Report in US-FSC (21.5). USA

208. In contrast to the facts of the United States – FSC (21.5) dispute, in this dispute all of the
product is produced in the United States; all of the product is eligible to receive the benefit of the
subsidy; and all of the potential uses of the product ar e similarly eligible. If the statutory formula of
price conditions applies, all US upland cotton used during that time – regardless of how such use is
manifested – will receive the subsidy. This case involves only one factual situation: use of cotton
during a particular period of time. The only fact ual distinction applicable here is whether the
applicable price conditions are on or off. Brazil' s emphasis on the "different instructions" in the
programme regulations is misplaced. Such instruct ions are simply to demonstrate the requisite use
and to assure payment is made to the proper party. If upland cotton could be used in a third or fourth
way, this would not change the eligibility for subs idy but would necessitate a parallel third or fourth
set of instructions to demonstrate that form of use as well.

103. Is the Step 2 programme fund a unified fund that is available for either domestic users
or exporters, without a specific amount earmarked for either domestic users or
exporters? Please substantiate your response, including by reference to any applicable
statutory or regulatory provisions. USA

209. The upland cotton user marketing certificat e programme (Step 2) makes no differentiation
between funds for payments to exporters and domest ic handlers – it is all one programme. The first
paragraph of the Step 2 rule states:

These regulations set forth the terms and conditions under which CCC shall make
payments, in the form of commodity certif icates or cash, to eligible domestic users
and exporters of upland cotton who ente red into an Upland Cotton Domestic
User/Exporter Agreement with CCC to pa rticipate in the upland cotton user
marketing certificate
The Step 2 rule was published on 18 October 2002, at 67 Federal Register 64454, and is codified at
7 Code of Federal Regulations 1427.100-.108.

210. As with other US domestic support measures, Step 2 payments are funded through the
Commodity Credit Corporation, which has a borrowing authority in the Treasury and as such does not
rely on appropriations. This is provided for in Sections 1207 and 1601(a) of the 2002 Act and
codified at 7 US Code 7937 and 7991.

104. How does the United States respond to th e data presented in Exhibit BRA-69? Is it
accurate? Please substantiate. USA

211. The data in Exhibit BRA-69 is not official US Government data, and Brazil has not indicated
the source of the information. Thus, we cannot conf irm its reliability. The United States has tried in
any event to obtain information in the format of Br a-69, which is not maintained and published by the
US Government in that manner. The following data has been collected by the US Department of
Agriculture and attempts to designate (as in Bra-69) Step 2 payments by fiscal year
87 and use.

User Marketing Certificate (Step 2) Payments, by Fiscal Year and Use

Fiscal Year

Mill Use (US $)

Export Use (US $)

1991

4,311,991

17,259

1992

102,769,543

30,852,107

1993

113,401,813

89,095,640

1994

28,251,613

178,266,742

1995

17,571,224

75,200,203

1996

0

34,798,579

1997

6,201,540

2,875,936

1998

255,502,154

158,924,004

1999

165,831,362

113,521,476

2000

260,075,318

185,273,956

2001

144,849,807

90,903,021

2002

72,425,112

105,415,152

A comparison with Exhibit BRA-69 suggests that the Brazilian data is inaccurate.

212. During the first panel meeting, the Panel ask ed about the figures shown for fiscal year 1996,
which showed a zero payment for mill use and a po sitive number for export use. We suggested that
perhaps appropriated amounts had suddenly run out, but our suggesti on was not accurate. Rather, the
odd numbers for fiscal year 1996 resulted because, at the time, payments for export use accrued when
the contract for export was made. However, such payments were not paid until the export actually
took place, at which time the exporter would be paid based on the Step 2 rates that applied when the

87The US fiscal year runs from October 1 - Septembe r 30, such that the 2002 fiscal year would run
from 1 October 2001, through 30 September 2002.

contract was made. As the Panel is aware, Step 2 payments can be made only when there is a
difference between world and US prices for cotton for a certain time period. In the case of fiscal year
1996, these prices did not satisfy the Step 2 conditions, but there were some payments that were made
during that fiscal year because they had accrued by an export contract made in the previous fiscal
year. That rule is now changed
88 so that the rate that a pplies for export use is the rate that is in effect
when the export is made not when the contract for export was made.

105. Why is the Step 2 program me separated into "domestic users" and "exporters"? Apart
from differentiating between exporters and domestic users, with consequential
differentiation as to the forms that must be filled out and certain other conditions that
must be fulfilled, are the eligibility criteria fo r Step 2 payments identical? Are the form
and rate of payment, as well as the actual payment made, identical? USA

213. US law does not separate the Step 2 programme into domestic users and exporters. There is
but one Step 2 statute – codified at 7 US Code 7937 – and but one Step 2 rule for all users – found at 7
Code of Federal Regulations 1427.100-.108. The statute and rule do identify “domestic users” and
“exporters” as the universe of bona fide users of upland cotton and thus potential recipients for Step 2
payments. Therefore, the only distinction drawn between these recipients is the proof of use:
domestic handlers are paid when they open a bale, and exporters are paid when they export. The form
and rate of payment are identical.

106. With respect to paragraph 139 of the United States' first written submission, are Step 2
export payments included in the annual reduction commitments of the United States? If
so, why? USA

214. The United States does not distinguish between the uses of US upland cotton for purposes of
reporting the subsidy because the subsidy is not contingent on export performance. All Step 2
payments are reported as product-specific domestic support for upland cotton and are included within
the Total Aggregate Measurement of Support calculation for purposes of domestic support reduction
commitments.

107. Please comment on any relevance, to Brazil' s de jure claims of inconsistency with the
provisions of the Agreement on Agriculture, of Exhibit BRA-69, which shows Step 2
payments made to (i) domestic users and (ii) exporters. This Exhibit shows that, from
FY 91/92 through 02, the Step 2 payments for exporters exceeded those for domestic
users in FY 94; FY 95; FY 96 (in fact there were no domestic payments in FY 96); and
FY 02. In the other years, the domestic p ayments are greater than export payments.
BRA, USA

215. Without commenting on the accuracy of the sp ecific numbers set forth in Exhibit BRA-69, it
is entirely possible that in certain years one type of user happened to receive a larger share of
payments than another type of user. This woul d entirely be a function of market conditions and
relative demand for manufacture or for export. That is, differences in amounts paid to exporters and
domestic users during any time period are happenstance based on actual use of US upland cotton.

216. The United States notes that payments to e xporters were previously made based on when
exporters finalized the sale contract, not on when the cotton was actually exported. In the specific
case of fiscal year 1996, it appears that payments for exported upland cotton accrued during a period
when Step 2 payments were allowed by the statute, but that the payments were actually made at a time
when market conditions no longer met the statutor y criteria for payment. The rule has been
changed,
89 and that situation can no longer recur.

88See 61 Federal Register 37544, 37548 (18 July 1996).
89See 61 Federal Register 37544, 37548 (July 18, 1996).

108. At paragraph 135 of its first written submission, the United States states : "[T]he
subsidy is not contingent upon export perfor mance..." (emphasis added). Again, in the
course of the first Panel meeting, the United States admitted that the Step 2 payments
were "subsidies". Does the United States thus concede that Step 2 payments constitute a
"subsidy" within the meaning of the WTO Agreement? USA

217. The United States has always maintained th at Step 2 payments are subsidies that provide
domestic support in favour of US agricultural producers.

109. How does the United States respo nd to Brazil's arguments concerning a
mandatory/discretionary distinction and th e allegation that certain United States
measures (including s.1207(a) of the 2002 FSRI Act) are mandatory? (This is referred
to, for example, in paragraph 28 of Brazil's first written submission). Does the United
States agree with the assertion that (subject to the availability of funds) the payment by
the Secretary of Step 2 payments is mandatory under section 1207(a) FSRI upon
fulfilment by a domestic user or exporter of the conditions set out in the legislation and
regulations? If not, then why not? To what extent is this relevant here? What
determines the "availability of funds"? Pl ease cite any other relevant measures or
provisions which you consider should guide the Panel in respect of this issue. USA

218. The United States does not disagree that, subject to the availability of funds (that is, the
availability of CCC borrowing authority), Step 2 paym ents must be made to all those who meet the
conditions for eligibility. With respect to th e well-accepted mandatory/discretionary distinction
reflected in GATT 1947 and WTO panel and Appellate Body reports, the United States notes that the
distinction is the natural consequence of the fact that there can be no presumption of bad faith in
WTO dispute settlement, a fact that numerous Memb ers, including the European Communities, have
emphasized.
90 Thus, to the extent that a Member retains discretion under a measure to act in
accordance with a WTO obligation, it may not be presumed that the Member will violate that
obligation, or to conclude that the measure itsel f – separately from the measure’s application in a
specific instance – may be found inconsistent with that obligation.

110. Section 1207(a) of the 2002 FSRI Act provides that during the period beginning on the
date of the enactment of the FSRI Act through July 31 2008, " .. the Secretary shall issue
marketing certificates or cash payments, at the option of the recipient, to domestic users
and exporters for documented purchases by do mestic users and sales for export by
exporters...". The Panel notes that Brazil do es not appear to distinguish between the
treatment of (i) cash payments and (ii) mark eting certificates in terms of the issue of
whether or not a "subsidy" exists. The United States refers to "benefits" and
"payments" and "programme" in asserting that Step 2 is not export contingent
(paragraphs 127-135 of the United States' first written submission).

 (a) Do the parties thus agree that there is no need to draw any distinction between
the treatment of (i) cash payments and ( ii) marketing certificates in terms of the
issue of whether or not a "subsidy" exis ts for the purposes of the Agreement on
Agriculture? BRA, USA

219. The United States agrees that there is no need to draw a distinction between cash payments
and marketing certificates in terms of whether a subsidy exists for purposes of the Agreement on
Agriculture.

90See Appellate Body Report, United States - Section 211 Omnibus Appropriations Act of 1998 ,
WT/DS176/AB/R, adopted 1 February 2002, para. 259.

 (b) Why would a domestic user or an exporter select to receive a marketing
certificate over a cash payment? What is the proportion of cash payments vs.
marketing certificates granted under the programme? USA

220. A user of upland cotton that elects to receive payment in the form of a marketing certificate is
entitled to redeem that certificate for an equivale nt amount of upland cotton held by the Commodity
Credit Corporation (CCC). Although authorized by st atute, no Step 2 payments have been made in
recent times in the form of certificates. Marketi ng certificates in lieu of cash payments for Step 2
were last used heavily in the early to mid-1990s . The CCC does not currently maintain high upland
cotton inventories from which such certificates if issued could be redeemed.

111. Does the United States maintain its argument that actions based on Article 3.1(b) of the
SCM Agreement are conditionally "exempt fr om actions" due to the operation of
Article 13 of the Agreement on Agriculture? USA

221. Article 13(c) provides that “export subsidies that conform fully to the provisions of Part V of
this Agreement, as reflected in each Member's Schedul e, shall be . . . exempt from actions based on
Article XVI of GATT 1994 or Articles 3, 5 and 6 of the Subsidies Agreement.” Article 13(b), which
applies to domestic support measures, does not refe rence Subsidies Agreement Article 3. Brazil has
advanced claims under Article 3.1(b) of the S ubsidies Agreement only with respect to Step 2
payments, which are domestic suppor t measures and not export subsidi es. Thus, on the US view the
Peace Clause would not appear to be applicable; however, to the extent Brazil asserts that Step 2
payments (or some part thereof) are export subsidies, Article 13(c) would be relevant.

222. We also note that paragraph 7 of Annex 3 requires that support in favour of domestic
agricultural producers that is provided through payment to processors shall be included in the AMS of
the Member. If payments are made in connection with both domestic and foreign product then such
payments are not support in favour of domestic agri cultural producers. Consequently, the Agriculture
Agreement necessarily contemplates that support paid to processors may be paid solely with respect
to domestic production. Under Article 6.3 of the Ag riculture Agreement, if a Member is providing
support within its domestic support reduction commitments, then such support may not be challenged
under Article 3.1(b) because that Article applie s “[e]xcept as provided in the Agreement on
Agriculture”. If a Member exceeds its domestic support reduction commitmen ts, on the other hand,
then such support paid to processors would be actionable under Article 3.1(b).

112. In the event that the Panel finds that Article 6.3 of the Agreement on Agriculture does
not preclude an examination of Brazil's claims under Article 3.1 of the SCM Agreement
and Article III:4 of GATT 1994, how does the United States respond to the merits of
Brazil's claims relating to Step 2 payments under those provisions? USA

223. As indicated in the US answer to Ques tion 111 from the Panel, and as the European
Communities has noted in its third party submissi on, inasmuch as paragraph 7 of Annex 3 of the
Agreement on Agriculture requires support in favour of agricultural producers that is paid to
processors to be included in the Member’s Aggreg ate Measurement of Support, then the Agreement
on Agriculture necessarily contemplates that such payments to processors may apply solely with
respect to domestic product. Otherwise, as in th e case of Step 2 payments, domestic cotton producers
would not receive the relative pr ice benefit conferred by the pa yment. Consequently, such
discrimination in favour of domestic production is permitted under the Agreement on Agriculture and,
under Article 21.1 of that Agreement, the provi sions of GATT 1994 and of other Multilateral Trade
Agreements in Annex 1A to the WTO Agreement ar e expressly “subject to the provisions of [the
Agriculture] Agreement.” For that reason, neither Article 3.1(b) of the Subsidies Agreement nor
GATT 1994 Article III:4 precludes such payments to users of US upland cotton, unless the
United States exceeds its domestic support reduction commitments.

113. Is it necessary for measures directed at agricultural processors included in AMS to
discriminate on the basis of the origin of goods? USA

224. The United States does not express an opinion wh ether it is necessary in all circumstances for
all Members with respect to all commodities. Howe ver, paragraph 7 of Annex 3 of the Agreement on
Agriculture certainly contemplates that suppor t in favour of domestic producers provided by
payments to processors is included in the Aggregat e Measurement of Support. In the case of Step 2
payments on upland cotton, if payments were pr ovided in favour of all upland cotton, whether
domestic or foreign, used by domestics mills or ex porters, the price benefit for US producers would
not be achieved. Without such a benefit to US producers, these payments would not need to be
included in the Aggregate Measurement of Support. The Agreement on Agriculture does not preclude
payments that solely benefit domestic produ cers; indeed, paragraph 7 contemplates such
discriminatory subsidy payments. Accordingly, th e United States reports all Step 2 payments as
domestic support in favour of US producers of upland cotton.

115. What is the meaning and relevance (if any) to Brazil's claims under Article 3 of the
SCM Agreement and Article III:4 of GATT 1994 of the phrase "measures directed at
agricultural processors shall be included to the extent that such measures benefit the
producers of the basic agricultural products" in the Agreement on Agriculture? BRA,
USA

225. The United States directs the Panel’s attention to the US answers to Questions 111, 112, and
113 from the Panel.

116. With respect to paragraph 32 of the oral st atement of the EC, are subsidies contingent
on the use of domestic goods consistent with the Agreement on Agriculture? Does the
phrase "provide support in favour of dom estic producers" in Article 3.2 of the
Agreement on Agriculture refer to, and/or permit such subsidies? BRA, USA

226. Subsidies contingent on the use of domestic goods may be consistent with the Agreement on
Agriculture. Paragraph 7 of Annex 3 of the Agreement requires the United States to include its Step 2
payments in favour of domestic upland cotton pro ducers, even though such payments are made to
processors, within its calculation of its Aggregate Measurement of Support. The United States has
complied with its domestic support reduction commitmen ts. Therefore, Step 2 payments to upland
cotton users that provide support to domestic produ cers contingent on the use of domestic goods is
consistent with the Agreement on Agriculture. If Members could not discriminate in favour of
domestic producers when making subsidy payments through processors, there would be no reason for
paragraph 7 of Annex 3. Such payments that ar e not limited to domestic products would not be in
favour of domestic producers because the relative ec onomic benefit of the subsidy vis-à-vis foreign
production would not exist.

117. What is the relationship between Step 2 p ayments to exporters and the marketing loan
payments, both of which appear to compensa te for the price differences relative to the
Liverpool A-Index? For example, is there double compensation? Or is one of the
explanations that these export-related pr ice compensatory payments are paid to
different operators (namely, the producer, on the one hand under the marketing loan
arrangements, and the processor/users (Step 2 programme) arrangements on the other?
USA

227. Both marketing loan payments and Step 2 payments are domestic support for upland cotton,
but the marketing loan payment is made directly to the producer whereas the Step 2 payment is made
to users of the cotton. The marketing loan repa yment formula, in section 1204 of the 2002 Act, and
the Step 2 payment formula in section 1207 of the 2002 Act, differ by their terms and are simply

different forms of support, the latter (Step 2) being a form of support that can facilitate higher market
prices for US cotton. We will address this more fully in our rebuttal submission.

118. Can the United States confirm that it does not rely on Article III:8 of GATT 1994? USA

228. The United States can confirm that the Step 2 payment is not made exclusively to domestic
producers.

ETI ACT

119. How does the United States respond to Brazil's reference to the panel report in India -
Patents (EC) (at paragraph 138 of its oral statement at the first session of the first
substantive meeting)? How, if at all, shou ld the Panel take this report into account in
considering the issues raised by Brazil's claims relating to the ETI Act? USA

229. We agree with the passage quoted from the India – Patents dispute and consider it relevant to
the extent that: Brazil has identified the challenge d measure; Brazil has argued why the reasoning of
the panels and Appellate Body are relevant in dete rmining that the measure is inconsistent; and the
Panel finds the reasoning in FSC/ETI persuasive. Our argument in the first written submission went
to whether Brazil had carrie d its burden of bringing a prima facie case, in order to assist the Panel to
fulfill its obligation under DSU Artic le 11 to make an objective assessm ent of the matter before it.
Brazil may consider that it should not have to m eet this burden, but unde r DSU rules as currently
agreed, it must.
91 Finally, we note our statement in the first submission that “[w]hile the United States
cannot specify the precise date on which this will occu r, the United States is confident that the ETI
Act will be repealed in the reasonably near future.”92

121. How do you respond to the reference in pa ragraph 43 of EC third party oral statement
with respect to the relevance of Article 17.14 of the DSU, and, in particular, the phrase
"a final resolution to that dispute" (em phasis added)? Please explain the use, and
relevance (if any) of the term "disputes" in Articles 9.3 and 12 and Appendix 3 of the
DSU, and please cite any other provisions you consider relevant. USA, BRA

230. The United States considers the EC’s references to be irrelevant to the resolution of this
dispute. As noted in the US first written subm ission, the United States intends to implement the
DSB’s recommendations and rulings in the FSC/ETI dispute. Further, the issues raised in the US first
written submission related solely to whether Brazil had met its burden of argumentation in this dispute
and not to the substantive correctness and applicabilit y, or lack thereof, of the adopted findings in
FSC/ETI. Nor did the US arguments relate to the bread th of the US obligation to implement the
DSB’s rulings and recommendations in that dispute. The United States considers that Brazil’s burden
in this dispute requires, at a minimum, that it identify those aspects of the measure which are WTO-
consistent and explain why that is the case.

91See TN/DS/W/45 (Brazilian proposal in ongoing DSU review: "Brazil understands that one of the
drawbacks of the current dispute settlement mechanism is the n ecessity for a Member to litigate a case de novo
through all the established phases even if the same meas ure nullifying or impairing benefits of this Member has
already been found WTO inconsistent in previous panel or appeal proceedings initiated by another Member.").
92US First Written Submission, para. 189.

Table of Cases Cited
Short Title Full Case and Citation
EC – Bananas (III) Appellate Body Report, European Communities – Regime for the
Importation, Sale and Distribution of Bananas , WT/DS27/AB/R, adopted
25 September 1997
US – Shirts and
Blouses
Appellate Body Report, United States – Measure Affecting Imports of
Woven Wool Shirts and Blouses from India , WT/DS33/AB, adopted
23 May 1997
Brazil - Aircraft Appellate Body Report, Brazil – Export Financing Programme for
Aircraft, WT/DS46/AB/R, adopted 20 August 1999
Guatemala – Cement
(I)
Appellate Body Report, Guatemala – Anti-Dumping Investigation
Regarding Portland Cement from Mexico , WT/DS60/AB/R, adopted
25 November 1998
Canada – Aircraft
(21.5)
Panel Report, Canada – Measures Affecti ng the Export of Civilian
Aircraft. Recourse by Brazil to Article 21.5 of the DSU , WT/DS70/RW,
adopted 20 August 1999
Canada - Aircraft Appellate Body Report, Canada – Measures Affecting the Export of
Civilian Aircraft, WT/DS70/AB/R, adopted 20 August 1999
US - DRAMS Panel Report, United States – Anti-Dumping Duty on Dynamic Random
Access Memory Semiconductors (DRAMS) of One Megabit or Above from
Korea, WT/DS99/R, adopted 19 March 1999
Canada – Dairy Appellate Body Report, Canada – Measures Affecting the Importation of
Milk and the Exportation of Dairy Products , WT/DS103/AB/R and
WT/DS113/AB/R, adopted 27 October 1999.
US - FSC Appellate Body Report, United States – Tax Treatment for “Foreign
Sales Corporation”, WT/DS108/AB/R, adopted 20 March 2000.
US – FSC (21.5) Appellate Body Report, United States – Tax Treatment for “Foreign
Sales Corporation”. Recourse to Article 21.5 of the DSU by the European
Communities, WT/DS108/AB/RW, adopted 29 January 2002.
Argentina – Footwear Panel Report, Argentina – Safeguard Measu res on Imports of Footwear ,
WT/DS121/R, adopted 12 January 2000.
Mexico – HFCS (21.5) Appellate Body Report, Mexico – Anti-Dumping Investigation of High
Fructose Corn Syrup (HFCS) from the United States. Recourse to
Article 21.5 of the DSU by the United States , WT/DS132/AB/RW,
adopted 21 November 2001.
Korea - Beef Panel Report, Korea – Measures Affecting Imports of Fresh, Chilled and
Frozen Beef, WT/DS161/R and WT/DS169/R, adopted 10 January 2001
Chile – Price Band Appellate Body Report, Chile – Price Band System and Safeguard
Measures Relating to Certain Agricultural Products , WT/DS207/AB/R,
adopted 23 October 2002
US – Byrd
Amendment
Appellate Body Report, United States – Continued Dumping and Subsidy
Offset Act of 2000 , WT/DS217/AB/R and WT/DS234/AB/R, adopted
27 January 2003
Canada – Aircraft II Panel Report, Canada – Export Credits and Loan Guarantees for
Regional Aircraft, WT/DS222/R, adopted 19 February 2002.
EC - Sardines Appellate Body Report, European Communities – Trade Description of
Sardines, WT/DS231/AB/R, adopted 23 October 2002.

List of Exhibits
Market Revenue and US Government Payments to US Upland Cotton
Producers
Exhibit Bra- 169
PFC, MLA, DP and CCP Payments per Base Acre of Covered Crops Exhibit Bra- 170
“Counter-Cyclical Payments under the 2002 Farm Bill,” NCC, August
2003
Exhibit Bra- 171
Rice Outlook, USDA, 13 August 2003, Table 1 Exhibit Bra- 172
Revised Estimate of Support Granted by Commodity via Countercyclical
Payments.
Exhibit Bra- 173
“Income Protection – Cotton Crop Provisions”, USDA Federal Crop
Insurance Corporation, 2000-321
Exhibit Bra- 174
“Cotton Crop Provisions”, USDA Federal Crop Insurance Corporation,
99-021
Exhibit Bra- 175
“Course Grain Crop Provisions”, USDA Federal Crop Insurance
Corporation, 98-041
Exhibit Bra- 176
“ERS Briefing Room: Farm Income and Costs: Farm Income Forecasts” Exhibit Bra- 177
“Facts About Texas and Agriculture”, Texas Cooperative Extension, The
Texas A&M University System
Exhibit Bra- 178
JunJie Wu, “Crop Insurance, Acreage Decisions, and Nonpoint-Source
Pollution,” American Journal of Agricultural Economics 81, May 1999
Exhibit Bra- 179
Keith J. Collins and Joseph W. Glauber “Will Policy Changes Usher in a
New Era of Increased Agricultural Market Variability?”, Second Quarter
1998.
Exhibit Bra- 180
US General Accounting Office, Report to the Ranking Minority
Member, Committee on Agriculture, Nu trition and Forestry, US Senate,
Former Soviet Union: Creditworthiness of Successor States and US
Export Credit Guarantees, GAO/GGD-95-60 (February 1995)
Exhibit Bra- 181
2004 US Budget, Federal Credit Supplement, Table 8 Exhibit Bra- 182
US Budget for FY 1992 Exhibit Bra- 183
US Budget for FY 1993 Exhibit Bra- 184
Congressional Budget Office Staff Memorandum, An Explanation of the
Budgetary Changes Under Credit Reform, April 1991
Exhibit Bra- 185
Congressional Research Service Issue Brief for Congress, Agriculture
and the Budget, IB95031, (16 February 1996)
Exhibit Bra- 186

O.A. Cleveland Newsletter, 25 April 2003; O.A. Cleveland Newsletter,
8 August 2003
Exhibit Bra- 187
Testimony of James Echols, Chairman of the National Cotton Council
before the Committee on Agriculture, Nutrition and Forestry of the US
Senate, 17 July 2001
Exhibit Bra- 188
Cotton and Wool Outlook, USDA, 13 August 2003 Exhibit Bra- 189
Affidavit of Marcelo Pinheiro Franco Exhibit Bra- 190

I. PRELIMINARY ISSUES

(3) If the request for consultations in this di spute omitted certain products in relation to
export credit guarantees, on what basis is it ar gued that it failed to identify the measures at
issue in accordance with Article 4.4 of the DSU?

Brazil’s Comment on US Answer:

1. In paragraphs 5-6 of its 11 August Answer to Question 3, the United States argues that
footnote 1 to Brazil’s request for consultations does not expand the scope of the request, with regard
to the US export credit guarantee programmes, be yond upland cotton. This is inaccurate. The
footnote number falls immediately after the words “upland cotton” in the first sentence of the first
paragraph of the request. With reference to “ upland cotton”, the footnote reads, “[e]xcept with
respect to export credit guarantee programmes as explained below”.
1 Although the United States
claims that there is no explanation “below”, there is indeed such an explanation. In particular, Brazil
described its potential claim as follows, on page 4 of the request:

 Regarding export credit guarantees, export and market access enhancement provided under
the Agricultural Trade Act of 1978, as amended, and other measures such as GSM-102, GSM-103,
and SCGP programmes, Brazil is of the view that these programmes, as applied and as such, violate
Articles 3.3, 8, 9.1, and 10.1 of the Agreemen t on Agriculture and are pr ohibited export subsidies
under Article 3.1(a) and item (j) of the Illustrative List of Export Subsidies included in Annex I to the
SCM Agreement.
2

 The Panel will note that there is no limitation in this sentence to any particular commodity or
commodities.

2. At paragraph 7 of its 11 August Answer, the United States asserts that “the statement of
evidence attached to Brazil’s consultation request did not include any evidence related to measures
other than those for upland cotton.” This too is inaccurate. The United States conveniently leaves the
word “available” out of the term “statement of available evidence” used in Articles 4.2 and 7.2 of the
SCM Agreement. Brazil was required to provide a statement
 of the evidence available to it at the
time. It was not required to attach exhibits w ith the evidence; nor was it required to provide a
statement regarding all of the evidence that it would eventually present to this Panel. In paragraph 3
of its statement of available evidence, Brazil addres sed what it knew at that point about the US export
credit guarantee programmes:

 US export credit guarantee programmes, since th eir origin in 1980 and up [to] the present,
provide premium rates that are inadequate to cove r the long-term operating costs and losses of the
programmes; in particular there were losses caused by large-scale defaults totaling billions of dollars
that have not been reflected in increased premiums to cover such losses.

3. This sentence speaks not just to the existe nce of the US export credit guarantee programmes,
but also to the way in which they constitute expor t subsidies, given the explicit use of the language
included in item (j) of the Illustrative List of Expor t Subsidies. The statement fulfils the requirement
in Articles 4.2 and 7.2 of the SCM Agreement. The Panel will also note that there is no limitation in
this sentence to any particular commodity or commodities.

4. In footnote 3 to its response, the United Stat es states that it “will be making a request for a
preliminary ruling” that Brazil’s consultation request was broader than its statement of evidence, in

1 WT/DS/267/1, p. 1.
2 WT/DS/267/1, p. 4.

violation of Article 7.2. 3 As demonstrated above, Brazil’s re quest, and the accompanying statement
of available evidence, do not support the United Stat es’ assertion. Both the request and the statement
of available evidence address the US export cred it guarantee programmes without limitation to any
particular commodity or commodities.

5. Moreover, even if the United States were to ma ke this request for a preliminary ruling and the
Panel were to grant it, it would not affect Brazil’s claims. Brazil’s compliance with Article 7.2 of the
SCM Agreement can have no effect on its claims under the Agreement on Agriculture, or on its
prohibited subsidy claims under the SCM Agreement, or on its actionable subsidy claims with respect
to upland cotton.

6. Finally, according to the Panel’s Working Pr ocedures, requests for preliminary rulings by a
party were to have been made “not later than its first submission to the Panel”.
4 Thus, the US request
would not be timely. Brazil submits this informati on at this stage in the hope of avoiding another
lengthy procedural objection by the United States.

(4) Is it argued that the export credit gu arantee programmes concerning upland cotton are
each a separate or independent measure, in that they operate independently?

Brazil’s Comment on US Answer:

7. In paragraph 11 of its 11 August Answer to Question 4, th e United States argues that “each
export credit guarantee issued is a separate measure”. It is not for the United States to define the
measures that are the subject of Brazil’s challe nge. Brazil’s requests for consultations and
establishment identify the measures at issue as the GSM 102, GSM 103 and SCGP programs, both as
such and as applied. In its submissions, Braz il has demonstrated that the programmes constitute
export subsidies under Articles 1.1 and 3.1(a) of th e SCM Agreement, since they are unique financing
vehicles that are not available on the market fo r agricultural commodity transactions and as such
provide something better than is available on the ma rket. Brazil has also demonstrated that the long-
term operating costs and losses for the programs outpace premiums collected, under item (j) of the
Illustrative List (item (j) speaks to the long-term operating costs and losses of “programmes,” and not
individual guarantees).

(8) Does the United States confirm that the qu estions referred to by Brazil in paragraph 92
of Brazil’s oral statement were posed to the United States in the consultations?

Brazil’s Comment on US Answer:

8. In paragraph 17 of its 11 August Answer, th e United States concedes that Brazil posed the
questions included at Exhibit Bra-101. The Panel will note that many of the questions included in
Section 9 of Brazil’s list of questions cover export credit guarantees for all commodities. The
United States therefore concedes that Brazil consulted with it on the matters raised in those questions.
As Brazil discussed in paragraphs 95-98 of its Statem ent at the First Meeting of the Panel, panels and
the Appellate Body have concluded that for a matter to be properly within the scope of a request for
establishment, actual consultations must have been held. That has also been the United States’
position in a number of other disputes, including US – DRAMS and Japan – Agricultural Products.
5

9. The refusal of the United States to answer Brazil’s questions cannot hinder Brazil’s ability to
pursue its claims against the CCC export guarantee pr ogrammes without any limitation to a particular

3 US 11 August Answer to Question 3, para. 7 and footnote 3 to that paragraph.
4 Working Procedures of the Panel, 27 May 2003, para. 12.

commodity or commodities. If it did, responding Members would have every incentive to refuse to
answer any questions during consultations, thereby halting dispute settlement proceedings altogether.

(10) What actual prejudice, if any, has the United States suffered as a result of the alleged
omission of products other than upland cotton from the request for consultations?

Brazil’s Comment on US Answer:

10. Brazil agrees that “a Member cannot proceed to a panel unless the Member has consulted on
that measure”, as the United States argues in paragr aph 19 of its response. Brazil’s request for
consultations included the CCC export guarantee pr ogrammes in connection with all commodities,
however, and the United States concedes, in para graph 17 of its answer to Question 8, that it
consulted with Brazil via the list of questions included in Exhibit Bra-101.

11. Brazil does not agree with the United States’ assertion, at paragr aph 20 of its 11 August
Answer, that the consultation request is of a “juris dictional nature”. While the Appellate Body has
concluded that a complain ing Member’s request for establishment is jurisdictional in nature, and
strictly delimits a pane l’s terms of reference
6, it has not made this statement with respect to a request
for consultations. In fact, in Brazil – Aircraft , the Appellate Body concluded that there is no
requirement for a “precise and exact identity” between a request for consultations and a request for
establishment, which suggests that a request for consultations is not jurisdictional in nature.7

12. In paragraph 23 of its 11 August Answer, the United States argues, without any proof, that it
“has suffered an inability to prepare, respond, and consult with respect to allegations on measures
never presented to the United Stat es in accordance with the DSU”. As noted above, Brazil’s request
for consultations specifically addressed potential claims against the US export credit guarantee
programs in connection with all commodities, and not just upland cotton. Moreover, the
United States acknowledges that Brazil posed qu estions to it regarding those programmes in
connection with all commodities. The questions were provided to the United States in writing on
22 November, in advance of the consultations session. 8 In paragraph 92 of its Oral Statement at the
First Meeting of the Panel, Brazil offered extr acts from those questions, which clarify that
consultations regarding the US export credit guarantee programs were not limited to upland cotton.

13. The United States, therefore, was aware, both from Brazil’s request for consultations and
from Brazil’s extensive list of questions, that th e consultations included US export credit guarantee
programs with respect to all commodities, and not ju st upland cotton. That the United States refused
to respond to Brazil’s questions does not mean that it had an “ inability” to prepare, respond, and
consult with Brazil – it means that the United Stat es made a strategic decision not to do so. The
United States had more than seven months from re ceipt of Brazil’s questions until it filed its First
Submission to “prepare and respond” to Brazil’s claims. This demonstrates that no due process rights
were violated nor any prejudice caused. The Unite d States alone bears responsibility for any alleged
“prejudice” it has suffered as a result of its own strategic decision.

14. In paragraph 24 of its 11 August Answer, th e United States argues that it “has not had [sic]
proper opportunity to consult” with Brazil on the US export credit guarantee programs with respect to
all commodities. In paragraph 17 of its 11 August Answer to Question 8, however, the United States
concedes that Brazil did pose questions on the US e xport credit guarantee programmes with respect to
all commodities. Consultations did, therefore, o ccur with respect to export credit guarantees covering
all eligible agricultural products. The United St ates refused during meetings on 3-4 December,
19 December 2002 and 17 January 2003 to provid e answers to Brazil’s questions. With its

6 Appellate Body Report, EC – Bananas III, WT/DS27/AB/R, para. 142.
7 Appellate Body Report, Brazil – Aircraft, WT/DS46/AB/R, para. 132.
8 Exhibit Bra-101 (Brazil’s Questions for the Purposes of Consulations, 22 November 2002).

consultations request and its extensive list of qu estions, however, Brazil fulfilled the requirement to
consult with the United States on the full scope of the programmes.

(11) Does the United States agree that Brazil’s request for establishment of the Panel can be
understood to indicate that Brazil’s export credit guarantee claims relates to products other
than upland cotton? How, if at all, is this relevant?

Brazil’s Comment on US Answer:

15. At paragraphs 96-97 of its Statement at the First Panel Meeting, Brazil noted that in other
disputes, the US position has been that “‘a Member should be permitted to refer a claim to a panel if it
was actually raised during consultations, even t hough it may not have been included in the written
request for consultations.’”
9 In its 11 August Answer to Ques tion 11, the United States now suggests
that its position is different with respect to measures than it is with respect to claims. According to
the United States, while a Member can add claims not present in its consultations request to its panel
request, it cannot add measures.10

16. Brazil repeats that its request for consultations does in fact address the US measures (the
GSM 102, GSM 103 and SCGP programs) in connection with all commodities. Every measure
included in its request for establishment was similarl y included in its request for consultations. The
US argument is therefore irrelevant.

17. In any event, the US reliance on the Appellate Body’s decision in Guatemala – Cement (I) is
misplaced.
11 In that case, the Appellate Body explained that the text of Article 6 of the DSU and
Article 17.4 of the Anti-Dumping Agreement require d a distinction between measures and claims.
The United States has, however, failed to explai n the textual reason why the distinction between
measures and claims is relevant for the purpose of comparing a request for consultations with a
request for establishment . In fact, the Appellate Body has specifically held that Articles 4 and 6 of
the DSU do not “require a precise and exact identity between the specific measures that were the
subject of consultations and the specific measures id entified in the request for the establishment of a
panel”.12 Nor has the United States offered any logical reason why a Member should be allowed to
add claims not covered by its consu ltations request to its request for establishment, but not measures.
If anything, a defending Member would seem to suffe r greater prejudice by the addition of claims
than by the addition of measures, since the Member is likely more familiar with its own measures than
it would be with another Member’s claims.

(16) What, if any, prejudice in terms of presenta tion of its case does the United States allege,
should the Panel proceed to consider the meas ures constituting the cottonseed payments under
the Agriculture Assistance Act of 2003?

Brazil’s Comment on US Answer:

18. There have been many disputes in which Pane l found that measures, which were replacement
measures to measures originally consulted on, were included in the panel’s terms of reference, Korea
– Beef13 and Chile- Agricultural Products (Price Band)14, to name a few. The Agricultural Assistance
Act of 2003 is in the nature of a revised measure, as Brazil has argued in pa ragraphs 145-150 of its

9 Panel Report, US – DRAMS, WT/DS99/R, para. 6.8.
10 US 11 August Answer to Question 11, para. 25.
11 US 11 August Answer to Question 11, para. 26 note 9
12 Appellate Body Report, Brazil – Aircraft, WT/DS46/AB/R, para. 132.
13 Panel Report, Korea – Beef, WT/DS161/R and WT/DS169/R, para. 563-564.
14 Appellate Body Report, Chile – Agricultural Products (Price Band) , WT/DS207/AB/R, para. 143-
144.

Oral Statement. Brazil also notes that the Unite d States has identified no prejudice to its ability to
defend this measure in this dispute.

(17) (a) What is the relationship of the Agricultural Assistance Act of 2003 to other
legislation in the request for establishment of the Panel?

 (b) Do the legal instruments follow directly one after another, or are there temporal
gaps? Are payments authorized under a broad legislative authority or are they
specific to each legal instrument?

 (c) Please provide any implementing regulations. Do these implementing
regulations resemble those relating to previous programmes or payments? Are
payments made retrospectively? How if at all is this relevant?

Brazil’s Comment on US Answer

19. The United States argues that the four legisla tive acts that authorize cottonseed payments for
the MY 1999, 2000 and 2002 crop are completely unrela ted measures and that – while the regulations
implementing these payments are very similar – this is immaterial to the question of whether such
payments are part of a single programme.
15

20. If a Member like Brazil would be prevented from challenging yearly renewed measures that
provide support under the very same mechanism – and in fact under nearly identical regulations 16 –
than another Member like the United States could continue to enact yearly measures and limit the
challenge by WTO Members to old measures without a prevailing challenge having any effect on its
current and future identical measu res. The result would put a complaining Member in the impossible
situation of having to challenge identical measures year after year, just because they are based on
legislation that “bears no relation”
17 to preceding identical legislation on the same matter.

21. The Panel in Argentina – Footwear rejected similar arguments to those made by the
United States:

Moreover, it appears that an interpretation whereby these subsequent Resolutions are considered to be
measures separate and independent from the definitive safeguard measure, and thus outside our terms
of reference, could be contrary to Article 3.3 of the DSU. Such an interpretation could allow a
situation where a matter brought to th e DSB for prompt settlement is not resolved when the defendant
changes the legal form of the measure through a se parate but closely related instrument, while the
measure in dispute remains essentially the same in substance . In this way, Members could always
keep one step ahead of any WTO dispute settleme nt proceeding because in such a situation, the
complaining Member would indeed, challenge a “m oving target”, and panel and Appellate Body’s
findings could already be overtaken by events when they are rendered and adopted by the DSB.
18

22. Brazil maintains that the Agricultural As sistance Act of 2003 constitutes a subsequent,
separate but closely related instrument, that is essentially the same as the legal instruments authorizing
the MY 1999 and MY 2000 cottonseed payments and that is, therefore, within the Panel’s terms of
reference.

15 US 11 August Answer to Question 17, para. 39-43.
16 Compare Exhibit US14-US16.
17 US 11 August Answer to Question 17, para. 39.
18 Panel Report, Argentina – Footwear, WT/DS121/R, para. 8.41 (emphasis added).

II. ARTICLE 13(B): DOMESTIC SUPPORT MEASURES

A. “EXEMPT FROM ACTIONS”

(20) In paragraph 8 of its initial brief (dated 5 June, 2003), the United States argued that the
word "actions" as used in the phrase "exempt from actions" in Article 13 of the Agreement on
Agriculture includes the "bringing of a case" and consultations. In paragraph 36 of its first
written submission (dated 11 July, 2003), the United States stated as follows:

"[P]rior to this point in the process, the DSU rules did not afford the United States any
opportunity to prevent the dispute from proceeding through consultations and panel
establishment automatically, regardless of the US insistence that its measures conform to the
Peace Clause."
Is it the United States’ understanding that the drafters used the phrase "exempt from actions"
knowing that under the DSU it would not be possib le fully to exempt "actions", as the United
States interprets that term?

(21) In US - FSC and US - FSC (21.5) the Appellate Body made findings under the SCM
Agreement relating to export subsidies in resp ect of agricultural products without making a
finding in respect of Article 13 of the Agreement on Agriculture. How is this relevant to the
United States’ interpretation of the phrase "exempt from actions" as used in Article 13? USA

Brazil’s Comment on US Answers:

23. The United States and the European Communities maintain that the complaining party has the
burden of proof under Article 13 of the Agreement on Agriculture. More specifically, they claim that
Article 13 is not in the nature of an affirmative de fence. Brazil’s comment will again show that their
position is untenable.

24. In its 11 August Answer to Question 20 of th e Panel, the United States asserts, under the
“exempt from action” argument, that “Brazil has attempted to improperly invoke dispute settlement
procedures notwithstanding the Peace Clause.”
19 According to the United States, a dispute settlement
procedure could only be initiated af ter a determination of non-compliance with Article 13 has been
made. In its 11 August Answer to Question 21, th e United States then dismisses the findings in US –
FSC by simply stating that they do not address th e peace clause and that the issue was not raised by
either party in that case. 20 Therefore, those rulings and recommendations “provide no guidance for
purposes of this dispute”.

25. The EC maintains that “Article 13 is more ak in to a threshold permitting further action if the
threshold is not complied with.”
21 The EC affirms that Article 13 “is an integral part of the
Agreement on Agriculture ”.22 In that sense it would be comparable to Article 6 of the ATC,
Article 3.3 of the SPS Agreement, and Article 2.4 of the TBT Agreement, which were found not to be
affirmative defences by the Appellate Body. 23 According to the EC, those provisions, like Article 13
of the Agreement on Agriculture, “provide certain rights to WTO Members, but cannot be seen as
exceptions”.24

19 US 11 August Answer to Question 20, para. 47.
20 US 11 August Answer to Question 21, para. 48.
21 Third Party Submission of the EC, para. 11.
22 Third Party Submission of the EC, para. 12.
23 Third Party Submission of the EC, para. 12.
24 Third Party Submission of the EC, para. 12.

26. Brazil disagrees. The Appellate Body addressed the issue of burden of proof on numerous
occasions. In US – Shirts and Blouses, the Appellate Body made a general finding stating that

... the burden of proof rests upon the party, whether complaining or defending, who asserts the
affirmative of a particular claim or defence. If that party adduces evidence sufficient to raise a
presumption that what is claimed is true, the burden then shifts to the other party, who will fail unless
it adduces sufficient evidence to rebut the presumption.
In the context of the GATT 1994 and the WTO Ag reement, precisely how much and precisely what
kind of evidence will be required to establish such a presumption will necessarily vary from measure
to measure, provision to provision, and case to case.
25

27. When examining Article 6 of the ATC, Article 3.3 of the SPS Agreement, and Article 2.4 of
the TBT Agreement, the Appellate Body did not st ray from this principle. In fact, it was the
cornerstone of all determinations concerning the above-cited provisions. Paragraph 275 of the
Appellate Body report in EC – Sardines reads:

In EC – Hormones, we found that a "gen eral rule-exception" relationship between
Articles 3.1 and 3.3 of the SPS Agreement do es not exist, with the consequence that
the complainant had to establish a case of inconsistency with both Articles 3.1 and
3.3.196 We reached this conclusion as a c onsequence of our finding there that
"Article 3.1 of the SPS Agreement simply excludes from its scope of application the
kinds of situations covered by Article 3.3 of that Agreement". 197 Similarly, the
circumstances envisaged in the second part of Article 2.4 are excluded from the scope
of application of the first part of Article 2.4. Accordingly, as with Articles 3.1 and 3.3
of the SPS Agreement, there is no "general rule-exception" relationship between the
first and the second parts of Article 2.4. Hence, in this case, it is for Peru – as the
complaining Member seeking a ruling on the inconsistency with Article 2.4 of the
TBT Agreement of the measure applied by the Eu ropean Communities – to bear the
burden of proving its claim. (emphasis added) (footnotes omitted)26

28. With regard to Article 6 of the ATC, the Appellate Body found that provision to be a
fundamental part of the rights and obligations of WTO Members concerning non-integrated textile
and clothing products covered by the ATC during the transition period. Consequently a party
claiming a violation of a provision of the WTO Agr eement by another Member must assert and prove
its claim. In this case, India claimed a violation by the United States of Article 6 of the ATC . We
agree with the Panel that it, therefore, was up to India to put forward evidence and legal argument
sufficient to demonstrate that the transitional safe guard action by the United States was inconsistent
with the obligations assumed by the United States under Articles 2 and 6 of the ATC. (emphasis
added)27

29. Unlike the EC, Brazil believes that these Appe llate Body findings underscore the striking
differences between Article 13 of the Agreement on Ag riculture and the other provisions cited by the
EC and which the Appellate Body found not to be in the nature of an affirmative defence.

30. First, Brazil notes that in all Appellate Body findings, the complaining party claimed a
violation of the provision at issue. The complaining party tried to impute the burden of proof on the
respondent by alleging that those provisions also contained language that provided an opportunity for
an affirmative defence under an “exception” to the general rule.

25 Appellate Body Report, US – Shirts and Blouses, p. 14.
26 Appellate Body Report, EC – Sardines, para. 275.
27 Appellate Body Report, US – Shirts and Blouses, p. 16.

31. Article 13 of the Agreement on Agriculture is entirely different. The peace clause imposes no
obligations on WTO Members. As the EC rightfully stated in paragraph 6 of its Initial Submission of
10 June 2003:

a Member is not under an obligation to act consistently with Article 13 of the
Agreement on Agriculture – failing to respect Article 13 implies that a Member no
longer enjoys protection thereof. Consequently ... Article 13 of the Agreement on
Agriculture can only be seen as a defence
 against a claim brought under other aspects
of the WTO Agreements which regulate the provision of subsidies. It would seem
bizarre if before Brazil could bring a cl aim with respect to subsidies which it
considered did not respect the US’s obligations, Brazil had first to establish that
potential defences did not apply. (italics in original) (underlining added)28

32. Brazil entirely agrees with the characterizati on of Article 13 as a potential defence against
claims brought before the WTO. In fact, as the Panel is well aware, in Brazil’s requ est for the
establishment of the Panel, Brazil does not claim that the United States violated Article 13. Such
violation is indeed impossible, since Article 13 of the Agreement on Agriculture imposes no
obligations whatsoever on WTO Members. Articl e 13 simply provides shelter to Members that
invoke its exemption from actions based on certain ot her provisions of the WTO Agreements. Again,
as the Appellate Body stressed every single time it a ddressed the issue, “the burden of proof rests
upon the party, whether complaining or defending, w ho asserts the affirmative of a particular claim or
defence.”
29

33. Second, Brazil’s interpretation is entirely comp atible with the findings of the panel and the
Appellate Body in US – FSC . Brazil, unlike the United States, considers these finding to be very
relevant to this dispute. In US – FSC , the United States decided not to invoke Article 13 of the
Agreement on Agriculture as a possible defence agains t the challenges brought by the EC. The panel
and the Appellate Body did not need to address Article 13 simply because it was not used as a defence
by the respondent. This situation is not necessarily unusual. For example, a respondent that knows,
in advance, that it is not complying with the requi rements of Article 13, may well choose to directly
rebut the prima facie case of th e complainant by providing rebuttal arguments and evidence without
attempting to use the Article 13 shelter.

34. Indeed, interpreting Article 13 of the Agreement on Agriculture as a “threshold”
30 provision is
at odds with the Appellate Body’s findings in US – FSC, US– FSC (21.5), Mexico – HFCS (21.5) and
US – Byrd Amendment. In Mexico – HFCS (21.5), the Appellate Body held that

We believe that a panel comes under a duty to address issues in at least two instances.
First, as a matter of due process, and the proper exercise of the judicial function,
panels are required to address issues that are put before them by the parties to a
dispute. Second, panels have to address and dispose of certain issues of a
fundamental nature, even if the parties to the dispute remain silent on those issues. In
this regard, we have previously observed that ‘[t]he vesting of jurisdiction in a panel
is a fundamental prerequisite for the lawful panel proceeding.’ For this reason, panels
cannot simply ignore issues which go to the root of their jurisdiction – that is, to their
authority to deal with and dispose of matters. Rather, panels must deal with such
issues – if necessary, on their own motion – in order to satisfy themselves that they
have authority to proceed. (emphasis added) (footnote omitted)
31

28 Initial Third Party Submission of the EC, para. 6.
29 Appellate Body Report, US – Shirts and Blouses, p. 14.
30 Third Party Submission of the EC, para. 11.
31 Appellate Body Report, Mexico – HFCS (21.5), WT/DS132/AB/RW, para. 36.

35. The Appellate Body applied this reasoning to itself in US – Byrd Amendment . In that case,
the Appellate Body examined an issue related to the Panels jurisdiction, although it was not addressed
before the Panel or, indeed mentioned in the notice of appeal.
32 If Article 13 of the Agreement on
Agriculture were a threshold provision affecting th e jurisdiction of a panel or the Appellate Body,
both the panels and the Appellate Body in US – FSC and US – FSC (21.5) would have had to address
the issue of peace clause exemption of the claims brought by the EC. The fact that none of them did
is further evidence that Article 13 is not a “thr eshold” or jurisdictional provision. As Brazil
maintains, Article 13 of the Agreement on Agriculture is an affirmative defence.

36. Further, Brazil does not claim that Article 13 is an “exception”. Brazil does not claim that the
United States “violated” Article 13 and, therefor e, Brazil does not bear the burden of proving any
such assertion. Actually, Brazil simply does not believe that Article 13 is at all relevant to claims
raised under the SCM Agreement or GATT Article XVI until the respondent claims that it is exempt
by the provisions of the peace clause. The res pondent claiming such exemption has the burden of
proving that it is entitled to it.
33 If the respondent does not claim such protection, Article 13 is moot,
as demonstrated by the US – FSC case.

37. In paragraph 11 of its Oral Statement of 24 Ju ly, the EC points out that no “credible response”
was given to the argument it put forward suggestin g that Brazil’s approach “has perverse effects”.
34
The EC claimed that

if Article 13 is considered an affirmativ e defence, when a complainant brings a
dispute under Articles 5 and 6 of the SCM Agreement and, for instance, Article 6 of
the Agreement on Agriculture , the complainant would be required to prove a breach
of Article 6 while at the same time the defe ndant would also be required to prove that
it had not infringed Article 6 of the Agre ement. The burden of proof cannot switch
between parties simply on the basis of whether the complainant cites the SCM
Agreement or not ...” (italics on the original)
35
38. Brazil fails to see the conundrum that seems to puzzle the EC. If the complainant cites the
SCM Agreement or, better still, alleges a violation of the SCM Agreement together with a violation of
Article 6 of the Agreement on Agriculture , the burden of proving both assertions rests on the
complainant irrespective of the fact that the res pondent may invoke Article 13. If the complainant
fails to establish the violation of Article 6 of the Agreement on Agriculture , then the task of the
respondent to invoke the Article 13 shelter agains t a possible violation of the SCM Agreement is
made that much easier. In fact, the burden of proof concerning the violation of Article 6 of the
Agreement on Agriculture will simply start with the complainant. As the Appellate Body noted in
US – Shirts and Blouses , if the complainant “adduces evidence su fficient to raise a presumption that
what is claimed is true, the burden shifts to th e other party, who will fail unless it adduces sufficient
evidence to rebut the presumption”. Therefore, th e burden of proof may well switch between parties,
but not “on the basis of whether the complainant cites the SCM Agreement”, as the EC suggested in its
Oral Statement.

39. In sum, Brazil reemphasizes that the peace clause is in the nature of an affirmative defence.

32 Appellate Body Report, US – Byrd Amendment, WT/DS217/AB/R and WT/DS234/AB/R, para. 206-
208.
33 Appellate Body Report, US – Shirts and Blouses, p. 14.
34 Oral Statement of the EC, para. 11
35 Oral Statement of the EC, para. 11.

B. “SUCH MEASURES” AND ANNEX 2 OF THE AGREEMENT ON AGRICULTURE

(22) Please explain the difference, if any, be tween the meaning of “defined” and the meaning
of “fixed” in the phrase “a defined and fixed base period” in paragraph 6(a) of Annex 2 of the
Agreement on Agriculture.

Brazil’s Comment on US Answer:

40. The United States 11 August Answer to Questi on 22 renders the meaning of the word “fixed”
meaningless by isolating the phrase “relative position” from the full dictionary definition.
36 T h e
complete definition includes the phrase “definite, permanent, and lasting”. 37 There is nothing
“permanent” about the US interpretation of the meaning of “fixed base period” for the PFC and direct
payment programmes. For further comments on the issu e, Brazil refers the Panel to paragraphs 10-12
of its Rebuttal Submission.

(24) How often can a Member define and fix a base period in accordance with paragraph 6
of Annex 2 of the Agreement on Agriculture?

Brazil’s Comment on US Answer:

41. Brazil agrees with the United States’ statemen t that there is “no requirement in paragraph 6
that a particular base period be used for a decoupl ed income support measure nor that the same base
period be used for purposes of every decoupled income support measure.”
38 But this misses the point.
The legal and factual question is whether a measure for which a new base period is “ fixed” has the
same structure, design, and eligibility crite ria as an older replaced measure which had a different base
period. The evidence demonstrates that PFC payments and direct payments have a similar structure,
design, and eligibility criteria.39

(29) Please explain the meaning of the words "the fundamental requirement" as used in
paragraph 1 of Annex 2 of the Agreement on Agriculture.

Brazil’s Comment on US Answer:

42. The United States argues in response to this question that “compliance with the fundamental
requirement of the first sentence will be demonstr ated by conforming to the basic criteria of the
second sentence plus the applicable policy-specific criteria of paragraphs 6-13.” 40 Brazil disagrees
that compliance with the basic and policy-specifi c criteria is a sufficient condition for compliance
with the fundamental requirement. For example, th e volume of direct payments that conform to the
criteria in paragraph 6 is not limited. However, the amount of support a Member provides may be so
large that the payments create significant production and trade-distorting effects. Therefore, even if
direct payments conform to the basic and policy- specific criteria in Annex 2, they may still have
considerable production and trade-distorting effects. Brazil refers to its arguments in support of the
“stand-alone” nature of the fundamental requirement.41

36 Brazil 11 August Answer to Question 22, para. 20.
37 The New Shorter Oxford English Dictionary, 1993 edition, p. 962.
38 US 11 August Answer to Question 24.
39 See Rebuttal Submission of Brazil, para. 10.
40 US 11 August Answer to Question 29, para. 59.
41 First Submission of Brazil, para. 163-165; Brazil’s 11 August Answer to Questions 27-28, para. 32-
43.

(32) If the first sentence of paragraph 1 of Annex 2 expresses a general principle which
informs the interpretation of the criteria in Annex 2, please explain how this affects the
assessment of the direct payments programme’s compliance with paragraph 6 of Annex 2.

Brazil’s Comment on US Answer:

43. Contrary to the US argument at paragraph 68 of its 11 August Answers, there is no conflict
between the Brazil’s position regarding the fruits, ve getables and wild rice pr ohibition and Annex 2,
paragraph 1 “fundamental requirement”. The undis puted facts show that this prohibition on the
production of certain crops channels production to other crops that are permitted to be produced to
receive the payment.
42 This channeling of payments creates production and trade distorting effects
inconsistent with Annex 2, paragraph 1.

44. Further, the United States engages in a wishfu l interpretation when it states in paragraph 68 of
its 11 August Answer that “paragraph 6(b) should be read to prevent a Member from requiring a
recipient to produce certain crops”. This interpretation would render Annex 2, paragraph 6(e) a
nullity. Paragraph 6(e) provides that “no producti on shall be required in order to receive such
payments”. The US interpretation of paragraph 6(b) as not requiring the production of “certain crops”
is the same as 6(e)’s prohibition on not requiring production of “any crops”.

45. Paragraph 6(b) is distinct from paragraph 6(e) because it provides a clear test that the amount
of payment cannot be related to the type of productio n. There is no factual dispute among the parties
that the amount of PFC and direct payments falls when base acres are used to produce fruits,
vegetables, tree nuts, and wild rice. There is no factual dispute that the 1996 FAIR Act and the 2002
FSRI Act require the prohibition or reduction in payments if these crops are produced on base
acreage. Given these two undisputed facts and the cl ear text of Annex 2, paragraph 6(b), the only
conclusion is that PFC and direct payments do not meet the policy specific criteria of Annex 2.

C. “DO NOT GRANT SUPPORT TO A SPECIFIC COMMODITY”

(33) According to the United States’ interpret ation of the word “grant”, when can a Member
claim that a measure is not exempt from action under Article 13(b)? what if the measures is
enacted annually? Can the Member obtain a remedy in respect of that measure under the
DSU?

Brazil Comment to US Answer:

46. Brazil’s addresses in detail the US “statute of limitations” argument at paragraphs 88-96 of its
Rebuttal Submission, as well as at paragraphs 40-47 of its Oral Statement.

(37) In the United States’ view, why did the drafters not use the exact term “product-
specific” in Article 13(b)(ii)?

Brazil Comment on US Answer:

47. The United States’ 11 August Answer once again reveals that it equates the term “support to a
specific commodity” with “product-specific”. Br azil notes again that neither the phrase “product-
specific” nor “AMS” is found in the text of Artic le 13(b). Given the use of such terms in the
Agreement on Agriculture, the Drafters must be presumed to have used the term “support to a specific
commodity” for a reason. The US answer ignores the likely reason which is that “support to a
specific commodity” is qualified by the term “such measures” which includes the universe of non-

42 See Rebuttal Submission of Brazil, para. 7.

green box support measures in the chapeau to Article 13(b). This universe of measures from which
such support may be found is not limited to simply “product-specific” measures.

(38) Given the fact that subsidies available for more than one product could have various
effects on production, how does the United Stat es demarcate between product-specific support
and non-product specific support?

Brazil’s Comment on US Answer:

48. The United States demarcation line does not take into account the defi nition of “non-product
specific” in Article 1(a) which is “pr ovided in favour of agricultural producers in general”. This “in
general” language shows where the line betwee n product-specific and non-product specific must be
drawn. Any support that is not provided to producers “ in general ” cannot, by definition, be non-
product specific support. It must instead fall into the category of “product-specific support”. The
United States fails to recognize that the term “in general” is directly related to and qualifies the phrase
“support . . . provided for an agricultural product in favour of the producers of the basic agricultural
product”.

49. The “demarcation” line drawn by the Unite d States between “product-specific” and “non-
product specific” support is necessary to justify the na rrow US specificity test for Article 13(b)(ii).
The United States argues that support could only be “product-specific” if “production is necessary for
the support to be received.”
43 Yet, the Article 1(a) notion of “support” “provided for an agricultural
product in favour of the producers of the basic agricultu ral product” is very broad. It could include
any type of support, regardless of whether production was required or not. For example, if the facts
demonstrate that $1 billion of support were received by the “producers of a basic agricultural product”
(such as in the case of CCP payments to upla nd cotton producers in MY 2002), the language of
Article 1(a) would support the finding that this s upport is “product-specific”. The only restraint on
such a conclusion is if it could be shown that all, or most of the producers of agricultural products
received the same type of support. However, none of the five domest ic support payments at issue in
this dispute comes even close to such an “in gene ral” finding. The inclusion of such subsidies as
“support to a specific commodity” is confirmed by the context of Article 13(b)(ii) which includes
Annex 3 of the Agreement on Agriculture as discu ssed in paragraphs 17-22 of Brazil’s Rebuttal
Submission.

50. Further, the United States never addresses the premise of the Panel’s question, i.e, that
subsidies for more than one product could have va rious effects on production. This is exactly the
situation with PFC, market loss, direct payments, CCP payments, and crop insurance subsidies. The
evidence (which consists in large part of the statements of present or former USDA economists)
shows the production enhancing effects of each of these subsidies.

51. The US 11 August Answer highlights the narrowness of its Article 13(b)(ii) specificity test.
Trade and production-distorting amber box support from each of these five subsidies increases US
production and sustains high levels of US exports of upland cotton. Yet, under the US specificity test,
it could never be deemed “support to” upland cotton because no production of upland cotton is legally
required. The Panel should reject this approach and find that these programmes provide support to
upland cotton.

(39) If “such measures” in Article 13(b)(ii) refers to all those in the chapeau of Article 13(b),
why are they not included in the potential co mparisons with 1992? In what circumstances can
measures which grant non-product specific support lose exemption from action under Articles 5
and 6 of the SCM Agreement and Article XVI of GATT 1994?

43 US 11 August Answer to Question 38, para. 81.

Brazil Comment to US Answer:

52. The United States 11 August Answer does not address the second of the Panel’s questions
directly. But based on the argument in the “answer,” the direct answer to the question would have
been “there are no circumstances in which measures wh ich grant non-product sp ecific support lose
exemption from action under Articles 5 and 6 of the SCM Agreement and Article XVI of GATT 1994 .”
The arguments presented by the United States in its an swer confirms that its interpretation creates a
broad new category of “exempt” non-green box supp ort – those presumptively trade and production-
distorting measures it labels “non-product specific”. The US constructs this new exempt category by
improperly interpreting the phrase “product-specific” to include only non-green box support legally
requiring the production of upland cotton. This incorrect definition is inconsistent with the fact that in
analogous situations involving calculation of AMS, paragraphs 12-13 of A nnex 3 of the Agreement
on Agriculture require all types of non-green box support providing support to the producers of an
agricultural commodity be included in the amount tabulated. These points are further discussed in
paragraphs 13-67 of Brazil’s Rebuttal Submission.

53. The US 11 August Answer to the first question in paragraph 84 indicates that it interprets the
phrase “such measures” as only including “product-sp ecific” support. Even apart from the incorrect
US definition, such an interpretation renders a nullit y the reference to most of the “measures” referred
to in the “such measures” phrase of Article 13(b)(ii). If the drafters had intended to limit the universe
of non-green box support in the manner suggested by the United States, they would have used the
phrase “product-specific” instead of “such measures”. The better in terpretation that does not render
the chapeau a nullity is that suggested by Brazil: any type of support listed in the chapeau which
provides “support to a specific commodity” must be included within the support to be counted for the
purpose of the required 13(b)(ii) comparison.

D. “IN EXCESS OF THAT DECIDED DURING THE 1992 MARKETING YEAR”

General Comment by Brazil on the US Answers to Questions 47-69

54. Brazil notes that the United States has not full y answered many of the questions posed by the
Panel. The United States further announced in va rious questions that it would provide its views on
certain questions posed by the Panel in its rebu ttal submission. In the answers provided, the
United States has continued to pursue its overly simp listic view of an alleged “decision” to provide a
rate of support of 72.9 cents per pound in MY 1992. Brazil has pointed out that this rate of support
does not accurately reflect the operation of the US support system to upland cotton and that it ignores
restrictions on the availability of support and cost s associated with the participation in the support
programmes.
44 Professor Sumner has attempted to correct the overly simplistic US approach and has
presented data to that respect.45

55. A fundamental flaw exposed by the US 11 A ugust Answers is the inability of the US “72.9
methodology” to account for a number of differe nt types of “support to upland cotton”. In its
11 August Answer to Question 67, the United States provides a calculation of upland cotton AMS that
lists as “product-specific” support Step 2 paymen ts (user marketing certificates), cottonseed
payments, storage payments, and interest subsidies, in addition to deficiency payments, and marketing
loan payments. Yet, the United States “72. 9 methodology” does not – and cannot – account for
cottonseed payments, Step 2 payments, storage pa yments and interest rate subsidies. The
United States takes no account of these subsidies – no matter how large the expenditures may be –
because they do not fit within the US methodology. So they simply disappear.

44 Oral Statement of Brazil, para. 36; Brazil’s 11 August Answer to Question 66(c), para. 120-128.
45 See Exhibit Bra-105 (Statement of Professor Sumner at the First Meeting of the Panel).

56. Any methodology that cannot account for all of the support “decided” and “granted” in MY
1992 and during the implementation period cannot be legitimate. A methodology that would sanction
the cover-up of hundreds of millions – if not billions – of dollars of expenditures cannot be justified
by the object and purpose of Agreement on Agriculture or by any reasonable reading of the text of
Article 13(b)(ii).

57. With these general points in mind, Braz il comments on the answers provided by the
United States.

(43) What are the precise differences between deficiency payments and counter-cyclical
payments that lead you to classify the former as product-specific and the latter as non-product
specific? How do you classify market loss assistance payments?

Brazil’s Comment on US Answer:

58. The US 11 August Answer at paragraph 87-90 reveals its erroneous interpretation of the
phrase “product-specific” in Article 1(a) of the Agreement on Agriculture. The United States ignores
the phrase “in general” and assumes that “non-product specific” support is a huge residual category of
support that includes everything except support which requires production of a specific product.
Further, the United States’ answer ignores the fact that all types of support in favour of domestic
producers of a basic commodity are included in the analogous AMS calculation of Annex 3 –
including “product-specific” support where the recipient is not required to produce a specific
commodity. Brazil outlines the erroneous US inte rpretation in paragraphs 13-23 of its Rebuttal
Submission.

59. The improper narrow US interpretation of “p roduct-specific” is highlighted in its discussion
of counter-cyclical payments where the only relevant fact is that a producer receiving CCP payments
need not plant any crop at all. Brazil addresses in detail the evidence demonstrating that CCP
payments are “support to” upland cotton in paragraphs 48-52 of its Rebuttal Submission.

60. With respect to market loss assistance pa yments, Brazil notes that it provides a detailed
analysis of how such payments are “support to upl and cotton” in paragra phs 29-35 of its Rebuttal
Submission, as well as in paragraphs 50-54 of its Oral Statement. Contrary to the US statement in
paragraph 92 of its 11 August Answers, Brazil has always asserted that market loss assistance
payments are “support to a specific commodity”, i.e., to upland cotton.

(46) What is the relevance, if any, of the concept of “specificity” in Article 2 of the SCM
Agreement and reference to “a product” or “subs idized product” in certain provisions of the
SCM Agreement to the meaning of “support to a specific commodity” in Article 13(b)(ii)
Agreement on Agriculture?

Brazil’s comment to US Answer:

61. For the reasons set forth in Brazil’s 11 Augus t Answer to this question, Brazil believes that
Article 2 of the SCM Agreement provides useful cont ext in interpreting the concept of specificity in
Article 13(b)(ii). Brazil notes that the very narrow US notion of specificity (only support requiring
recipients to produce the commodity in question) for Article 13(b)(ii) is quite different than the very
broad concept of specificity applying to all comm odities (including agricultural commodities) as set
out in the US SAA referred to in Brazil’s answer. The United States has not provided any reasons
why there should be such a radically different concept of specificity involving non-green box
domestic support measures under Article 13(b)(ii) and all types of products (including agricultural
goods) under the SCM Agreement. Brazil sees no basis for such a significant difference.

(48) Does Article 13(b)(ii) require a comparison of support granted with support decided?
How could such a comparison be made?

Brazil’s Comment on US Answer:

62. Brazil comments on the US 11 August Answer to Question 48 in the context of its Rebuttal
Submission at paragraphs 68-96.

(54) Please identify all United States legal and regulatory and administrative instruments
decided during the marketing year 1992, with th e respective dates of decision, that decided
support for upland cotton.

Brazil’s Comment on US Answer:

63. As Brazil has noted in its general comment at paragraphs 54-57 above, the United States
focuses solely on the alleged target price decision of 72.9 cents per pound. This simplistic approach
does not accurately reflect the actual operation of the US support programmes to upland cotton. As
detailed by Professor Sumner in his Statement at the First Meeting, the United States took a number
of decisions concerning support for the 1992 marketing year.
46

64. Professor Sumner – who actually participated in the decision making process concerning the
MY 1992 acreage reduction programme decision – expl ained during the First Meeting of the Panel
that the decision on the percentage of upland cotton base that farmers participating in the deficiency
payment programme had to leave idle was a conscious decision based on, inter alia , budgetary
considerations. Given expectati ons about production and prices in the upcoming marketing year, the
decision on the acreage reduction programme was also a decision on expected participation. The
United States could base expected participation on historical experience about participation in the
deficiency payment program. Professor Sumner i ndicated that USDA was able to fairly accurately
predict actual participation. The decision on th e amount of mandatory acreage reduction is, thus, a
decision on the level of participation.

65. Professor Sumner’s testimony is supporte d by the Chief and Deputy Chief Economist of
USDA who have explained that the aim of the acr eage reduction programme was “to balance supply
and demand”
47, i.e., to influence prices and thereby US budgetary outlays. They furthermore report
that the United States implemented the acreage reduc tion programme with a view of reducing costly
government stocks, and that the United States – with further budget considerations in mind – reduced
target prices.48

66. Furthermore, the United States ignores various required additional administrative decisions
that were necessary to make its domestic suppor t programmes operative. These decisions include
decisions on the deficiency payment rate, on weekly Step 2 payment rates and on a weekly-
determined adjusted world price setting the amounts of marketing loan benefits available for that
week. By taking all of these decisions, the United St ates directly influenced the expenditures related
to the MY 1992 crop.
49 In addition, as the United States now reflects in its AMS data, the

46 Exhibit Bra-105 (Statement of Professor Daniel Sumner at the First Meeting, para. 7-8).
47 Exhibit Bra-180 (“Will Policy Changes Usher in a New Era of Increased Agricultural Market
Variability?,” Keith J. Collins, Joseph W. Glauber, Choices, Second Quarter 1998, p. 27).
48 Exhibit Bra-180 (“Will Policy Changes Usher in a New Era of Increased Agricultural Market
Variability?,” Keith J. Collins, Joseph W. Glauber, Choices, Second Quarter 1998, p. 27).
49 Brazil acknowledges that the United States could not possible determine its expenditures as they
would depend to a certain extent on market prices that were also influenced by factors outside the control of the
US Government.

United States considers storage payments and interest subsidies 50 as product-specific support to
upland cotton. Consequently, under the US ap proach, these product-specific domestic support
measures need to be taken into account for purposes of the Article 13(b)(ii) decision. Yet, the
United States fails to account for these programmes in its list of decisions taken concerning support to
upland cotton, just as it failed to account for variou s decisions relating to the deficiency payment,
marketing loan and Step 2 programmes.

67. Brazil also notes that the United States fa iled to answer Question 54 that asked the
United States to identify “all” instruments that d ecided support for upland cotton. This would also
cover instruments other than product-specific inst ruments. However, the United States has only
followed its simplistic view of what kind of decision it took and has not provided information on other
decisions. This appears to be an attempt to avoi d the conclusion under all other approaches: that the
United States provided support in MY 1999-2002 in excess of that decided during the 1992 marketing
year.

(55) Please provide a copy of the instruments in which the rate of support for upland cotton
during the marketing year 1992 was decided, indicating the date of the decision.

Brazil’s Comment on US Answer:

68. As noted in Brazil’s Comment to the previous question, the United States failed to identify a
list of decisions taken with respect to support for upland cotton in MY 1992. As a consequence, the
United States also failed to provide copies of those instruments.
51

(57) If the United States decided on a rate of support for MY1992, does that not mean that it
decided on whatever budgetary outlay was required to meet that rate of support, even if the
exact amount was not known at that time?

Brazil’s Comment on US Answer:

69. At the outset, Brazil refers the Panel to the general comment made in respect of the set of
questions referring to the term “decision” in Article 13(b)(ii) of the Agreement on Agriculture. Also
this answer suffers from the simplistic picture the United States draws of its MY 1992 support
programmes to upland cotton.

70. Brazil disagrees with the United States that it could not be said that the United States decided
on budgetary outlays. Indeed, for all of the US programmes, there was a decision to authorize
whatever budgetary outlays would be necessary to meet the rate of support.
52 In addition, the
United States ignores that it has ad mitted that there were other prog rammes that meet its definition of
“product-specific” and that do not provide a rate of support: Step 2, cottonseed, storage payments and
interest subsidies. The United States accounted for those subsidies by providing budgetary outlays in
its upland cotton AMS calculation, but it does not pr ovide any information on the decision taken with
respect to those domestic support measures and the rate of support provided by them. In addition, the
United States took specific administrative decisi ons on the deficiency payment rate for MY 1992
(20.3 cents per pound 53), weekly Step 2 payment rates as we ll as weekly decision on the adjusted
world price and, thus, the rate of marketing loan benefits. By taking these decisions, the United States
decided on the payment rates that resulted from the “rate of support” and, therefore, on the amount of
budgetary outlays it would use from its unlimited spending authority.

50 Brazil notes that the United States nowhere provides any information concerning the type and
conditions of payments that are covered by these terms.
51 See paras. 63-67 supra.
53 Exhibit Bra-4 (“Fact Sheet: Upland Cotton,” USDA, January 2003, p. 5).

71. Brazil further disagrees with the US assertion at paragraph 113 of its 11 August Answers that
the programs decided by the United States require d an unlimited budgetary authority in both MY
1992 and in later marketing years.
54 Even at prices of zero cents per pound, the amount of US
expenditure for the deficiency payment and the ma rketing loan programme in MY 1992 was, in fact,
limited by decisions restricting the participation in the programs to farmers that historically had grown
upland cotton, who were eligible, and who decided to participate based on the eligibility criteria. By
contrast, participation in the MY 2002 marketi ng loan programme, the crop insurance programme,
and the Step 2 programme, for instance, is no l onger limited and now has an unlimited budgetary
authority coupled with mandatory payment provisions . In particular, the marketing loan programme
is now unlimited whereas in MY 1992, eligibility to ma rketing loan benefits wa s restricted to upland
cotton grown on acreage that was enrolled in the deficiency payment programme.

72. In sum, the United States not only “decided on wh atever outlay was required to meet that rate
of support”, it also took various administrative deci sions that implemented the rate of support and
transposed it into specific payment rates that resulted in identifiable budgetary outlays. The
United States took those decisions with respect to all of the programmes including crop insurance and
Step 2, as well as with respect to storage payments and interest subsidies.
55 Thus, the collective effect
of these multiple decisions was to decide on the am ount of expenditures for MY 1992. The only way
to express this multitude of decisions and conduc t the required comparison with MY 1999-2002 is to
use total monetary amounts of budgetary expenditures.

(60) Can you provide information on the suppo rt decided in 1992 and the years with which
you believe it should be compared, on a per s upport programme / per unit of production basis /
per annum basis? If possible, please specify how, if at all, budget outlays may be transposed into
units of production, and which units of production are best to use.

Brazil’s Comment on US Answer:

73. Brazil notes that the United States has not pr ovided, as requested, an y per support measure,
per unit figures of support that it decided in 1992 and support it granted in other years. Nor did the
United States provide any information whatsoever on how to account for Step 2 payments, cottonseed
payments, storage payments and interest subsidi es because there is no way such measures could be
measured using the simplistic US rate of support only approach.

74. In addition, the United States does not respond to the Panel’s request to transpose this rate of
support into budgetary outlays per pound of producti on. Brazil refers the Panel to paragraphs 84-85
of its Rebuttal Submission, where it provides a new chart reflecting new information provided by the
United States for various programmes.
56

(61) Does the United States consider that Article 13(b)(ii) permits a comparison on any other
than a per pound basis?

Brazil’s Comment on US Answer:

75. The United States admits that Article 13(b)(ii) , and in particular the term “decided”, permit a
comparison different from comparing a rate of support, had the US domestic support measures been
structured (i.e. decided) differently than characterized by the United States.
57 This admission is
significant, because, in fact, the US measures were structured quite differently from what the

54 US 11 August Answer to Question 57, para. 113.
55 US 11 August Answer to Question 67.
56 US 11 August Answer to Question 67, para. 129-134.
57 US 11 August Answer to Question 61, para. 118.

United States asserts. Professor Sumner 58 established that the US support programmes in MY 1992
did not provide a rate of support of 72.9 cents per pound to each poun d of upland cotton produced in
the United States. Numerous restrictions on the availability of the support by the deficiency payment
programme and the marketing loan programme existed. In addition, participation in both programmes
was costly to farmers, as farmers were mandated to set aside a certain percentage of acreage every
year. USDA Chief Economist Keith J. Collin s and USDA Deputy Chief Economist Joseph W.
Glauber explain that

[s]everal programme changes beginning w ith the 1985 Farm Act reduced the ability
of deficiency payments to stabilize inco mes by fixing programme payment yields,
reducing the amount of acreage eligible fo r payments, and tightening payment limits.
In addition, many producers elected not to participate in farm programs, making a
large portion of production not covered by payments and a large portion of producers
ineligible for them by the early 1990s.
59
76. This statement confirms the existence of sever e restrictions on the availability of deficiency
payments and the cost of participating in the pr ogrammes. Were there no cost associated with the
programme, no rational farmer would op t to not take the “free money”, i.e., nearly everybody would
participate. These conscious decisions by USDA a nd other US Government agencies must, therefore,
be reflected in the claimed rate of support pr ovided by the various non-green box domestic support
measures during MY 1992.

77. Brazil agrees with the European Communiti es that such a mélange of domestic support
measures decided in MY 1992 must be accounted for “in monetary terms”.
60 While the European
Communities advocates using an AMS-like approach for the support decided in MY 1992, 61 Brazil
considers that an expenditure approach more accura tely reflects the text of Article 13(b)(ii), which
does not refer to AMS or “product-specific”. Br azil emphasizes that the domestic support measures
that need to be included in this approach are a ll those domestic support measures that provide support
to upland cotton.

78. Furthermore, the US “72.9 methodology” is inconsistent with the object and purpose of
Article 13(b)(ii) and of the Agreement on Agricu lture to correct and prevent restrictions and
distortions in world agricultural markets.

79. Accepting the US interpretation that eligibility criteria and participation costs of a programme
are irrelevant would enable Members like the United States to avoid the disciplines of the SCM
Agreement on trade-distortive subsidies. For ex ample, the United States in MY 1992 decided and
applied restrictive support programmes that require d costly land set aside programs, low payment
yields, restricted payments to 85 per cent of elig ible acres, tied benefits from the marketing loan
programme to participation in the costly defi ciency payment programs, and applied payment
limitations, among others. The US interpretations would allow it in MY 2002 to lift all of these
restrictions and maintain the rate of support without affecting its entitlement to peace clause
exemption. The approach taken to its extreme w ould allow a Member that decided a rate of support
of 72.9 cents per pound for 0.0001 per cent of its pro duction in MY 1992, to provide a rate of support
of 72.9 cents per pound to 100 per cent of its producti on in MY 2002 without affecting its entitlement
to peace clause exemption. Every legitimate comp arison must take account of economic realities of
support regimes in MY 1992 and in later marketing years during the implementation period. And
these realities show that the support increased massively.

58 Exhibit Bra-105 (Statement of Professor Daniel Sumner at the First Meeting of the Panel).
59 Exhibit Bra-180 (“Will Policy Changes Usher in a New Era of Increased Agricultural Market
Variability?,” Keith J. Collins, Joseph W. Glauber, Choices, Second Quarter 1998, p. 28).
60 EC Answer to Third Party Question 22, para. 47 and 49.
61 EC Answer to Third Party Question 22, para. 49.

(66) Could you please comment on the relative m erits of each of the following calculation
methods for purposes of the comparison of suppo rt to upland cotton with 1992, irrespective of
whether a particular measure should be included or excluded:

 (a) Total budgetary outlays (Brazil’s approach)

 (b) Budgetary outlays per unit of upland cotton: Could you please calculate and
provide an estimate for the marketing years 1992 and 1999-2002, respectively,
and draw the Panel’s attention to any factors / qualifications that the Panel
would need to be aware of.

Brazil’s Comment on US Answers:

80. Brazil comments jointly on both of the 11 August Answers provided by the United States. In
essence, the United States rejects any approach based on budgetary outlays as ex post or retrospective
and as does not reflecting its alleged single decision taken during MY 1992.
62 Based on the same
argument, the United States also declines the Pane l’s request for information on how to calculate
budgetary outlays per unit of upland cotton. 63 Therefore, Brazil refers the Panel to its own 11 August
Answer to Question 60 and 66(b) for the only ev idence in that respect as well as to Brazil’s
reservations concerning this approach.64

81. The United States maintains that because its support programmes depend on a price-gap, only
a rate of support approach can reflect the US decision. 65 It further maintains, that any budgetary
approach would automatically reflect also producers’ planting and participation decisions and market
prices, factors that the United States alleges, it could not have decided.
66 However, Brazil has
demonstrated that the anticipated participation in the deficiency payment and marketing loan
programme was an important aspect of the decision on the acreage reduction programme. Professor
Sumner has indicated that, based on historical participation data and projections about other
programme parameters, the United States in MY 1992 had a very good idea of the participation rate
that would result from the setting of a 10-per cent acreage reduction rate under the deficiency
payment programme.

82. Further, Brazil has demonstrated above that the range of programme decisions the United
States has taken, including decisions on deficiency payment rates, adjusted world prices and Step 2
payment rates in connection with decisions on ot her programme parameters, impacted the amount of
budgetary outlays. Thus, while the United States cer tainly did not decide on market prices, it took a
number of decisions that translated these market prices into actual expenditures for MY 1992.

83. The European Communities and other third parti es to this dispute agree with Brazil that the
appropriate basis for a comparison of the support decided in MY 1992 with support granted in later
marketing years during the implementation peri od is a approach base d “on monetary terms”.
67 Given
the special situation of the EC with respect to the peace clause decision, it may be appropriate to use
an ex ante AMS-like approach to its decision during MY 1992 compared to the actual AMS for later
marketing years.68 But even that decision would be expressed in “monetary terms”.

62 US 11 August Answer to Question 66, para. 119-120.
63 US 11 August Answer to Question 66, para. 120.
64 See Brazil’s 11 August Answer to Question 60, para . 94-98 and Brazil’s Answer to Question 66(b),
para. 117-119.
65 US 11 August Answer to Question 66, para. 119.
66 US 11 August Answer to Question 66, para. 119.
67 EC Answer to Third Party Question 22, para. 47.
68 EC Answer to Third Party Question 22, para. 47-49.

84. Total expenditures for MY 1992 and total expenditures for marketing years during the
implementation period are the only legitimate bases fo r the comparison required by Article 13(b)(ii)
of the Agreement on Agriculture. All other cal culation methods are either not supported by a Vienna
Convention analysis of Article 13(b)(ii) (US rate of suppor t approach; US rate of support approach as
modified by Professor Sumner), or have major shortc omings that should lead them to be used them
with extreme caution (budgetary outlays per unit). Brazil notes that its expenditure approach and the
analogous AMS calculation yield identical results, if one were to account for deficiency payments in
terms of expenditures rather than by using the form ula approach offered by Annex 3, paragraph 10-11
of the Agreement on Agriculture.
69

(d) Per unit rate of support for upland cotton (Pro f. Sumner’s approach at the first session of the
first substantive meeting).

Brazil’s Preliminary Comment on US Answer:

85. Brazil will further comment on any answer pursu ant to the US promise to provide “a detailed
critique of Mr. Sumner’s analysis.”
70 As for the 11 August US comme nts, Brazil has earlier in its
22 August Comments to Questions 66(a) and (b) argued that Professor Sumner properly accounted for
all US decisions. 71 Concerning the inclusion of crop insu rance subsidies, PFC and market loss
assistance payments, as well as direct and counter-c yclical payments, Brazil has demonstrated in its
Rebuttal Submission72 and in comments to Questions 38 and 43 that these domestic support measures
constitute support to upland cotton as well as product-specific support. Thus, there is no basis to
exclude these payments from any US calculation of upland cotton AMS.

(67) The Panel requests the parties to calculat e and submit estimates of the AMS for upland
cotton for marketing years 1992, 1999, 2000, 2001 and 2002. For this purpose the parties are
each requested to submit AMS calculations for upland cotton (using the budgetary-outlay/non-
price gap methodology employed by the United States in respect of cotton in its DS Notifications
(e.g., G/AG/N/USA/43) and using the formats and supporting tables in document G/AG/2) on
the same basis as would be the case in calcul ating a product specific AMS for the purposes of
the calculation of the "Total Current AMS" in any year in accordance with the relevant
provisions, including as appropriate Article 1(a), (b) and (h), Article 6 and Annex 3 to the
Agreement.

Brazil’s Comment on US Answers:

86. The United States’ calcula tion of upland cotton AMS is incomplete because it does not
account for the product-specific support provided to upland cotton from PFC and market loss
assistance payment, direct and counter-cyclical paym ents and crop insurance subsidies. Brazil has
discussed the nature of these programs as produc t-specific (and as constituting “support to upland
cotton”) and the incorrect US interpre tation of “product-specific” elsewhere.
73 Brazil further notes
that the United States has included in its calcu lation of upland cotton AMS storage payments and
interest subsidies – product-specific support measure s that the United States has not mentioned so far
during this dispute.74 Based on this and other new data supp lied by the United States, Brazil provides
an update of its AMS calculation and of its analysis of total budgetary outlays.75

69 Brazil’s 11 August Answer to Question 60, para. 97, and to Question 67, para. 130.
70 US 11 August Answer to Question 66, para. 121.
71 See para. 81-85 supra.
72 Rebuttal Submission of Brazil, paras. 24-67.
74 Brazil notes that it has asked the United States in consultations for information on any other domestic
support measures the provides support to upland cotton and that the United States did not mention these

III. EXPORT CREDIT GUARANTEES

71 (a) Is an export credit guarantee a financia l contribution in the form of a "potential
direct transfer of funds or liabilities (e.g. loan guarantee)" within the meaning of
Article 1.1(a)(1)(i) of the SCM Agreement? Why or why not? Does it confer a benefit
within the meaning of Article 1.1(b)? Why or why not? If so, to whom?

 (b) How, if at all, would these elements be relevant to the claims of Brazil, and the
United States response thereto?

87. In responding to this Question, the United States relies solely on Article 10.2 of the
Agreement on Agriculture and – alternatively – rest ricts the use of context from the SCM Agreement
to item (j) only.
76 Brazil addresses the United States’ arguments regarding Article 10.2 of the
Agreement on Agriculture at paragraphs 99-100 of its Rebuttal Submission. In determining what
constitutes an export subsidy within the meaning of Article 10.1 of the Agreement on Agriculture,
Brazil considers that the Panel should refer to Artic les 1(e) and 10.1 of the Agreement on Agriculture
itself, as well as to contextual guidance included in Articles 1 and 3 of the SCM Agreement, and in
item (j) of the Illustrative List of Export Subsidies annexed to the SCM Agreement. This is consistent
with the Appellate Body’s decisions in US – FSC77 and Canada – Dairy.78

(73) The Panel could arguably take the view that Articles 1 and 3 of the SCM Agreement
were relevant in assessing the WTO-consistency of United States export credit guarantees. The
United States has yet to submit any evidence or argumentation on this point, either as potential
context for interpretation of the terms in Arti cle 10 of the Agreement on Agriculture or in
relation to Brazil’s claims under the SCM Agreement. The Panel would therefore appreciate
United States views in respect of this situation, and invites the United States to submit relevant
argumentation and evidence.

Brazil’s Comment on US Answer:

88. The United States argues that it does not need to address Articles 1 and 3 of the SCM
Agreement because it “does not believe that Braz il has submitted evidence and argumentation that
would establish a prima facie case in favour of Brazil’s claims . . .”
79 Since the United States has
surpassed its quantitative export quantity reduction co mmitment levels, Article 10.3 of the Agreement
on Agriculture allocates the burden to the United States to prove that its excess exports did not benefit
from export subsidies, including export credit guarantees. 80 Therefore, it is not Brazil, but the
United States, that is faced with satisfying the elements of a prima facie case in favour of its defence.

(74) If the Panel decides to refer to provi sions of the SCM Agreement for contextual
guidance in the interpretation of the terms in Article 10 of the Agreement on Agriculture,
should the Panel refer to item (j) or Articles 1 and 3 of the SCM Agreement or both?

programs during consultations. See Exhibit Bra-101 (Brazil’s Questions for the Purposes of the Consultations,
22 November 2002, Questions 15.1-15.6).
75 Rebuttal Submission of Brazil, paras. 73-74.
76 US 11 August Answer to Question 71, para. 137-139.
77 Appellate Body Report, US – FSC, WT/DS108/AB/R, para. 136-140.
78 Appellate Body Report, Canada – Dairy, WT/DS103/AB/R and WT/DS113/AB/R, para. 87-90.
79 US 11 August Answer to Question 73, para. 140.
80 See First Submission of Brazil, paras. 263-268.

Brazil’s Comment on US Answer:

89. In paragraph 141 of its 11 August Answer to Question 74 (and again in paragraphs 189 and
195 of its 11 August Answers to Questions 88(b) and (d), respectively), the United States asserts that
“Brazil has not contested that challenged US export credit guarantee programs are within the scope of
Article 10.2.” The United States is incorrect. While it is possible that GSM 102, GSM 103 and
SCGP export credit guarantees might be included in any international agreement that Members might
some day reach in negotiations pursuant to Artic le 10.2 of the Agreement on Agriculture, no one
knows at this stage what the scope of that agreement, if any, will be. The agreement might only cover
export credits other than guarantees, like the OE CD Arrangement on Guidelines for Officially
Supported Export Credits, which does not cover export credit guarantees.

90. In any event, the relevant question is not whether export credit guarantees are “covered” by
Article 10.2, but whether they are “exempted” by Article 10.2 from the general export subsidy
disciplines of the Agreement on Agriculture. Brazi l’s position is that Article 10.2 does not exempt
export credits like export credit guarantees from th e general export subsidy disciplines of the
Agreement on Agriculture, including Article 10.1 ther eof. If those export credit guarantees constitute
export subsidies, then they are subject to those disciplines. (In paragraph 142 of its 11 August
Answer, the United States appears to concede this point, when it acknowledges that “[t]o determine
the applicability of Article 10.1 to a particular m easure not described in Article 9.1 first requires a
determination whether a subsidy exists.”)

(75) (identical to Third Party Question 32)

 The Panel’s attention has been drawn to Ar ticle 14(c) of the SCM Agreement (see third
party submission of Canada) and to the panel report in DS 222 Canada- Export Credits and
Loan Guarantees. How and to what extent are Article 14(c) of the SCM Agreement, and the
cited panel report, relevant to the issue of wh ether or not the United States export credit
guarantee programmes confer a "benefit"? What would the appropriate market benchmark be
to use for any comparison? Please cite any other relevant material.

(Third Party Question 33)

 What is the relevant (if any) of Brazil’s statement that: “ … export credit guarantees for
exports of agricultural products [sic] are not available on the marketplace by commercial
lenders.”

Brazil’s Comment on EC Answers on Third Party Question 32 (identical to Question 75) and 33
and on US Answer to Question 75:

91. The United States argues that item (j) alone is relevant context for a determination whether
CCC export credit guarantee programmes are export subsidies.
81 The European Communities argues
that the fact that a particular financing instrume nt offered by a government (such as CCC guarantees)
is not available on the marketplace does not mean that such financing confers a benefit per se within
the meaning of Article 1.1(b) of the SCM Agreement. 82 The European Communities maintain that in
circumstances in which a comparable type of fi nancing is not available on the marketplace, an
“alternative” benchmark such as item (j) has to be used for determining whether a benefit exists. 83
While Brazil agrees with the European Communities that item (j) is an alternative test for the
existence of an export subsidy, Brazil strongly disag rees that Article 1.1 of the SCM Agreement is –
as the European Communities effectively and the Un ited States explicitly argues – inapplicable in

81 US 11 August Answer to Question 75, para. 143.
82 EC’s Answers to Third Party Questions, para. 68.
83 EC’s Answer to Third Party 35, para. 67.

such situations. Article 1.1 defines the existence of a subsidy for the purposes of the SCM Agreement
and provides relevant context for the interpretati on of the term “export subsidy” under the Agreement
on Agriculture. Article 1.1(b) requires a compar ison between what the recipient of a financial
contribution received from the government and what the recipient could have received on the
marketplace.
84 The Appellate Body clarified that the sta ndard under Article 1.1(b) is not the cost
incurred by the government (as under item (j)). 85 The relevant standard is the “benefit to the
recipient” standard.

92. This definition of a subsidy cannot simply be read out of the SCM Agreement in a situation
where there is no comparable commercial financing ava ilable. Nothing suggests that Article 1.1(b) is
inapplicable in such a situation. The United States and the European Communities would certainly
agree that a direct transfer of funds without cons ideration is not commercially available. In these
circumstances, a benefit within the meaning of Artic le 1.1(b) of the SCM Agreement is conferred. A
similar situation exists with respect to CCC guarantees. A recipient of CCC guarantees cannot
receive a similar financial contribution on commercial terms, as no such financing is available on the
marketplace.
86 Thus, the CCC export credit guarantee programmes confer benefits. Brazil notes that
the United States agreed, in its third party submission in Canada – Aircraft II , that where there is no
comparable financial product on the market, a programme confers benefits per se.87

(76) How does the United States respond to Brazil’s statement that : "...export credit
guarantees for exports of agricultural exports [sic] are not available on the marketplace by
commercial lenders."?

Brazil’s Comment on US Answer:

93. The United States asserts that export cred it insurance may be a comparable commercial
product to CCC export credit guarantees.
88 As noted in paragraph 103-104 of Brazil’s Rebuttal
Submission, the United States acknowledges that ther e are distinctions between insurance coverage
and guarantees. Thus, the terms of insurance covera ge by private, market-based financial institutions
cannot serve as a benchmark against which to determine whether the CCC guarantee programmes
confer “benefits,” within the meaning of Article 1. 1(b) of the SCM Agreement. As the United States
has elsewhere noted, “[i]f the commercial mark et does not offer a particular borrower the exact terms
offered by a government, then the government is pr oviding a benefit to the recipient whenever those
terms are more favourable than the term s that are available in the market.” 89 M o r e o v e r , t h e
United States has not provided actual terms for insu rance coverage by private, market-based financial
institutions. Brazil understands that private, market-based insurance c overage for agricultural
products is not available for periods extending nearly as long as periods provided by CCC guarantees.

(77) How does the United States interpretation of "long term operating costs and losses" in
item (j) as claims paid give meaning to both "costs" and "losses"? Do claims paid represent
"losses" or "costs" or both? If claims paid is represented by "losses", what would go into the
"cost" element of item (j)? Could the United States expand on why it disagrees with the items
which Brazil identifies for inclusion in the examination to be conducted under item (j)?

84 Appellate Body, Canada – Aircraft, WT/DS70/AB/R, para. 157.
85 Appellate Body, Canada – Aircraft, WT/DS70/AB/R, para. 160.
86 See also Rebuttal Submission of Brazil, paras. 103-105.
87 Panel Report, Canada – Aircraft II , WT/DS222/R, Annex C-2 (para. 7). See also Answers to
Questions by Brazil, para. 151.
88 US 11 August Answer to Question 76, para. 144.
89 Panel Report, Canada – Aircraft II, WT/DS222/R, Annex C-2 (para. 7).

Brazil’s Comment on US Answer:

94. In paragraph 145 of its response, the United St ates suggests that claims and defaults must
exceed “revenue from whatever source it may be derived” to meet the elements of item (j), despite the
fact that item (j) limits the revenue to be used to offset operating costs and losses to “premium rates”.
On the other hand, the United States maintains that it is only legitimate to account for claims and
defaults in the context of item (j), and not for ot her operating costs and losses such as interest on debt
to Treasury90, even though those sorts of other costs a nd losses are covered by the ordinary meaning
of the terms included in item (j).91 This is incongruous, and not supported by the text of item (j).

95. Further, Brazil refers the Panel to its Re buttal Submission and to its 22 August Comments to
the US Answers to Question 81 below for a more de tailed discussion on the elements that are to be
included in an item (j) analysis.

(78) Can the United States provide supporting documentation for data used relating to
"costs and losses" in paragraph 173? Could the United States confirm that the figures cited in
paragraph 173 of its first written submission relate to the SCGP? Why did the United States cite
these figures after stating that it is not po ssible to make any assessment of the long-term
operating costs and losses of this programme?

Brazil’s Comment on US Answer:

96. The United States has failed to provide the s upporting documentation requested by the Panel.
The data mentioned in paragraph 149 of the Un ited States’ 11 August Answer could have been
provided for review and analysis by the Panel and Br azil. As a result, Brazil requests that the Panel
reject the United States’ assertions in paragraph 173 of the US First Submission.

(80) (identical to Third Party Question 35)

 Did the drafters of the Agreement on Agriculture include export credit guarantees in
Article 9.1 of the Agreement on Agriculture? Why of why not?

Brazil’s Comment on EC Answer:

97. Brazil agrees with the European Communities that “Article 9.1 represents a list of export
subsidies … that are subject to reduction commitments.”
92 Export credit guarantees are not included,
as they do not constitute per se export subsidies subject to reduc tion commitments. Only if export
credit guarantees confer a benefit within the meaning of Article 1.1(b) and/or Article 14(c) of the
SCM Agreement, or if they are provided at premium rates that are inadequate to cover the long-term
operating costs and losses of the export credit guarantee programme, do they constitute export
subsidies to be assessed against the export subs idy reduction commitments of a Member. In these
circumstances, export credit guarantees must not be provided in a manner inconsistent with
Article 10.1 of the Agreement on Agriculture.

98. Because export credit guarantees are not – under a Vienna Convention interpretation of
Article 10.2 of the Agreement on Agriculture – excl uded from the general export subsidy disciplines
in AoA Article 10.1, their provision counts toward s the export subsidy reduction commitments of a
Member. Article 10.2 states that after agreem ent on disciplines governing the provision of export
credits is reached, these credits can only be provided in conformity therewith. Brazil does not want to
speculate on whether the internationally-agreed disciplines will subject export credit guarantees to

90 First Submission of the United States, para. 178.
91 See Oral Statement of Brazil, para. 123.
92 EC’s Answers to Third Party Questions 35, para. 70.

reduction commitments. In any event, under the cu rrent regime governing the provision of export
credit guarantees, they are subject to the anti-ci rcumvention disciplines in Article 10.1 of the
Agreement on Agriculture and count towards a Memb er’s export subsidy reduction commitments, if
they constitute export subsidies within the meaning of the Agreement on Agriculture (and, by context,
the SCM Agreement).

(81) How does the United States respond to the following in Brazil’s oral statement

 (a) paragraph 122 (rescheduled guarantees)

Brazil’s Comment on US Answer:

99. Although “rescheduled amounts are counted as receivables, not losses,” that does not mean
that rescheduled amounts are actually collected, or even expected to be collected. CCC’s 2002
financial statements demonstrate that many of CCC receivables are classified as “uncollectible” – in
fact, $3.34 billion of total receivables of $6.93 billion are classified as “uncollectible.”
93 Moreover, as
noted in Brazil’s 11 August Comment on Question 77 (at paragraph 162), the US General Accounting
Office has stated that historically, the majority of GSM support that is rescheduled is “in arrears”. 94
Based on this evidence, it is simply not accurate for the United States to argue, in paragraph 155 of its
11 August Answer, that “[t]he history of rescheduled Commodity Credit Corporation (CCC) export
credit guarantee claims over the long-term (the 10-year period 1993-2002) confirms” that “the
United States does in fact collect on the rescheduling.”

100. Brazil also notes that the United States h as not provided any documentary evidence that
would support its assertion.

 (c) paragraphs 125 ff. (guaranteed loan subsidy)

Brazil’s Comment on US Answer:

101. In paragraphs 108-110 of its Rebuttal Submission, Brazil summ arizes the several bases on
which the Panel can rest a finding that the GSM 102, GSM 103 and SCGP programmes constitute
export subsidies under item (j). The United States criticizes one of those bases – the FCRA cost
formula – as inappropriate because it allegedly reli es on “estimated” rather than “actual” data about
the costs of the programmes.
95 This appears to be the United Stat es’ sole defence, which Brazil again
notes applies only to the FCRA cost formula and not the other evidence and bases summarized by
Brazil in paragraphs 108-110 of its Rebuttal Submission. In any event, Brazil rebuts the US
arguments concerning “estimated” versus “actual” data in paragraphs 111-119 of its Rebuttal
Submission, and asks the Panel to refer to Brazil’s arguments therein.

93 Exhibit Bra-158 (US Department of Agriculture, Office of Inspector General, Financial and IT
Operations, Audit Report, Commodity Credit Corporation’s Financial Statements for Fiscal Year 2002 , Audit
Report No. 06401-15-FM (December 2002), Notes to the Financial Statements, p. 14).
94 Exhibit Bra-152 (GAO, Statement of Allan I. Mendelowitz, Director, Trade, Energy and Finance
Issues, National Security and International Affairs Divisi on, before the Task Force on Urgent Fiscal Issues of
the Committee on Budget of the US House of Representatives, Status Report on GAO’s Reviews of the Targeted
Export Assistance Programme, th e Export Enhancement Programem, and the GSM-102/103 Export Credit
Guarantee Programmes, GAO/T-NSIAD-90-53, 28 June 1990, p. 14). See also Exhibit Bra-181 (US General
Accounting Office, Report to the Ranking Minor ity Member, Committee on Agriculture, Nutrition, and
Forestry, US Senate, Former Soviet Union: Creditworthiness of Successor States and US Export Credit
Guarantees, GAO/GGD-95-60 (February 1995), p. 50-52 (demonstrating that most of the rescheduled Russian
and Former Soviet Union GSM claims have been in arrears)).
95 See US 11 August Answers to Questions, paras. 157-161, 162-163, 169-172, 173.

102. Brazil notes that the United States has o ffered no documentation a nd data to support the
figures included in paragraph 160 of its 11 Augus t Answer. The Panel should not accept these
unsupported assertions by the United States.

103. At paragraphs 122-123 of its 11 August Answer to Question 81(c), the United States asserts
that “[a] cohort consists of all transactions associ ated with each type of guarantee issued during a
particular year”, and that “[n]ot until the cohort is closed can one make an assessment as to whether or
not that particular cohort represents a cost to the Fe deral Government”. Brazil notes that a “cohort” is
not necessarily composed of all guarantees issued in a particular year. As the US Office of
Management and Budget notes, cohorts may also be divided according to risk categories, with annual
reestimates calculated according to those risk category-based cohorts.
96 The United States in fact
acknowledges at paragraph 148 of its 11 August Answer to Question 86 that “[a]ll countries eligible
for any of the CCC export credit guarantee programmes are categorized according to risk”.

 (d) paragraphs 127-129 (re-estimates, etc.)

Brazil’s Comment on US Answer:

104. In paragraph 163 of its 11 August Answer, the United States asserts that the “net total for all
cohorts for guarantees issued since 1992 currently stands at a downward re-estimate of $1.9 billion”,
suggesting that by the time a cohort is closed and final data becomes available, the cohort becomes
profitable. Although the United States offers no ci tation, the $1.9 billion lifetime reestimate figure
appears to be taken from the Federal Credit Supp lement attached to the 2004 US budget. As
discussed further in paragraphs 115-117 of Brazil’ s Rebuttal Submission, however, the United States
fails to note that when these total lifetime reestim ates for all cohorts of guarantees disbursed since
1992 are netted against the total original subsidy estimates adopted each budget year during the
period 1992-2002, the resulting loss is nearly $1.75 billion.

 (b) paragraph 123 (interest on debt to Treasury)

Brazil’s Comment on US Answer:

105. The United States’ 11 August Answer addresses in terest rate reestimates under the FCRA cost
formula. Paragraph 123 of Brazil’s Statement at the First Panel Meeting, however, to which the
Panel’s question refers, does not address the treatm ent of interest paid by the CCC to the Treasury
Department under the FCRA cost formula. Rather, in paragraph 123 of its Oral Statement at the First
Meeting of the Panel, Brazil was responding to the US assertion that Brazil’s constructed formula for
determining whether the CCC guarantee programmes’ operating costs and losses outpaced premiums
collected should not have included interest paid by the CCC to the Treasury Department. In
paragraph 123 of its Oral Statement, Brazil argue d that under the ordinary meaning of the term
“operating costs”, interest paid by the CCC to the Treasury Department should be included in an
assessment of the programmes under item (j). Brazil’s arguments have nothing to do with interest rate
reestimates under the FCRA cost formula. The United States’ answer is, therefore, only relevant in so
far as the United States now seems to acknowle dge that, for the purposes of Brazil’s revised
constructed formula, interest payments to Treasury are properly included.
97

96 Exhibit Bra-116 (OMB Circular A-11, p. 185-16 – 185-17).
97 US 11 August Answer to Question 81(b), para. 167.

 (e) Exhibits BRA-125-127

Brazil’s Comment on US Answer:

106. The United States’ 11 August Answer is in correct. Reestimates are recorded in the
“programme account” segment of the CCC guarantee programme budget, in line item 00.07 (interest
on reestimates is recorded in line 00.08).
98 Furthermore, Brazil has cons istently also included the
financing account in its exhibits, including – contrary to the US allegation99 – in Exhibit Bra-127.

 (f) the chart on page 53 of Brazil’s oral statement at the first session of the first
Panel meeting relating to "Guaranteed Loan Subsidy and Administrative
Expenses of US Export Credit Guar antee Programmes GSM-102 GSM 103 and
SCGP"?

Brazil’s Comment on US Answer:

107. Brazil refers the Panel to pa ragraphs 111-119 of Brazil’s Rebuttal Submission for discussion
of the US arguments concerning “estimated” versus “actual” data.

 (g) In respect of (a)-(f) above, how and to wh at extent do the information and data
presented for the export guarantee programmes concerning "programme" and
"financing", "summary of loan levels", "subsidy budget authority", "outlay
levels", etc., in particular in Exhibi ts BRA-125-127, reflect "actual costs and
losses" of the GSM-102, GSM-102 and SCGP export credit guarantee
programmes(see e.g. Brazil’s closing oral statement at the first session of the
first substantive meeting, paragraph 24)?

Brazil’s Comment on US Answer:

108. Brazil refers the Panel to pa ragraphs 111-119 of Brazil’s Rebuttal Submission for discussion
of the US arguments concerning “estimated” versus “actual” data.

(84) Is the Panel correct in understanding that, under the GSM-102 and GSM-103
programmes, the exporter pays a fee calculated on the dollar amount guaranteed, based on a
schedule of rates applicable to different credit periods? How and on what basis are the fee rates
fixed? Do the fee rates ever change? If so, how and for what reason? Would it be necessary to
amend the legislation and/or regulations in order to adjust the fee rates?

Brazil’s Comment on US Answer:

109. As noted in Brazil’s 11 August Comment on Question 84 (at paragraphs 192-194), GSM 102
and GSM 103 fees are charged according to a fee sc hedule that does not account for the country risk
involved or the credit rating of the borrower. Th e US Department of Agriculture’s Office of the
Inspector General noted in June 2001 that “the fees CCC charges fo r its GSM-102 and GSM-103
export credit guarantee programmes have not been changed in 7 years and may not be reflecting
current costs”.
100 It repeated this statement in February 2002.101

98 See Exhibits Bra-88 to Bra-95 (US budgets for the years 1996-2003); Exhibits Bra-125 to Bra-127
(US budgets for the years 1994, 1995 and 2004). See also Exhibit Bra-184 (US budget for fiscal year 1993);
Exhibit Bra-183 (US budget for fiscal year 1992).
99 US 11 August Answer to Question 81(e), para. 168.
100 Exhibit Bra-153 (US Department of Agriculture Office of Inspector General Financial and IT
Operations Audit Report of the Commodity Credit Corporation’s Financial Statements for Fiscal Year 2000,
Audit Report No. 06401-14-FM (June 2001), p. 31).

110. Moreover, the US General Accounting Offi ce (“GAO”) analyzed CCC’ s failure to charge
guarantee fees that take account of country risk or the creditworthiness of individual borrowers.
Brazil quotes at length from the GAO study, sin ce it provides further corroborating evidence that
beneficiaries of CCC guarantees receive terms better than available on the market, and that CCC
guarantee fees do not cover the costs of the CCC guarantee programmes:

Although GSM-102 recipient countries vary si gnificantly from one another in terms
of their risk of defaulting on GSM-102 lo ans, CCC does not adjust the fee that it
charges for credit guarantees to take account of country risk. CCC fees are based
upon the length of the credit period and the number of principal payments to be made.
For example, for a 3-year GSM-102 loan with semiannual principal payments, CCC
charges a fee of 55.6 cents per $100, or 0.56 per cent of the covered amount. For 3-
year loans with annual principal payments, the fee is 66.3 cents per $100.
[ ] CCC fees
that included a risk-based component might not cover all of the country risk, but they
could help to offset the cost of loan defaults.
USDA officials told us that including a fee for country risk could reduce the
competitiveness of GSM-102 exports. However, they said they did not have recent or
current data to support their claim.
The US Export-Import Bank, which provides credit guarantees to promote a variety
of US exports, uses risk-based fees to defray the cost of defaults on its portfolio.
Under its system, each borrower/guarantor is rated in one of eight country risk
categories. Exposure fees vary based on both the level of assessed risk and the length
of time provided for repayment. For example, in the case of repayment over 3 years,
a country rated in the lowest risk category is charged a fee of 75 cents per $100,
whereas a country in the highest risk ca tegory is charged a fee of $5.70 per $100 of
coverage. Thus, the bank’s fee structure includes a substantial added charge for high
country risk. According to the bank, its sy stem is designed to remain as competitive
as possible with fees charged by official export credit agencies of other countries.
Under section 211(b)(1)(b) of the 1990 Farm Bill, CCC is currently restricted from
charging an origination fee for any GSM-102 credit guarantee in excess of an amount
equal to 1 per cent of the amount of credit extended under the transaction.
[102] This
restriction was initially enacted in 1985 fo llowing proposed administration legislation
to charge a 5-per cent user fee for expor ts backed with credit guarantees. Some
Members of Congress were concerned that such a fee would adversely affect the
competitiveness of GSM-102 exports. Under the 1-per cent restriction, CCC would
be considerably limited in the size of the f ee that it could charge to take account of
country risk should it decide to do so. For example, as previously noted, CCC
charges 0.56 per cent for a loan payable in 3 years and with principal payments due
annually. The most it could increase the f ee would be 0.44 per cent. In contrast, the
Export-Import Bank currently charges fees as high as 5.7 per cent for 3-year loans.
103

101 Exhibit Bra-154 (US Department of Agriculture Office of Inspector General Great Plains Region
Audit Report of the Commodity Credit Corporation’s Fina ncial Statements for Fiscal Year 2001, Audit Report
No. 06401-4-KC (February 2002), p. 49 (“[T]he fees CCC charged for its GSM-102 and GSM-103 export credit
guarantee programs have not been changed for many years and may not be reflecting current costs.”).
102 The United States confirmed in paragraphs 179-180 of its 11 August Answer that this remains the
case.
103 Exhibit Bra-181 (US General Accounting Office, Report to the Ranking Minority Member,
Committee on Agriculture, Nutrition, and Forestry, US Senate, Former Soviet Union: Creditworthiness of
Successor States and US Export Credit Guarantees, GAO/GGD-95-60 (February 1995), p. 135-136). Although
government support from the Export-Import Bank does not constitute a market benchmark for the purposes of

111. Brazil notes that CCC fees for GSM 102 ha ve not changed materially since the GAO
published its report in 1995.
104 Moreover, the United States conf irmed in its 11 August Answer to
Question 84 (at paragraph 180) that US law prohibits CCC from charging fees in excess of one
per cent of the guaranteed dollar value of the transaction.

(85) Is the Panel correct in understanding that , under the SCGP, the exporter pays a fee for
the guarantee calculated on the guaranteed portion of the value of the export sales? How and on
what basis are the fee rates fixed? Do the f ee rates ever change? If so, how and for what
reason? Would it be necessary to amend the legislation and/or regulations in order to adjust the
fee rates? Please explain any "risk" assessment involved in the programme.

Brazil’s Comment on US Answer:

112. As noted in Brazil’s 11 August Comment on Question 85 (at paragraph 195), SCGP fees do
not vary according to the country risk involved or the credit rating of the borrower. With or without
the “risk sharing” described in paragraph 183 of the United States’ 11 August Answer, Brazil notes
the United States’ acknowledgement that “CCC does not determine the creditworthiness of importers
participating in the SCGP.”
105 This presents further corroborating evidence that beneficiaries of CCC
guarantees receive terms better than available on the market, and that CCC guarantee fees do not
cover the costs of the CCC guarantee programmes.

(86) Is there a risk categorization in relatio n to three export credit guarantee programmes
(GSM-102, GSM-103 and SCGP)? Does this have any impact on premiums payable and the
ability of the CCC to on-sell the guarantees ?

Brazil’s Comment on US Answer:

113. Brazil notes the United States’ acknowledgement th at “[a] country’s risk classification has no
impact on the premiums payable under the US e xport credit guarantee progra mmes”. CCC’s failure
to account for country risk provides further co rroborating evidence that beneficiaries of CCC
guarantees receive terms better than available on the market, and that CCC guarantee fees do not
cover the costs of the CCC guarantee programmes.

(87) What proportion of CCC (export-related and total) long term operating costs and losses
are represented by GSM-102, GSM-103 and SCGP programmes?

Brazil’s Comment on US Answer:

114. The United States asserts that funding fo r the CCC export guarantee programs is provided
from the US Treasury, and is not “financed out of ” the CCC. This suggests that the CCC export
guarantee programs are not self-sustaining. This suggests in turn that the CCC export guarantee
programmes meet the elements of item (j) and, thus, constitute export subsidies.

(88a) Is the Panel correct in understanding that the United States’ argument is that, at
present, by virtue of Article 10.2 of the Agreeme nt on Agriculture, there are no disciplines on
agricultural export credit guarantees under th e Agreement on Agriculture (or the SCM
Agreement)?

Article 1.1(b) of the SCM Agreement, Brazil offers this example to demonstrate that the CCC guarantee
programs do not even meet non-market benchmarks.
104 Brazil’s 11 August Answer to Question 77 and 84, para. 167, 193-194.
105 US 11 August Answer to Question 85, para. 138.

Brazil’s Comment on US Answer:

115. The United States incorrectly argues, in para graph 187 of its 11 Augus t Answer, that “[i]f
export credit guarantee programmes were already subject to export subsidy disciplines, then
Article 10.2 would be unnecessary.” The negotiators may have considered it useful to negotiate
additional disciplines for export credit guarantees one day, but that does not mean that they intended
for export credits to be exempted from the genera l disciplines of the Agreement on Agriculture while
those negotiations were pending.

116. The United States also argues in paragraph 187 that Brazil’s use of the term “specific”
disciplines somehow defeats Brazil’s interpretation of Article 10.2. Brazil uses the term “specific”
disciplines merely as a way of distinguishing between one actual and one potential category of export
subsidy disciplines under the Agreement on Agriculture: (i) those “general” disciplines that apply to
export credit guarantees today; and (ii) those “specifi c” disciplines that would additionally apply to
export credits upon the completion of the negotiations called for by Article 10.2.

 (b) Does the United States agree with the following proposition: a WTO Member
may therefore extend agricultural export credit guarantees without charging a
premium, and for an indefinite period, in a ddition to any other terms and conditions it
may wish? How would this reconcile with the title of Article 10 of the Agreement on
Agriculture ("Prevention of Circumventi on on Export Subsidy Commitments"), and
with other commitments contained in the Ag reement on Agriculture? Please cite any
relevant material, including any past WTO dispute settlement cases. How would this
reconcile with the United States’ own statement, at paragraph 21 of its closing oral
statement that "of course, the United States may not provide subsidies without any
limit".

Brazil’s Comment on US Answer:

117. Please see Brazil’s 22 August Comment on the United States’ 11 August Answer to Question
74 for observations on the United States’ assertion, in paragraph 189, that “Brazil has not contested
that US export credit guarantee programmes are encompassed by the terms of Article 10.2.”

118. The United States argues that an interpretation of Article 10.2 of the Agreement on
Agriculture that exempts export credits from the ge neral export subsidy disciplines of that agreement
is consistent with the title of Article 10 – “Prevention of Circumvention of Export Subsidy
Commitments.”
106 The United States’ argument is absurd . Since negotiations on specific disciplines
pursuant to Article 10.2 have not been concluded, the United States’ interpretation of Article 10.2
would leave export credit support completely undisciplin ed, and open to the abuse outlined in the text
of the Panel’s question. In this way, the United States’ interpretation of Article 10.2 facilitates, rather
than prevents, circumvention of its export subsidy commitments.

119. The United States also argues that the porti on of Article 10.2 calling for Members to work
toward the negotiation of specific di sciplines on export credits also contributes to the prevention of
circumvention. As the ordinary meaning of the first portion of Article 10.2 demonstrates, however
107,
Members are not even required to actually negotiate specific disciplines for export credits, let alone to
reach actual agreement on those sp ecific disciplines. All Members ha ve agreed to do is to work
toward the development of those specific disciplines, which does not in itself prevent circumvention.

 (c) If, as the United States argues, there are no disciplines on export credit
guarantees in the Agreement on Agriculture, how could export credit guarantees

106 US 11 August Answer to Question 88(b), para. 190.
107 See Oral Statement of Brazil, para. 102.

"conform fully to the provisions of Part V" of the Agreement on Agriculture
within the meaning of Article 13 (how can you assess "conformity" or non-
conformity when there are allegedly no disciplines against which such an
assessment could occur)?

Brazil’s Comment on US Answer:

120. The United States argues that since export cr edit guarantees are not subject to export subsidy
disciplines in the Agreement on Agriculture, they “ca nnot be out of compliance with Part V” of the
that agreement. The pertinent question is whet her export credit guarantees can, under the terms of
Article 13(c), “conform fully to the provisions of Pa rt V” of the Agreement on Agriculture. In this
regard, the United States ignores the conclusions of the panel in Canada – Aircraft (21.5) .
108 A s
noted in Brazil’s 11 August Comment on Question 88(c) (paragraphs 200-202), if the United States is
correct that CCC export credit guarantees are not subject to the disciplines in Part V of the Agreement
on Agriculture, then CCC guarantees cannot logically “conform fully to the provisions of Part V” and
trigger the exemption from action provided for in Article 13(c).

121. Alternatively, the United States suggests that Article 13(c) does not apply to export credit
guarantees because “export credit guarantees are not e xport subsidies within the meaning of either
Article 9.1 or 10.1” of the Agreement on Agri culture. This assertion is not supported by the
United States with any reference to the tools of interpretation included in the Vienna Convention, and
is fundamentally incorrect. Brazil has demonstrated that the GSM 102, GSM 103 and SCGP export
credit guarantee programs administered by the CCC cons titute export subsidies within the meaning of
Articles 10.1, 1(e) and 8 of the Agriculture Agreem ent, Article 3.1(a) of the SCM Agreement, and
item (j) of the Illustrative List of Export Subsidies attached as Annex I to the SCM Agreement.
109

 (d) Is the United States advocating the view that its own export credit guarantee
programmes, which pre-dated the Uruguay Round, are effectively
"grandfathered" so as to benefit from some sort of exemption from the export
subsidy disciplines of the Agreement on Agriculture? How, if at all, is it relevant
that the SCGP did not, according to the United States, become relevant for
upland cotton until the late 1990’s (i.e. after the entry into force of the WTO
Agreement)?

Brazil’s Comment on US Answer:

122. Please see Brazil’s comment on the United States’ 11 August Answer to Question 74 for
observations on the US assertion in paragraph 189 that “Brazil has not contested that SCGP provides
export credit guarantees within the meaning of Article 10.2.”

IV. STEP 2 PAYMENTS

(92) Does the United States confirm that Ex hibit Bra.65 represents a sample contract for
exporters of eligible upland cotton to conclude with the CCC under the FSRI 2002, and that an
application form (Exhibit Bra-66) needs to be filled out with data on weekly exports and
submitted to the USDA FAS. Is Exhibit Bra-66- Form CCC 1045-2 also a valid example? If not,
please identify any differences or distinctions.

(96) Is a domestic sale a “use” for the purposes of Step 2 payments? Is a sale for export, or
export, considered a “use”?

108 Panel Report, Canada – Aircraft (21.5), WT/DS70/RW, para. 5.143-5.145.
109 First Submission of Brazil, para. 271-294; Oral Statement of Brazil, para. 116-133; Brazil’s
11 August Answers to Quetions, para. 139-168, 175-189 and 192-199.

Brazil’s Comments to the US Answers:

123. Brazil notes that the Step 2 regulations make a clear distinction between “domestic users” and
“exporters”.110 “Domestic users” may only receive payment upon “proof of purchase and
consumption of eligible cotton by the domestic user . . .”. 111 The agreement for domestic users
provides that a domestic user is a person regularly engaged in manufacturing eligible upland cotton
into cotton products in the United States and that “i n the event that the cotton is not used for that
purpose, the payment received shall be re turned immediately and with interest”. 112 T h e r e i s n o
requirement that “exporters” prove, prior to recei ving payment, that exported US upland cotton be
“used” for anything upon export. Rather, the paymen t is a function of “proof of export of eligible
cotton by the exporter”.113 Thus, the structure of the Step 2 programme clearly differentiates between
“export” and “use”. Article 3.1(b) applies the phrase “contingent upon use.” Article 3.1(a) uses the
phrase “contingent . . . upon export performance”.

124. In relation to Exhibit US-21, Brazil agrees with the United States that the two different forms
that have to be annexed to the User/Exporter Ag reement have different objectives depending on the
final destination of upland cotton. That is, if the upland cotton is used domestically, then the CCC-
1045UP-1 form has to be completed and annexed to the User/Exporter Agreement. If the cotton is
exported, then the CCC-1045UP-2 form has to be used . However, contrary to the US statement at
paragraph 201 of its 11 August Answer to Question 92, the latter makes no reference whatsoever to an
“Exporter User.” Indeed, the term “exporter user” is not contained either in the Step 2 regulations nor
in the form that has to be annexed to the Us er/Exporter Agreement if the upland cotton will be
exported. This is consistent with the fact that an exporter is not a “user” under the Step 2 programme
and the act of exporting is unlikely a final “use” of upland cotton. In sum, Step 2 export payments are
not made contingent upon “use,” but contingent upon “export”.

(93) Please elaborate why the United States deems that Step 2 payments upon submission of
proof of export are not subsidies contingent upon export. Is it the US contention that, in order
to be contingent on export, exportation must be the exclusive condition for receipt of the
payment?

(99) How does the United States respond to Brazil’s arguments in paragraphs 71-75 of
Brazil’s Oral Statement at the first session of the first panel meeting concerning the relevance of
the Appellate body Report in US- FSC(21.5)

Brazil’s Comment on US Answers:

125. The United States in its 11 August Answer to Question 93 states at paragraph 202 that “all
upland cotton produced in the United States is eligib le for the benefit of the Step 2 cotton subsidy”.
114
Furthermore, it submits that “when the entirety of production of a good in a country is eligible to
receive a subsidy, no contingency on export exists”.115

126. Brazil provides a detailed comment to these assertions in its Rebuttal Submission. 116 In fact,
Step 2 payments are not made to every pound of upland cotton that is “used”. Rather, Step 2
payments are made on every pound of upland cotton that is exported by eligible exporters or that is

110 Exhibit Bra-37 (7 CFR 1427.104)
111 Exhibit Bra-37 (7 CFR 1427.108(d)).
112 Exhibit US-21 (Upland Cotton Domestic User / Exporter Agreement, Section, Section B1)
113 Exhibit Bra-37 (7 CFR 1427.108(d))
114 US 11 August Answer to Question 93, para. 202.
115 US 11 August Answer to Question 93, para. 202.
116 See Rebuttal Submission of Brazil, paras. 129-130.

used by eligible
 domestic users . No Step 2 payment is made for upland cotton exported or used by
ineligible persons, or for upland cotton that is neith er used domestically nor exported, but that is for
instance stored, stolen or incidentally destroyed by for example fire.

127. Furthermore, the criterion whether Step 2 payments are available to all upland cotton
produced in the United States is entirely irrelevant for Brazil’s claims under Article 3 of the SCM
Agreement. That provision prohibits the payment of subsidies that are contingent upon export or
contingent upon the use of domestic over imported goods. It follows that a subsidy is prohibited if its
payment is conditional on the existence of one of the two situations: export or use of local content.

(107) At paragraph 135 of its first written subm ission, the United States states: “The subsidy
is not contingent upon export performance…”(empha sis added). Again, in the course of the first
Panel meeting, the United States admitted that the Step 2 payments were “subsidies”. Does the
United States thus concede that Step2 payments constitute a “subsidy” within the meaning of
the WTO Agreement?

Brazil’s Comment on US Answer:

128. The arguments provided by the United States are not responsive to the question posed by the
Panel. Brazil reiterates that Exhibit Bra-69 is not relevant for its de jure claims. Whenever a Step 2
payment for exported or domestically used upland cotton takes place, the payment is made
inconsistently with Articles 3.1(a) or 3.1(b) of the SCM Agreement and with Articles 3.3 and 8 of the
Agreement of Agriculture in the case of Step 2 export payments. Step 2 export payments are
contingent upon export performance and Step 2 do mestic payments are contingent upon use of
domestic over imported upland cotton. Neither the respective share of Step 2 export and domestic
payments nor the share of eligible US upland cotton production materially affects this conclusion.

(111) Does the United States maintain its argument that actions based on Article 3.1(b) of the
SCM Agreement are conditionally « exempt from ac tions » due to the operation of Article 13 of
the Agreement on Agriculture?

(112) In the event that the Panel finds that Article 6.3 of the Agreement on Agriculture does
not preclude an examination of Brazil’s claims under Article 3.1 of the SCM Agreement and
Article III:4 of GATT 1994, how does the United St ates respond to the merits of Brazil’s claims
relating to Step 2 payments under those provisions?

(113) Is it necessary for measures directed at agricultural processors included in AMS to
discriminate on the basis of the origin of goods?

(115) What is the meaning and relevance (if any) to Brazil’s claims under Article 3 of the
SCM Agreement and Article III:4 of GATT 1994 of the phrase "measures directed at
agricultural processors shall be included to the ex tent that such measures benefit the producers
of the basic agricultural products" in the Agreement on Agriculture?

(116) With respect to paragraph 32 of the oral statement of the EC, are subsidies contingent
on the use of domestic goods consistent with the Agreement on Agriculture? Does the phrase
“provide support in favour of domestic producers” in Article 3.2 of the Agreement on
Agriculture refer to, and/or permit such subsidies?

Brazil’s Comment to the US Answers:

129. Brazil addresses the US 11 August Answers to the questions listed above in its Rebuttal
Submission at paragraphs 131-144. Brazil further re fers the Panel to paragr aphs 78-86 of its Oral
Statement and to its 11 August Answ ers to Questions 100-102 and 115-116.

ANNEX I-4

 Please refer to Section V. of Annex D-4.